Yesterday, the Department of Justice filed suit to block the acquisition of T-Mobile USA by AT&T, citing serious antitrust concerns. The Department of Justice is claiming that the disappearance of T-Mobile USA would reduce competition and raise prices in the industry through the "elimination of T-Mobile as an independent, low-priced rival." Making such a claim is a lot easier than to prove it in court.
In its complaint, the Department of Justice conveniently ignores the competitive reality in which consumers make their purchase decisions and replaces it with ideas and wishful thinking that fits into their world view. People make purchase decisions brand by brand and on a local level. People who don't want to spend a lot of money on wireless are not swayed about who is a national provider or not or if the price is set on a national level or not. They go for the lowest price. T-Mobile is clearly not the lowest priced provider in the market. Straight Talk, Boost, MetroPCS and Leap are--and people are leaving T-Mobile in order to join them. People who want to have a better value proposition but do not want to pay too much go to Sprint. People who want to have a better quality experience join Verizon or AT&T as both are growing in postpaid subscribers. T-Mobile is like Oldsmobile: too expensive for a low cost experience, not luxurious enough for the premium segment. Did anyone really feel an impact in the market when Oldsmobile disappeared?
Furthermore, the Department of Justice repeatedly cited the business and enterprise market and how critical it has been in its review. The problem is that T-Mobile USA is a virtual no-show in the business and enterprise segment. The Department of Justice puts a lot of faith in T-Mobile's ability to increase its position in the enterprise and government segment when they have historically been unable to and discount the ability of new entrants when they have been historically been successful. In the last year, two companies (LightSquared and Dish) have decided this is a market they want to enter because they think they can compete in it--betting billions of dollars against what the DOJ thinks and what MetroPCS, Leap Wireless, and Clearwire have shown to be able to do. None of the three companies have an easy time, but that's the hallmark of a competitive market. They have to fight for every customer.
The next step is a court hearing where the Department of Justice has to prove the anticompetitive effects of the merger. The judge in the case is Ellen Segal Huvelle, who is an antitrust expert. Judge Huvelle, a Clinton appointee, also presided over the SunGard Comdisco antitrust challenge in 2001, which the Department of Justice sought to block. SunGuard and Comdisco were the second and third largest provider of disaster recovery services compared to the second and fourth largest mobile operator in this case. Judge Huvelle was not convinced by the Department of Justice's case that the SunGuard Comdisco acquisition was anti-competitive and allowed the merger to proceed.
What if the merger is blocked? Customers have been leaving T-Mobile in droves--before the acquisition was announced and after the acquisition was announced--and are in all likelihood going to continue to leave the ailing operator. T-Mobile's market positioning has not changed significantly. It's still between a rock and a hard place. Verizon still has a better network, MetroPCS, Leap Wireless, Straight Talk and Boost still offer cheaper service, and Sprint has locked down the value segment through superior positioning. With Deutsche Telekom committed to getting out the United States, this leaves T-Mobile USA to die a death of a thousand cuts as their competitors are taking the company slowly apart. The company does not have the money to improve its spectrum constrained position to make itself competitive for the future and it does not have the cost base to go head-to-head against the low cost competition. Either way, we are down to three--through a fast death or a slow death.
We should also look at the economy overall. The decision of the Department of Justice to block this merger has clearly added to the nervousness in the market with the most of the telecom and technology sector taking a hit.
Roger Entner is the Founder and Analyst at Recon Analytics. Recon Analytics specializes in fact-based research and the analysis of disparate data sources to provide unprecedented insights into the world of telecommunications.