T-Mobile-Sprint judge rules for companies in light of ‘dynamic and rapidly changing industry’
11 Feb 2020 12:43 pm by Flavia Fortes
The federal judge who approved T-Mobile's plan to buy Sprint said the usual presumptions in antitrust law don't work in this case because of the specifics of the dynamic, rapidly changing mobile wireless industry.
US District Judge Victor Marrero issued his decision today on the challenge brought by a group of states to the merger between the US' third- and fourth-largest wireless carriers. The 173-page decision came eight months after the states sought to stop the deal following clearance by the US Department of Justice and the Federal Communications Commission. The DOJ and the FCC cleared the merger with conditions intended to make way for Dish Network to become the new fourth national wireless carrier.
"Despite the strength of Plantiff states' prima facie case, which might well suffice to warrant injunction of mergers in more traditional industries, a variety of considerations raised at trial have persuaded the court that a presumption of anticompetitive effects would be misleading in this particularly dynamic and rapidly changing industry," Marrero said.
The judge found that Sprint is "falling farther and farther short of the targets it must hit to remain relevant as a significant competitor" and the merger would allow the merged company to continue T-Mobile's successful business strategy of spurring the two largest competitors to make pro-consumer changes.
Marrero said DISH persuaded the court at trial that it will take the opportunity to aggressively compete in the market for retail mobile wireless telecommunications services (RMWTS), to the benefit of price-conscious consumers.
"The FCC and DOJ have closely scrutinized this transaction and expended considerable energy and resources to arrange the entry of DISH as a fourth nationwide competitor, based on its successful history in other consumer industries and its vast holdings of spectrum, the most critical resource needed to compete in the RMWTS Markets," he said.
DOJ antitrust chief Makan Delrahim welcomed the judge's decision, particularly his conclusion that the department's divestiture and remedy package resolves the competitive concerns in this case.
"As I have noted before, should a minority group of states, or even one, be able to undo the nationwide relief secured by the federal government, it would wreak havoc on parties' ability to merge, on the government's ability to settle cases, and cause real uncertainty in the market for procompetitive mergers and acquisitions," Delrahim said.
New York's attorney general said today the state is reviewing its options, including a possible appeal, while California's attorney general said the coalition of states "is prepared to fight as long as necessary to protect innovation and competitive costs".
T-Mobile and Sprint are working toward completing their merger and expect to close the transaction as early as April 1.
The deal also is still awaiting a decision from the California Public Utilities Commission. The CPUC has until July 12 to issue a decision, but could extend the deadline.
It isn't clear whether the companies could structure their deal in a way that would let them close before CPUC action.
Particulars of wireless telecom industry
Marrero said the unique features of the wireless telecommunications industry and its impact on the entire population and on the national economy rendered it unlikely the proposed merger would produce anticompetitive effects.
He said the analysis of antitrust effects of specific transactions in dynamic markets, such as RMWTS, "warrants more particularized consideration than courts accord under traditional economic analysis, to that extent counseling greater caution in judicial intervention."
"[I]t commands no stretch of imagination to predict that many of the defining features and standards that characterize the wireless telecommunications industry today may be considered outmoded and unmarketable in the not too distant future, much like the brick phones of not long ago, and the flip phones that replaced them in a later generation of handsets," Marrero said.
The judge said projections of likely conduct in one type of market "should take account of the unique features of the particular market and not be gauged by economic standards and practices that characterize another."
"Effects on competition in the market for cinder blocks, for instance, should not be assessed by the rules and practices prevalent in the market for computers," he said.
"[T]he extreme complexity and dynamism characterizing the wireless telecommunications markets would justify treating the industry as unusual for the purposes of antitrust analysis, and hence not be examined solely according to traditional economic models or based narrowly on the simpler business calculus that may be more fitting in evaluating competitive effects in relatively simpler and stable product markets."
The judge said "it is not likely, perhaps improbable or even not rational" that a new market entrant would risk harm to its customer base, reputation and revenues instead of competing aggressively to add customers from competitors by adding innovations and investing more to increase market share.
"A boxer who has strived and sweated for years to reach the title prize fight is not likely to pull punches and take a dive the moment he steps into the ring against the reigning champ," he said.
Efficiencies substantiated by analogous past merger
In his decision, Marrero found that efficiencies would be substantial even if not quite as large as the plaintiff's prediction.
He cited the Horizontal Merger Guidelines — issued by the DOJ and Federal Trade Commission — in stating that efficiency claims may be verifiable if substantiated by analogous past experience, and in this case "[d]efendants' claimed efficiencies are verifiable in significant part because of T-Mobile' s successful acquisition of MetroPCS in 2013."
"Considering T-Mobile has already overdelivered on its projected efficiencies in an analogous past merger, the Court is persuaded that the Proposed Merger's efficiencies are ultimately verifiable rather than speculative."
Marrero stressed, however, that the proposed merger efficiencies he recognized are just one of many factors he considered and "do not alone possess dispositive weight in this inquiry."
Sprint as a weakened rival
The judge said that Sprint's decreasing competitive relevance — demonstrably poor network quality and numerous financial constraints — also weakened the strength of the states' case.
"Evidence that a merging party is a 'weakened competitor' that can't compete effectively in the future may serve to rebut a presumption that the merger would have anticompetitive effects," he said.
The judge said this is a "rare case" where the weakened competitor defense is applicable.
"Sprint's financial difficulties hamper its ability to invest in its network, which in turn prolongs its poor network quality and hurts its ability to generate the revenues necessary to improve its financial condition," the judge said. He concluded that no means other than the merger could resolve these difficulties.
Deference to FCC, DOJ remedies
Considering the remedies applied by the FCC and the DOJ, Marrero said that while their conditional approval doesn't immunize the merger from the states' challenge, "the reality remains that the court must now assess the proposed merger as conditioned by both the regulators after lengthy review."
"The Court declines to assume at present that the FCC and DOJ will, either through their regulatory review processes or lax enforcement, frustrate the conditions that they negotiated themselves over a period of 15 months," he said.
The judge said the court isn't bound by the regulatory agencies' decisions, and it doesn't simply adopt their conclusions wholesale, however, it "treats their views and actions as persuasive and helpful evidence in analyzing the competitive effect of this merger."
"The court will accord their views some deference," Marrero said.
He said the court is persuaded that DISH's entry will encourage competition in the RMWTS markets. "DISH is undeniably well equipped to enter the market by virtue of its large spectrum portfolio, which is worth roughly $22 billion dollars and rivals Verizon's in size," he said.
Entry by DISH
Marrero said DISH wouldn't face the industry's usual high barriers to entry, and because of its extensive preparations and regulatory remedies, it can sufficiently replace Sprint's competitive impact in the RMWTS markets.
"Under the commitments made to the FCC, DISH would stand to lose $2 billion in fines and $12 billion of spectrum if it fails to deploy a nationwide 5G network covering at least 70 percent of the United States population by June 2023," he said.
The judge said that because of that commitment, DISH's entry would fit into the three-year time frame some courts have said is the window for timely entry.
"[I]f Plaintiff States insist that entry must be assessed under an even stricter timeline, the Court would disagree that the two-year standard once specified by the Merger Guidelines should carry any talismanic force here," he added.
In any case, he said the current guidelines set no hard limit on the timeliness, but rather specify that entry must be "rapid enough to make unprofitable overall" any potential anticompetitive actions.
The judge considered the potential for coordinated and unilateral effects, ultimately concluding that neither are reasonably likely.
"Anticompetitive results such as higher prices and lower quality produced by coordinated or unilateral effects of a merger do not just 'happen,'" he said.
Marrero said each effect would require that "T-Mobile reverse course and effectively disestablish the business strategy and reputation it has developed over the past decade, even though the proposed merger gives it the ability to simply continue that business strategy on a greater scale and thus compete more effectively with the current market leaders AT&T and Verizon."
He said the likelihood of coordinated or unilateral effects is further diminished by Sprint's decline and DISH's entry into the RMWTS markets.
"The Court does not doubt that Sprint and T-Mobile are now direct competitors, as the evidence at trial reflected," he said. "The Court hesitates, however, to place too much stock in Shapiro's upward pricing pressure analysis given the numerous aspects of the market that it does not capture, as well as the potential that the underlying data may not be sufficiently reliable." Carl Shapiro is the economist hired by the states to support their case.
The judge said in complex and dynamic markets, anticompetitive behaviors, such as pricing strategies creating coordinated or unilateral effects, are likely more risky, impractical, or unrealistic for reasonable corporate executives to implement.
"The post-merger pricing structure in such markets is less likely to be a function of the calculations that the experts' traditional economic analysis and engineering models devise, and impelled more by the measures of conduct that reasonable business managers are likely to adopt when making real-world pricing decisions," he said.
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