Here is a fact. The FCC recently announced it would move to have a hearing about the AT&T and T-Mobile merger. In response, AT&T withdrew its application from the FCC, delaying the hearing indefinitely (or until AT&T resubmits the application).
What is that all about? At a procedural level it is just a detail — the FCC reviews mergers involving the transfer of licensing. The Department of Justice (DOJ) has a review process too, but just a different standard of review. The DOJ uses antitrust, while the FCC considers whether the merger is in the “public interest.” Even if the FCC delays its review, the FCC must continue to do its review. The first hearing in front of judge takes place in February.
Today’s post provides a little insider baseball about these reviews (The Wiktionary definition for insider baseball “Matters of interest only to insiders”), trying to explain the chess moves to a wider audience. Seemingly small procedural moves provide a window on the likely outcome of this merger. To paraphrase Robin Bienenstock and Craig Moffett of Bernstein Research, AT&T has not thrown in the towel, but they are acting like a firm who understands the odds of success are low. I prefer to think of it this way: economic substance does matter. This requires a brief explanation.
Here is the relevant background. Ever since AT&T announced its intention to merge with T-Mobile brand and absorb all its assets, I have had many conversations with friends in the industry, and these quickly descend into insider baseball. These conversations recently took on a whole new tenor because the FCC just announced plans to hold a hearing about the merger.
Prior to that announcement these conversations differed in one of two ways, depending on whether the conversations involved lawyers or a political analysts.
My basic observation has never changed: if this merger were a homework exercise in an economic textbook, then this merger could not pass without modification. It combines the second and fourth largest firms in a market that is already very concentrated. It would take large additional economic gains — in efficiency or some other facet of the situation — to make up for the higher prices, lower innovation and blockaded distribution higher concentration would generate.
And I would always end the same way. The insiders might know something the rest of us do not know about those gains. What are those gains, if any?
For quite some time lawyers have answered this question one way and political analysts answer another.
Lawyers invariably dodge the question, arguing that the framing is irrelevant. They launch into comments about the uncertain state of antitrust law in the United States, observing that many judges today do not think there is any valid reason to enforce any antitrust law, irrespective of the facts of the case. Such judges just do not like antitrust laws for ideological reasons. Recently such friends have gotten more specific, commenting on the odds of getting past the particular judge assigned to hear the from Department of Justice, as it tries to block the merger.
Political analysts, in contrast, avoid the question a different way, reaching the same conclusion, that the economic analysis was irrelevant. They invariably launch into comments about AT&T’s enormous powerful presence in Washington, observing that AT&T has gotten whatever it has wanted from the Obama and Bush administrations. Recently such friends have gotten very specific, about which representatives and senators were most likely to act on AT&T’s behalf.
To be sure, both answers do explain a number of events in the last decade. Both avoid the substantive question in this specific instance, under the (not entirely crazy) belief that economic substance generally does not matter for legal or political questions. However, both have the same flaw: economic analysis does not matter most of the time, but that does not imply its irrelevance all of the time in every instance.
To say it another way, both still beg the question: are there any benefits to make up for the drawbacks inherent in the merger?
Bit by bit the evidence started to accumulate during the summer. To make a long story short, there was not much evidence of benefits. To make efficiency gains AT&T would have to fire quite a few people, but to get the merger past its unions AT&T’s management had to promise to preserve jobs. To buy political support AT&T had to promise to build broadband in under-served areas, but independent analysis showed that far cheaper ways to build such broadband than through a thirty billion dollar merger. The economic benefits did not exist. To use an old expression, there was no there there.
That is my point. While sometimes — perhaps even most of the time — the underlying economic facts do not have any bearing on a review of a merger, in this case it has mattered. That is what the insiders are coming to terms with. In this case, the economic substance is egregiously below any minimal standard, so much so that it cannot be ignored.