Last week’s announcement that AT&T is buying T-Mobile from Deutsche Telekom for $39 billion should raise serious antitrust concerns with regulators analyzing the deal under the horizontal merger guidelines of the Department of Justice and Federal Trade Commission. The Wall Street Journal reported that antitrust specialist Herbert Hovencamp thinks the deal will face difficulty with the merger guidelines. Hovencamp stated that “it’s a pretty highly concentrated market” and “the guidelines would say this is a highly questionable merger unless there is a significant provable efficiency.”
Many of the factors which make a merger questionable under the guidelines are present in this deal. First, the deal would eliminate substantial head-to-head competition between AT&T and T-Mobile, the 2nd and 4th largest wireless carriers nationally. Second, it would eliminate T-Mobile’s arguable “maverick” or disruptive role in the market caused by its cheaper wireless plans.
Third, it would dramatically increase AT&T’s market shares in the relevant market and increase market concentration. The merger would give AT&T approximately 129.2 million subscribers compared to Verizon’s 94.1 million subscribers and Sprint’s 49.9 million subscribers. AT&T and Verizon would together hold more than 70 percent of the “U.S. mobile service provider market” with Sprint and other competitors far behind.
A calculation of the deal’s Herfindahl-Hirschman Index (“HHI”), a tool used by regulators to analyze market concentration, in the national market for mobile services demonstrates the intense market concentration. This analysis gives a pre-merger HHI of 1990, post-merger HHI of 2406, and change in HHI of 416. A mere change in HHI greater than 100 can raise the eyebrows of federal regulators. Here, we have an significant change in HHI of 416 in a market that is near highly concentrated (anything greater than 2500 is highly concentrated).
AT&T will challenge federal antitrust regulators with at least three potent counter arguments. First, the numbers used to calculate market concentration above are incorrect because the relevant geographic market is not the United States. AT&T wants to calculate market concentration on a city-by-city basis in order to demonstrate that the largest markets, which may have more market players, are more competitive than the United States as a whole. Second, Hovencamp’s “significant provable efficiency” exists in the efficiency gains created by combining the wireless spectrums of AT&T and T-Mobile. Indeed, the merger guidelines contemplate that efficiencies matter in antitrust analysis. Third, when all else fails, AT&T might be willing to divest itself of a “substantial” number of subscribers to satisfy regulators.
Still, the guidelines will be a significant hurdle in the months ahead. But AT&T is confident, given that the company has committed to pay Deutsche Telekom $3 billion if the merger does not close. After all, it seems unfathomable that AT&T would attempt this purchase if the company’s highly-sophisticated team of lawyers did not believe the deal could overcome antitrust concerns raised by the elimination of a head-to-head competitor, the elimination of a disruptive market player, and the significant increase in market concentration and market power.