Justice: Tough case against telecom

Building an antitrust case against Big Telco may not be easy. The Justice Dept. is in the early stages of a review aimed at determining whether the largest U.S. telecommunication service providers are impeding competition, The Wall Street Journal reported on July 6, citing people familiar with the matter.

But before this inquiry turns into a formal investigation or results in charges against companies, the government will need to amass evidence that rivalry has been stymied and consumers harmed. That could prove challenging, legal experts and former government officials say. "There's no obvious antitrust case to me," says Donald Russell, an attorney who was chief of the telecommunications task force at the Justice Dept. until 2001.

A big concern for regulators and lawmakers is the industry's affinity for partnerships that wed a particular wireless handset to a single service provider, such as the arrangement whereby AT&T is the sole distributor of Apple's iPhone in the U.S. Smaller service providers say these deals bar them from selling some of the hottest phones on the market. Consumer advocates allege they limit consumer choice; the iPhone is of little use to a Verizon Wireless customer, for instance. The Federal Communications Commission has agreed to examine whether handset exclusives harm consumers and stifle competition.

Law Experts Are Skeptical

Yet, exclusive devices account for only a small percentage of overall mobile device sales, making it hard to prove they give one carrier an undue advantage over rivals. In June, Apple iPhone's had 8% of retail sales at the nation's largest carriers, according to a survey from Avian Securities. That month, of about 600 handsets available through all U.S. carriers, only 14 were exclusive to a given carrier, mobile service providers say. There's no question that AT&T has benefited from its pairing with Apple, attracting more than 1.2 million new customers in the first quarter alone, in large part due to the iPhone. At the same time, there's little evidence its closest rival, Verizon Wireless, has suffered much. Verizon Wireless added 1.3 million new subscribers in the same period.

Justice Dept. officials will "have a hard time proving" the deals impede competition, says Thomas Hazlett, professor of law and economics at George Mason University School of Law and a former chief economist at the FCC. "It will be a very tall hill to climb."

In spite of the pairings, the wireless market remains competitive, analysts say. Most cities have at least three providers vying for customers, and the number has risen recently as cable companies such as Comcast join the fray. That helps keep prices on service plans and handsets low, analysts argue. "Put simply, there are just too many competitors," Sanford C. Bernstein analyst Craig Moffett wrote in a recent report.

Investigation Isn't a Given

AT&T and Verizon Wireless, the largest U.S. mobile service providers, say they have not been contacted by the Justice Dept. and have no knowledge of an inquiry. A Justice representative declined to comment, as did spokespeople for Sprint Nextel and T-Mobile USA, the third- and fourth-biggest wireless carriers, respectively.

An internal inquiry may not result in a formal investigation. "At this stage, it could be something they consider but then quietly drop," says Harold Feld, legal director at consumer advocacy group Public Knowledge. Even if it comes to fruition, an internal review could take more than a year, and a resulting lawsuit several more years, says Marc Schildkraut, an antitrust attorney and partner at law firm Howrey.

However hard it may be to build an antitrust case against telecom carriers, the political will to bring regulation to the largely unfettered wireless industry is growing in Washington. On July 6, Senator Herb Kohl (D-Wis.), chairman of the Senate subcommittee on antitrust, competition policy, and consumer rights, sent a letter to the Justice Dept. and the FCC. "It is vitally important that the FCC and the Justice Dept. take action to enhance competition in this market and to remove barriers to competition preventing the emergence of new competitors," he wrote.

New Era Under Obama

Small carriers, seeking the end of exclusive handset agreements, are openly lobbying Congress. "We intend to pursue every avenue for relief," says Eric Graham, vice-president of government relations at carrier Cellular South.

Under President Barack Obama, Justice has taken a decidedly more aggressive stance on antitrust issues. Assistant Attorney General Christine Varney has vowed to return to "vigorous antitrust enforcement action" by the department.

The department also has recently hired several well-known experts who favor increased government regulation of telecom companies. One, former law professor Philip Weiser, argued in 2005 congressional testimony that "today's regulatory regime… is fundamentally flawed." Another recent hire, Gene Kimmelman, had been vice-president for federal and international affairs at Consumers Union, which has long argued for increased government regulation. He also represented consumers during the breakup of AT&T two decades ago. In April, he became the Justice Dept.'s chief counsel for competition policy and intergovernmental relations.

Still, they and other Justice Dept. officials will have a big job taking on Big Telco.

Kharif is a senior writer for BusinessWeek.com in Portland, Ore.