Tales of the Sausage Factory

Will Wall St. Put The Kibosh On The AT&T/T-Mo Takeover Before the DoJ Does?

The more I see AT&T frantically spend money like water and call in every political chip it has to try to pressure the Department of Justice to settle its case, the more I become convinced that it will ultimately be the Wall St. financial community that will finally persuade Randal  Stephenson to give up before AT&T gets to trial. Oh, I expect to see more wild gyrations. There’s perpetual whispers that AT&T will find a dance partner in the form of MetroPCS (the current favorite of the rumor mongers) or Leap or U.S. Cellular (one even occasionally hears Sprint, but that doesn’t even pass the laugh test) and they will publicly announce some big proposed settlement so that AT&T’s political friends and its cadre of honest politicians can howl some more for DoJ to settle. Who knows? We have five months until trial, and AT&T seems infinitely capable of making all sorts of political noise.

But the more I look at it, the more convinced I become that the upper management at AT&T and that of T-Mobile’s parent, Deutsche Telekom (DT), have not really thought through just what kind of a settlement they would now have to offer and how radically different it is from what AT&T expected to offer before DoJ brought suit. A settlement now is far, far more expensive than anything AT&T envisioned and quietly vetted with Wall St. analysts back in March. Back then, AT&T expected to divest from 30-50 midsized markets via a divestiture trust (allowing them to sell licenses at profit-maximizing prices over time), some wussy roaming and deployment conditions that could be easily evaded or ignored. Now, AT&T will need to divest enough to create a “T-Mo Lite,” something that can at least pretend to replace the loss of a national carrier. As I explain below, that becomes so expensive and complicated that even if AT&T can find the financing to make it happen, its stock is likely to tank on the mere announcement of such a deal.

Mind you, I am not saying a settlement is desirable or good policy. I continue to believe that AT&T’s take over of T-Mobile is so thoroughly awful as a mater of both antitrust and telecom policy that no conditions or divestitures can save it. But even discounting my opinion on the matter, there are certain practical realities that make a settlement at this point not merely bad policy, but so expensive and complicated to manage that it is effectively impossible.

If I’m right, the only question is how much shareholder money and political capital AT&T spends lobbying for a settlement that can’t be done for financial reasons before enough officers on the AT&T and DT Boards sit down AT&T CEO Randal Stephenson and DT CEO Rene Obermann and explain to them that the time has come to face reality, renegotiate the break up fee to let DT out early, and cut their loses before AT&T stock starts to tank big time.

I demonstrate why below. Warning, as this is a “show your work” thing, it’s kinda long . . .

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Tales of the Sausage Factory

Deutsche Telekom Keeps Messing Up “T-Mo Is Doomed Unless AT&T Buys It” Song By Explaining Who Else Could Buy T-Mo

 Two weeks ago, Deutsche Telekom (DT) Chief Technology Officer Olivier Baujard accidentally spoke truth about T-Mobile to an audience of German investment analysts. After running through the usual company talking points about the effort to sell T-Mobile to AT&T (e.g., it will happen, DoJ is just playing hardball with negotiations, etc.), Baujard said at a public presentation at a Paris broadband conference that: “any rational company had a Plan B and that Deutsche Telekom had other opportunities for its U.S. operations should the U.S. Department of Justice succeed in terminating the deal.”

This is vitally important because, after accidentally shooting the “this is the only way to bring 4G to rural America” argument in the foot by accidentally leaking documents proving AT&T could bring 4G to rural America whenever it wants, and T-Mobile killed the ‘this will create jobs’ argument by confirming that it was preparing pink slips for more than 20,000 employees after the acquisition gets approved, the “T-Mobile is a sickly gazelle” argument is about all AT&T and it supporters have left. Unfortunately for AT&T, this is not the first time Deutsche Telekom has screwed up the “sickly gazelle” storyline by revealing inconvenient truths about its other options. And while there is usually a rule in Washington that “we totally ignore what you say to investors when it contradicts your chosen story,” this deal is sufficiently high profile and has sufficient problems that eventually someone may notice if AT&T’s “Sickly Gazelle Chorus” keeps getting thrown off key by Deutsche Telekom’s “We Have Lots of Other Options Counterpoint.”

More below . . . .

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Tales of the Sausage Factory

What’s At Stake in United Stated v. AT&T, Inc.? The Future of Antitrust. (Part I)

The Department of Justice (DoJ) Antitrust Division challenge to the AT&T/T-Mo deal, United States v. AT&T, Inc., in addition to being a huge deal for us in the telecom world, is probably the single most important merger review case for the next ten years. In two ways, this has become a battle about the future of antitrust enforcement and the soul of the Antitrust Division.

Yes, that sounds melodramatic, but I make no apologies. As I explain below, this case has become a test case for the nature of antitrust and whether traditional metrics of concentration and market share, notably the Herfendahl-Hirschman Index (“HHI”), coupled with the concerns that such concentration predicts both the ability of the largest company to raise process and for all surviving companies to raise process (the “coordinated effects” test), will still have validity going forward.  If the court accepts the arguments from AT&T and its defenders that the traditional measures of concentration are irrelevant, then antitrust review of mergers will essentially end for the next 5-10 years while economists and antitrust enforcers struggle to develop a new set of metrics for predicting the likely impact of mergers.

More importantly, however, this case represents a clear decision of the Antitrust Division to move ahead with enforcement despite the possible political consequences. Yes, politics has always mattered, and anyone who rises to the position of Assistant Attorney General for Antitrust has a well-developed political sense. The back channels for unofficial influence remain strong, and only a brave head of the Antitrust Division, whether or Acting or confirmed Appointee, seeks to challenge the most powerful and well connected companies in Washington.

But we have not yet reached the point where the head of the Antitrust Division decides to enforce the Antitrust law and the White House tries to pull it back. This may seem a small thing, but it is what separates us as a country that can still aspire to say it follows the rule of law and a country like Russia where  law enforcement is simply the extension of the policy of the ruling oligarchy. And I assure you, oh cynical reader, that when we cross that threshold you will know the difference between a society where influence matters and a society that has abandoned any pretense of the rule of law.

I shall reserve this second point for a separate post. I address the legal significance of the case below . . .

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Tales of the Sausage Factory

DoJ Says “No” To Ma Cell; Here’s What Happens Next (and Why It’s All Over But The AT&T Screaming)

In what is undoubtedly the best Labor Day present the Department of Justice ever gave America, DOJ has filed to block the AT&T/T-Mobile Merger in court. One should not, however, expect AT&T to give up easily. AT&T can, and almost certainly will, decide to fight rather than simply abandon the deal. If nothing else, it has $6 billion in break up fees to pay if the merger does not go through. On the plus side, the odds definitely favor the DoJ, which is why so many companies simply abandon the merger once DoJ has filed.

Meanwhile, the FCC, an independent agency, still needs to make its decision on what it will do. Unlike DoJ, where the head of the Anti-Trust division makes the call (subject to the usual political checks, of course), the FCC must have a vote on an Order, which must get a majority of the Commission (3 votes). Since Congress repealed the FCC’s ability to immunize phone mergers from antitrust back in 1996, the FCC cannot approve if DoJ wins in court. OTOH, the FCC is under no time pressure, and can wait to see how the court case turns out. At the same time, however, the court may decide to stay consideration until the FCC decides, since the merger cannot proceed without FCC approval.

All of this has huge implications for AT&T and its current bluster that it will fight DoJ for the right to eat T-Mo. Normally, AT&T could hope to get this wrapped up in a few months, and continue to try to use its political muscle to force a settlement. But the interaction between DoJ’s challenge and the FCC lawsuit make it incredibly difficult for AT&T to get this done before Deutsche Telekom decides it wants it $6 billion cash ‘n spectrum break up fee. As I explain below, AT&T must simultaneously persuade the FCC not to act while convincing the court to move at super speed, despite the fact that the usual way things work is for courts to wait for agencies to finish review (because the agency may remove the need for the court to act).

I explain AT&T’s legal problems below . . .

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Tales of the Sausage Factory

What the DoJ Documents Tell Us About the Comcast/NBCU Merger

In all the hoo ha about the Comcast/NBCU Merger, few folks troubled to read the Department of Justice Competitive Impact StatementComplaint, andConsent Decree. That’s rather unfortunate, as these documents sets forth a straightforward case under the antitrust laws for program access conditions for online competitors and for network neutrality. Here’s the short version:  Comcast pre-merger makes almost 30 times more money from providing cable service than from programming revenues. Even adding all of NBCU’s revenue, Comcast will still make more than twice as much from selling cable service ($34 billion) as from programming ($16.9 billion). Anyone who can do basic arithmetic would therefore conclude that yes, Comcast’s incentive to protect its cable business from erosion by online distributors (or even from traditional rivals) outweighs the potential gain from increasing programming distribution. As an added bonus, for those ideologically committed to believing otherwise, turns out Comcast’s own documents agree with the simple arithmetic and not the fun theoretical models their experts submitted. Which is why (among other reasons) DoJ continued oversight is not merely something extra. It really matters.

Lets break this out some below …

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Tales of the Sausage Factory

Congratulations to Gene Kimmelman, and to the American People.

I haven’t been posting much and will continue to be busy for the next while, owing to Passover and bunch of other things. But I had to give a brief post of congratulations to Gene Kimmelman on his appointment to the Department of Justice as Chief Counsel for Competition Policy and Intergovernmental Relations. Gene has been a tireless advocate for consumer protection and pro-competitive policies as the head of Consumers Unions Washington office. His addition to the DoJ in this critical office is good news for those who want to see policies that genuinely promote competition rather than deregulation for its own sake.

Stay tuned . . . .

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Tales of the Sausage Factory

AT&T's $10 DSL and the Renomination of Commissioner Tate: What The Senate Confirmation Hearing Should Ask

The Consumerist runs this good but inaccurate report on AT&T’s offering its mandated $10 DSL intro rate for those who have not subscribed to DSL previously. AT&T accepted this as a merger condition when it acquired BellSouth last year. What Consumerist gets wrong is that this condition comes not from the FTC, which did not review the merger (regular readers will recall that it was the Department of Justice Anti-Trust Division that gave the merger a thumbs up with no conditions). The price control aspect came from the FCC, as part of the bucket ‘o concessions AT&T made after it failed to get McDowell unrecused and suddenly had to respond to Democrats rather than blowing them off with bogus concessions.

This matters for two reasons. First, it means that complaining to the Federal Trade Commission, as suggested by Consumerist, is not exactly effective. FTC had nothing to do with the condition and won’t enforce it under their merger authority. If AT&T makes it damn hard for people to order the cheap rate, then there might be a claim as an unfair or deceptive trade practice, but I think that is kind of a stretch.

No, the place to complain is at the Federal Communications Commission. While it doesn’t hurt to file a complaint with the FCC’s Enforcement Bureau, you will also want to make sure that you copy it to the FCC’s record in the AT&T/BellSouth merger via its Electronic Comment Filing System (ECFS). The relevant docket number is 06-74.

But, more importantly, this raises some serious questions that Congress needs to ask not merely about AT&T’s commitment to honoring the merger conditions, but also about the FCC’s willingness to enforce them — especially in light of statements made by Chairman Martin and Commissioner Tate at the time of the merger. Fortunately, President Bush’s decision to nominate Tate for a second term provides an excellent opprtunity for members of the Senate Commerce Committee to put these questions to Commissioner Tate directly.

Because while $10 DSL is important, this is also important to other AT&T merger conditions, such as network neutrality condition. And while, unlike many of my colleagues, I don’t think Martin or Tate are mindless Bellheads or wholly owned subsidiaries of AT&T, I do think it’s important to get them pinned down on the record that they will vigorously enforce the merger conditions and not allow AT&T to weasel out by “complying” in a way that deprives these conditions of meaning.

More below . . . .

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Tales of the Sausage Factory

DOJ — “Antitrust? What's That?”

The U.S. Department of Justice Antitrust Division approved the AT&T/BellSouth mereger without imposing any conditions. By law, the DOJ Antitrust division has no obligation to explain its decision to take no action. Nevertheless, Assistant Attorney General Thomas Barnett did issue a statement explaining the decision to take no action. Apparently, the market has gotten so much more competitive since the DOJ imposed (albeit wussy) conditions last year on the Verizon/MCI merger and SBC/AT&T merger last year that DOJ can’t imagine why this merger might be anticompetitive.

We now bounce over to the FCC, where Kevin Martin has placed approval of the AT&T/BellSouth on the agenda for tomorrow’s FCC meeting. But will the meeting take place? Can Martin get the merger through without conditions? And why didn’t DOJ at least pretend to care and enter into some wussy conditions — rather than just roll over like a good little industry lap dog begging for treats?

Some guesses below . . . .

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Tales of the Sausage Factory

TotSF: I agree with the American Conservative Union

Well, on one thing anyway. ACU — one of the backbones of the conservative movement, is opposing attempts by Congress to pass yet another stupid bill on copyright enforcement. Details in this Wired article. The quote that caught my eye was:

“’It’s just plain wrong to make the Department of Justice Hollywood’s law firm,’ said Stacie Rumenap, ACU’s deputy director.”

Couldn’t agree with them more.

Stay tuned . . .

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