AT&T’s purchase of T-Mobile will test antitrust law

Here’s the first clue that AT&T knows that its going to run into trouble with antitrust regulators over its purchase of T-Mobile: In its press release on the $39 billion deal, AT&T said, “The U.S. wireless industry is one of the most fiercely competitive markets in the world and will remain so after this deal.”

That’s clearly a preemptive effort to address the likely critics of the deal, because it will mean a drop to just three major carriers in the U.S. (Verizon, AT&T and Sprint) from four. There’s no doubt this deal is going to test the Obama administration’s stance on antitrust, as the Federal Trade Commission and the Justice Department have to approve the deal.

Two years ago, VentureBeat wrote about the growing clout of AT&T and Verizon, and the threat this posed to the market place — namely to the two smaller players, Sprint and T-Mobile. With T-Mobile gobbled up, it will put even more pressure on Sprint.

David Balto, senior fellow at the Center for American Progress and former policy director at the Federal Trade Commission, said that this merger is going to “face a really stiff challenge from the Obama antitrust cops.”

Under section 7 of the Clayton Act, antitrust law prohibits mergers that substantially lesson competition, Balto said.

“T-Mobile has been an incredibly important force in the market,” he said. “AT&T taking it out is not going to be good for consumers and this is going to face very aggressive scrutiny.”

Mark Cooper, director of research at the Consumer Federation of America, said in an email, “When the number two firm in a market that is highly concentrated buys the number four firm, it is not only anti-competitive, but severely so by the new merger guidelines. However, the public policy challenge is more profound than ‘just say no.'”

He added, “There is not enough competition in the wireless market today, before the merger, to prevent a variety of anti-competitive and anti-consumer practices. When the number four firm in such a market says it cannot make a go of it and sells itself to the number one firm, that raises the distinct possibility that there will never be enough competition to protect consumers.”

And he said, “If the market conditions are such that the minimum efficient scale is so large that only a small number of firms can succeed, then policy makers may have to give up the fiction that competition can work. They may have to step in to prevent the anti-consumer and anti-competitive behaviors that competition would have prevented. They can do so under the Communications Act or the Antitrust law, or both. The first opportunity to do so will be during the merger review, but both the FCC and the DOJ have broad powers to take action against such conduct. ”

AT&T went on to say, “The U.S. is one of the few countries in the world where a large majority of consumers can choose from five or more wireless providers in their local market. For example, in 18 of the top 20 U.S. local markets, there are five or more providers.”

AT&T added, “Local market competition is escalating among larger carriers, low-cost carriers and several regional wireless players with nationwide service plans. This intense competition is only increasing with the build-out of new 4G networks and the emergence of new market entrants.”

And AT&T says the competitiveness of the market has directly benefited consumers. “A 2010 report from the U.S. General Accounting Office (GAO) states the overall average price (adjusted for inflation) for wireless services declined 50 percent from 1999 to 2009, during a period which saw five major wireless mergers.”

What AT&T doesn’t mention is Moore’s Law. The telecommunications network is built from electronics equipment where the core technology lies in the semiconductor chips. Chip makers can continuously improve their devices by moving to new generations of manufacturing equipment which can miniaturize circuitry. With smaller circuits, you can fit the same circuitry in a smaller space, reducing the cost, power consumption and improving the speed all at the same time.

Gordon Moore, the chairman emeritus of Intel whom the law is named after, observed in 1965 that chip performance doubles every couple of years. That also means that you can halve the cost of a chip that uses the same circuits as the previous generation of chips. During the decade from 1999 to 2009, Moore’s Law should have knocked out a lot of cost from the telecommunications networks run by AT&T and others. The chip costs alone should be about 6.25 percent of what they were a decade earlier.

Clearly, there are other costs that go into building a network. But the point is that the cost of operating a network should go down over time, all other things being equal. If prices for consumers have gone down 50 percent in a decade, that may not be consistent with the decline in costs over time. The regulators can figure that out.

AT&T also didn’t mention that the GAO also said the Federal Communications Commission should improve its oversight of wireless phone service, since 9 to 14 percent of consumers are somewhat dissatisfied or very dissatisfied with their network service. This represents millions of unhappy consumers, and the GAO said that the FCC receives tens of thousands of complaints a year from wireless consumers.

The GAO says that four companies account for 90 percent of the U.S. wireless service market: AT&T and Verizon Wireless, T-Mobile, and Sprint. The GAO said this oligopoly makes it very hard for small regional carriers to remain competitive. The FCC said that the top two companies have 60 percent of the wireless industry’s customers and revenues.

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