On October 15, Japanese tech titan SoftBank announced that it will acquire 70% of Sprint Nextel. The $20.1 billion deal will allow Sprint to compete with the two largest American wireless companies, Verizon and AT&T, by providing Sprint with $8 billion in new capital. Of the $8 billion, $3.1 billion will come in the form of a bond, to be issued by Sprint shortly after the announcement, convertible at $5.25 per share; this gives Sprint some immediate access to capital that could be used to retire some debt, improve its wireless network, and possibly to buy additional spectrum if airwaves are auctioned in the near future. The closing of the transaction is scheduled for mid 2013 and the advisers to this transaction stand to earn up to $200 million.
Of course, it’s hard not to compare this deal to AT&T’s failed attempt to buy T-Mobile for $36 billion. However, the main reason that regulators opposed the AT&T deal was because it would reduce the number of national wireless choices from four to three. SoftBank’s acquisition of Sprint will likely make regulators happy, as it would strengthen one of the four national wireless competitors. Furthermore, both Verizon and T-Mobile are at least partly owned by foreign companies (45% and 100%, respectively).
This acquisition could provide some much needed cash and spark innovative ideas in a company that has constantly been lagging behind AT&T and Verizon. The rise of Sprint as a reliable alternative to those companies would increase nationwide competition, which could not only incentivize the development of more advanced wireless network technologies, but also reduce the price of wireless services for consumers.
The often-overlooked Sprint made two majors moves this week to take center stage in the “battle of the telecoms.” Sprint began the week by filing a suit on behalf of “consumers and competition” against both AT&T and T-Mobile in response to the potential merger between the two wireless companies and the recent block by the Department of Justice’s civil antitrust lawsuit..
Sprint’s filing is hardly surprising since they petitioned the Federal Communications Commission to block the merger and had no interest in potential deal sweeteners. Sprint likens the potential AT&T and Verizon control of the market to “Twin Bells.” The T-Mobile merger would give AT&T and Verizon “more than 78% of revenue and 88% of profits” and leave Sprint, the third and only remaining national carrier, in the dust. While Sprint’s push to block the merger may initially have seemed like an act of desperation, with the move of the Department of Justice to block the merger already in place, Sprint’s lawsuit can only add another level of concern for AT&T and T-Mobile as they are now forced to defend their proposed merger on multiple fronts.
However, AT&T may have more to worry about from Sprint than just a lawsuit. A rumor leaked on Friday that Sprint would not only soon be offering the coveted iPhone 5, but unlike AT&T and Verizon, Sprint would continue offering an unlimited data plan with the phone rather than moving to a tiered data option. Sprint’s possible activities concerning its own iPhone release may indicate that the AT&T/T-Mobile merger is actually good for innovation and competition as a few commentators have indicated. However, Sprint’s actions this week at least indicate the company is prepared to go down fighting in both the legal and market share arenas.
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.
AT&T could have brought a dilution claim against Verizon’s use of the slogan, “There’s a map for that,” which is very similar to AT&T’s slogan, “There’s an app for that,” featured in its own iPhone commercials.
In bringing a dilution claim, AT&T could have argued that Verizon’s use of “There’s a map for that” weakened the effect of AT&T’s slogan because consumers would no longer think exclusively of AT&T when hearing the phrase. It seems like AT&T would have had a good argument for dilution, but instead, it sued Verizon for false advertisement under the Lanham Act, federal trademark law.
The ads themselves feature two maps comparing AT&T’s 3G network coverage area to Verizon’s superior 3G coverage area. AT&T asked the court to stop Verizon from running the ads because they could mislead customers into thinking AT&T doesn’t offer any coverage in areas where its 3G network isn’t available. (In reality, customers can still make calls and access the Internet using AT&T’s slower EDGE or GPR networks, even where there isn’t 3G network coverage.) Verizon, on the other hand, argued that the ads simply point out that AT&T hasn’t invested enough in upgrading its network to handle new smartphone activity from the popular Apple iPhone.
In its response to AT&T’s complaint, Verizon wrote: “AT&T did not file this lawsuit because Verizon’s ‘There’s a Map for That’ advertisements are untrue; AT&T sued because Verizon’s ads are true and the truth hurts.” Verizon also pointed out that the Lanham Act requires AT&T to show actual proof that the ads are misleading consumers because First Amendment free speech is at stake in the suit. Verizon continues:
As to four of the five challenged ads, AT&T has presented no evidence of consumer deception. This alone is a sufficient basis to deny AT&T’s motion as to these ads. As to the one ad . . . AT&T commissioned a consumer survey . . . . But this survey is riddled with errors.
Apparently the court agreed. Judge Timothy C. Batton, a federal judge in Atlanta, declined to grant AT&T a preliminary inunction that would temporarily stop Verizon from running the ads. He stated that he didn’t believe AT&T would succeed in its claim based on the evidence submitted. The judge said:
I think that a person with a skeptical bent of mind might call Verizon’s ads sneaky . . . . I think a more sanguine view is that they are simply clever. Either way, however, they are literally true. And the Court holds that AT&T has failed to carry its burden of showing that they are nevertheless misleading.
Immediately following the court’s ruling, AT&T indicated that it would continue with the suit despite the initial loss, but it has since decided to drop the claim.
Perhaps AT&T realized that after its own expansive advertising campaign touting its network as the “fastest 3G network” (implicitly comparing it to Verizon’s coverage and other secondary competitors’ — such as Sprint and T-Mobile), it isn’t likely to garner much sympathy in its claims against Verizon. The bottom line is that Verizon’s maps of AT&T’s 3G network are accurate. If AT&T wants to say its 3G network is faster than Verizon’s, why shouldn’t Verizon be able to say its own coverage is more expansive than AT&T’s? Maybe AT&T realized that it should stop sinking its money into law suits and instead use it to fill those gaps in its coverage. Federal trademark law is meant to protect against false advertising, but this should promote fair competition, not hinder it. Therefore, Verizon’s ads, if accurate, should encourage AT&T to improve its service. This type of competition, in a free market, will hopefully produce the best quality products at the lowest prices for consumers.