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 . . .
What’s So Important Legally?
We will keep in mind that the DoJ Complaint offers only the outline of the case, not the proof of the case. So what we see is the shape of the argument, not the underlying evidence that supports it. Nevertheless, the complaint is important because it shows us the lines of argument that DoJ will pursue.
DoJ has framed this as a classic antitrust/merger review case, citing to the traditional concerns of merger review and pointing to both the traditional metrics and the traditional harms. In particular, the DoJ points to three key arguments:
a) The level of concentration in the industry for national markets and 97 of the top 100 markets, as measured by increase in the HHI, show that this merger produces an unhealthy degree of concentration.
b) The increase in concentration will not only allow AT&T to raise prices and lower quality of service (the classic dangers of market power), but will allow the largest surviving firms to raise prices and lower customer service – even without explicit coordination with the combined AT&T/T-Mobile. Under this “coordinated effects” harm, the DoJ must show that the resulting market concentration enables better coordination among surviving companies, and is a traditional danger associated with market concentration.
c) T-Mobile is a “maverick” firm, meaning that it has beneficial (from a consumer standpoint) impact on pricing and service beyond its marketshare. Elimination of this firm from the market would therefore have an even greater than usual negative impact for consumers.
This may seem unexceptional. But for the last 20 years, a fierce debate has raged in the antitrust literature over whether the whole idea of industry concentration and market share, as measured by the HHIs, should continue to have validity in antitrust analysis. Perhaps unsurprisingly, two camps have emerged. On the one hand, antitrust advocates maintain that antitrust enforcement has become anemic (particularly during the last 8 years of the Bush Administration). They argue that the DOJ and FTC have increasingly ignored the doctrines of coordinated effects and the influence of maverick firms. They have also argued that HHIs understate the dangers of concentration depending on the market. On the opposite side, those who generally oppose “government intervention in the market” argue that HHIs either overstate the dangers of concentration, or are simply not a good indicator of market power (usually defined as the ability to raise prices post-merger). Each side points to what it considers compelling evidence of its point of view.
In 2010, after carefully considering the academic debate and weighing the evidence, the Department of Justice (DoJ) and the Federal Trade Commission (FTC) revised the Horizontal Merger Guidelines, the Bible of merger review for the two agencies. Reflecting the criticism of HHIs, the agencies revised the measures of concentration upward. At the same time, however, the agencies rejected the view that HHIs have no value. Instead, the agencies decided that HHIs remained a useful measure for predicting both increased market power for the merging firms and for increasing the likelihood of coordinated effects. The agencies, both in the Guidelines and in other recent merger review cases, also reaffirmed the importance of blocking deals that remove “maverick firms” from the market.
The AT&T/T-Mo deal presents pretty much everything that DoJ/FTC identified in the 2010 Merger Guideline revisions as raising red flags and likely to prompt a challenge. (I must sadly conclude Hal Singer was engaged in wishful thinking when he said the DoJ was sending “mixed signals” by challenging the AT&T/T-Mo deal in the wake of the 2010 Merger Guideline revisions. This is exactly the kind of merger the 2010 Merger Guideline revisions says the agency will challenge.) As such, it presents a perfect test of the doctrines on which the 2010 Merger Guidelines rest.
Which is why, as a legal matter, this case will define the future of merger review for the next decade. If the court finds for the DoJ complaint and issues an injunction against AT&T from acquiring T-Mobile, it will affirm the approach taken by the 2010 Merger Guidelines and tilt the antitrust dial back to the antitrust “hawks” who argue that merger review and enforcement has declined to levels unhealthy for the future of competition. By contrast, if AT&T prevails, it will vindicate the antitrust “doves” who maintain that none of the traditional market concentration metrics matter for determining whether a merger is likely to “substantially lessen competition” (to quote the relevant statute).
Mind you, the problem with the current state of criticism is that it doesn’t actually provide much of a metric for predicting the likely impact of a merger. Perhaps unsurprisingly, antitrust doves know what they don’t like (antitrust), but have some difficulty saying what sort of standard would actually prove satisfactory. Hence we see the unintended irony of a Competitive Enterprise Institute Fellow invoking Hayek against antitrust litigation, whereas the entire point of antitrust is to avoid the concentration of decision making power against which Hayek inveighed.
This brings us to why this case matters so much for the next 5-10 years. As noted above, this case represents a fairly straightforward application of the new Horizontal Merger Guidelines. The revisions to the Merger Guidelines were in no small part a response to the beating the DoJ took in United States v. Oracle, where the DoJ challenged Oracle’s acquisition of PeopleSoft in 2004. For the next 5 years after losing Oracle, neither DoJ nor the FTC brought a significant merger review challenge. While that was certainly in part a consequence of the political character of the Bush Administration (George Bush once stated that the only reason for antitrust was to prevent explicit price fixing), it was also a product of the two antitrust agencies struggling to figure out what, exactly, would make for a successful challenge.
Since Oracle, the antitrust agencies have issued the revised Merger Guidelines and, more recently, begun to challenge mergers based on the revised Merger Guidelines. The AT&T/T-Mo merger presents a straightforward up/down on the factors identified in the Merger Guidelines as relevant. If the agency prevails, it will send a clear signal to the DoJ, the FTC, and to potentially merging parties that courts will bless the revised Merger Guidelines and that the core concerns and metrics of traditional antitrust remain intact. If AT&T prevails, we can expect merger review enforcement to essentially go back on hold for another 5-10 years while the agencies try to determine what standard the courts will accept.
Stay tuned . . . .