The week of March 21 was a bad one for Dan Hesse, president and CEO of Sprint Nextel Corp. On the eve of the wireless industry's annual gathering in Orlando, Fla., he was hit with the news that AT&T Inc. had struck a deal to acquire T-Mobile USA Inc. from Deutsche Telekom AG. The $39 billion combination not only snatched away what was widely believed to be an acquisition target for Sprint, but it put Hesse's company at a disadvantage in the race to grab market share in the wireless business. Compounding Hesse's discomfort, as current chairman of the Cellular Telecommunications Industry Association, he was obligated to put on as brave a public face as possible and act as the convention's de facto host.
According to press accounts from the International CTIA 2011 convention, Hesse was clearly shocked by AT&T's announcement and was able to carry his diplomatic obligations only so far. He used a panel appearance with Verizon Wireless CEO Dan Mead and AT&T's wireless chief Ralph de la Vega to attack the deal as a threat to the industry. Noting that it would put 79% of the U.S. wireless market share under control of AT&T and current market leader Verizon, Hesse predicted "consolidation could stifle growth and innovation."
Sprint announced it will oppose the acquisition, which requires approval by the Department of Justice and the Federal Communications Commission. The deal was also condemned by Free Press, Public Knowledge and other groups opposed to consolidation in the telecommunications and media sectors.
The merger will indeed face a long, and likely tortuous, regulatory review process, but outright opponents of the deal are the ones facing an uphill battle. It offers some clear benefits for wireless customers and offers to help meet a goal of the Obama administration by using telecommunications spectrum more efficiently. By integrating T-Mobile's frequencies into its network, AT&T can make its iPhone and other popular smart-device services much more reliable in congested markets like New York and San Francisco.
Allowing the merger to go through would give the FCC some breathing room in its effort to reallocate spectrum used for other services, particularly broadcasting, in order make more room to roll out superfast fourth-generation, or 4G, wireless products. It may be harder for opponents to make the case that price hikes will be the inevitable result. AT&T will press its claim that mergers have helped bring down rates on an hourly usage basis.
The opponents' job is made tougher because some likely allies have indicated they might sit out the fight. Mead told Reuters that his company would not oppose the merger. He added that he was not particularly concerned about losing Verizon's No. 1 spot in the wireless business and wouldn't defend its top position by making an offer for Sprint. "We're not interested in Sprint. We don't need them," he said.
The deal already has union support. Both AT&T and T-Mobile employees are unionized, and the merger is likely to better keep labor relations intact than a deal between T-Mobile and Sprint would have. Larry Cohen, president of the Communications Workers of America, quickly endorsed the deal. "Of all the possible partners, AT&T will mean better employment security and management record of full neutrality toward union membership and a bargaining voice," Cohen said in a statement issued only hours after the merger was announced.
Even consumer groups may split on the merger, because they see both risks and potential benefits. On the one hand, they fear the deal will reduce competition, boost rates and potentially give AT&T and rival Verizon a chokehold on mobile broadband.
They point to T-Mobile's aggressive advertising campaign and the innovative rate plans that T-Mobile offers as demonstrating the kind of competition that could be lost.
The deal's mere announcement has already changed the playing field, they say, pointing to its impact on Sprint. "The biggest threat is that the low-priced leader is being swallowed up by one of the high-priced companies, leaving two companies with three-quarters of the market," says Andrew Jay Schwartzman, senior vice president and policy director of the Media Access Project.
Advocacy group Free Press opposes the deal. "It will raise prices for consumers, decrease consumers' choice and give the company increased ability to regulate the flow of information over their network," says research director Derek Turner.
The opportunities come from regulators' review of the deal. The review will give consumer groups a chance to obtain concessions that they have sought for years in the cellular area. For example, consumer groups want lower text-messaging fees, limits on early-termination fees, net-neutrality concessions, easier ability for smaller carriers to get sought-after cellphones and potentially some pricing relief. Advocates also have been pushing to remove limits carriers place on using cellphone connections for other purposes -- like tethering of laptops or for calls made over the Web.
One consumer group official says the opportunities to use concessions to reshape cellphone industry practices are so great that he is weighing not directly opposing the deal, but instead seeking extensive conduct remedies. Mark Cooper, research director of the Consumer Federation of America, says pushing for conduct remedies also reflects the difficulty of using divestitures to remedy any antitrust concerns in the deal. If the feds are going to require the merged entity to sell assets, he says the question then becomes, "To whom?" Cooper says it could be difficult to find a viable competitor outside of Verizon or Sprint that would benefit enough to increase competition. "If you can't restore the competitive balance of industry [through divestitures], it raises a whole lot of questions about the structure of the industry. You have to ask the question about whether you have a deeper market structure problem" that needs to be dealt with, he says.
Yet other consumer groups are wary of limiting their fight to concessions. "Right now we are not thinking of conditions. We are looking at the problems that it raises," says Parul P. Desai, policy counsel for Consumers Union. She says there are many actions the FCC could take to ensure competition.
Complicating the fight for concessions is the uncertain lineup of the FCC. Unless President Obama quickly nominates a new FCC commissioner and the Senate confirms that choice, there is a good chance that Chairman Julius Genachowski could be minus one Democratic commissioner when the agency rules on the merger.
While Democratic Commissioner Michael Copps is a strong backer of net neutrality and would likely want net-neutrality conditions as part of significant conditions to be imposed, the FCC's review of the deal could well last into 2012. Copps' term as FCC commissioner expired last June. He has to leave the commission when Congress finishes its work this year, which will leave an equally divided FCC deciding the AT&T conditions. Republican FCC Commissioners Robert McDowell and Meredith Attwell Baker have strongly opposed net-neutrality requirements.
Thus, meaningful concessions may have to come from the Department of Justice. Christine Varney, head of the DOJ's Antitrust Division, earlier this year said she will be inclined to work with merging parties when they suggest remedies that might allow their deals to be approved. "We're also very mindful of parties' willingness to fix problems," she told a gathering of antitrust lawyers in February. "If they provide meaningful relief to our concerns, I don't see a reason to challenge."
On Capitol Hill, hearings are already slated by several committees, and while Democrats have been most active in questioning the deal, Republicans too have called for hearings. "We look forward to the ensuing discussion about what this transaction means for consumers, job creation, competition and our evolving communications marketplace," said House Energy and Commerce Committee Chairman Fred Upton, R-Mich., and Greg Walden, R-Ore., chairman of the House Energy Subcommittee on Communications and Technology, in a joint statement. They said they also want to look into the role of the FCC in approving deals. Many have argued that the FCC abused its sway over telecom mergers to win an agreement from Comcast Corp. to abide by the agency's net-neutrality policy in return for approval to acquire NBC Universal Inc.
AT&T has said it expects it will have to make some concessions.
"The deal will undergo a thorough review by the Department of Justice and the Federal Communications Commission," says Michael Balmoris, an AT&T spokesman. "We are confident that the facts will demonstrate that the deal is in the public interest and that competition will continue to flourish."
AT&T has been quick to line up supporters from some public interest groups. Within hours of the deal's announcement, the Hispanic Federation and the United States Distance Learning Association announced support. Within days the NAACP added its endorsements.
"The National Association for the Advancement of Colored People views AT&T's announced acquisition of T-Mobile USA from Deutsche Telekom as potentially benefiting communities, consumers and workers alike," said the NAACP statement.
The review is likely to offer the Obama administration a way to distinguish itself from the Bush antitrust team. For example, in 2006, the previous administration approved the BellSouth-AT&T deal without any conditions. That prevented opponents from using the Tunney Act to file objections in court and horrified consumer groups and some legislators who had called for conditions.
AT&T is clearly willing to deal to get this done. General counsel Wayne Watts told a gathering of analysts the morning after the deal was announced, "We're very confident we can achieve a successful regulatory review. This deal can and should be approved."
AT&T is offering Deutsche Telekom an extraordinary breakup fee and other favorable handouts if approval isn't obtained. If regulators reject the merger or AT&T refuses to accept the government's conditions, AT&T will have to pay a breakup fee of $3 billion, transfer certain spectrum to T-Mobile and provide T-Mobile a roaming agreement that is "favorable to both parties." Those terms give AT&T huge incentive to accept whatever demands the government is likely to impose.