California PUC Scheduled to Vote on Charter/Cox Transaction: Additional Bites at the "Conditions" Apple Shouldn't Be Allowed to Upset the Pro-Consumer Cart

Next Thursday, the California Public Utilities Commission (CPUC) at long last is poised to vote on the transfer of control of Cox Enterprises, Inc. (Cox) to Charter Communications, Inc. (Charter). And with little time to spare. The question is, will extra-legal attempts to saddle this pro-consumer transaction with unjustified conditions "jeopardize the Transfer's public benefits altogether"?

In comments filed with both the CPUC and the FCC, a June 2025 Perspectives from FSF Scholars, and a series of blog posts, Free State Foundation President Randolph May and I consistently have argued that the proposed combination of Charter and Cox is likely to generate clear consumer-benefitting efficiencies and, as a result of the de minimis overlap of their service territories as well as the impact of intense competition from Big Tech, no significant offsetting harms.

As we concluded in our submission to the FCC:

[T]he combination of Charter and Cox promises numerous consumer benefits. These include [(1)] lower costs, greater choice, and additional innovation in traditional cable offerings (broadband and video) fostered by an enhanced ability to compete with often much larger rivals, including Big Tech platforms with global reach; (2) the expansion of Charter's hybrid [mobile virtual network operator] offering into Cox's footprint combined with lower costs through greater scale; and (3) the "onshoring" of Cox customer-service jobs. And given the lack of any meaningful overlap in service territories, not to mention the high level of third-party competition in all three marketplace sectors, there appears to be little, if any, basis for concern that the transaction could result in significant harms.

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Regarding the state of play in California, the last hurdle that the transaction must clear, let's start with (potentially) good news: as I noted in my June 23 post to the FSF Blog, the parties expressed concern in a June 18 notice of ex parte communication that the CPUC's failure to act by August 13 – that is, the very day upon which the vote is scheduled – could result in the expiration of the Department of Justice's Hart-Scott-Rodino (HSR) approval. That "would cost the companies $2.5 million in filing fees and require them to wait at least another 30 days for DOJ clearance."

Should a vote to approve proceed as scheduled, those imminent instances of inefficiency and waste would be averted.

And now, let's turn to the (potentially) bad news: as I described in that same blog post, commenters, certainly aware of that looming deadline, had urged the CPUC to impose still more conditions – that is, on top of those agreed to by the parties in comprehensive settlements (Settlements) with the CPUC's Public Advocates Office and the California Emerging Technology Fund (CETF) and described in a May 18 notice of ex parte communication.

(Without getting too far into the weeds, there are two proposals before the CPUC: (1) the Proposed Decision of Administrative Law Judge Ormond (PD), to which Charter and Cox roundly object, and (2) the Alternative Proposed Decision of Commissioner Matthew Baker (APD), which is based upon the Settlements.)

In reply comments, CETF took issue with the PD, contending that "[b]ottom-line, a settlement agreement requires the assent of its parties" (emphasis in original).

Similarly, in their reply comments regarding the PD, Charter and Cox asserted it "deviates from longstanding Commission precedent, resulting in 'clear legal error and technical inconsistency,' by improperly superseding Settlement terms, and imposing extraneous measures with no record support. It would materially impede Charter's ability to compete and jeopardize the Transfer's public benefits altogether" (citations omitted).

By contrast, Charter and Cox noted approvingly in their reply comments on the APD that it "correctly finds that the Transfer, with the Settlements, serves the public interest, and, 'paired with the mitigations' that Joint Applicants accept (subject to modest revisions), also 'address[es] concerns raised by parties outside the [Settlement A]greement[s]'" (emphasis in original).

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The Settlements to which Charter and Cox – as well as the CPUC's Public Advocates Office – are a party appear to be more than sufficient to address any potential harms resulting from this transaction. The CPUC therefore should reject calls to unilaterally supersede those agreements and instead approve the APD at its meeting next week.

Is California Leveraging the Clock to Extract More Concessions From Charter and Cox?

In a March post to the FSF Blog regarding the merger between Charter Communications, Inc., and Charter Holdings, LLC (collectively, Charter) and Cox Enterprises, Inc. (Cox), I identified the California Public Utilities Commission (CPUC) as "the final, time-sensitive hurdle preventing the formation of a combined company better able to compete in broadband, mobile, and video." In recent days that time-sensitive hurdle has grown substantially.

In a video conference that took place on June 15 described in a June 18 notice of ex parte communication, representatives from Charter reiterated its concerns that the CPUC's timeline for action "would not sufficiently account for unforeseen or unanticipated delays that may occur, and that failure to complete the Transaction review prior to the [Hart-Scott-Rodino Act (HSR)] expiration would jeopardize the Transaction and the consumer benefits it would produce."

Meanwhile, Broadband Breakfast (subscription required) reports that "[s]ome advocacy groups in California want the state to tack on more conditions if it approves Charter's $34.5 billion acquisition of Cox Communications." Any such conditions would be in addition to commitments – including, among other things, a "$275 million investment over three years to upgrade Charter's network to support symmetrical gigabit service across its legacy service areas" – already agreed to in comprehensive settlements with the Public Advocates Office and the California Emerging Technology Fund described in a May 18 notice of ex parte communication.

Coincidence? Who can say.

What we do know is that the parties to this transaction – which has obtained the approval of the FCC, the Department of Justice (DOJ), and every other state within which they operate – repeatedly have warned the CPUC that its failure to sign off on the deal by September 15 at a minimum "would cost the companies $2.5 million in filing fees and require them to wait at least another 30 days for DOJ clearance."

Accordingly, the parties have on numerous occasions urged the CPUC to act "promptly." Most recently, and as described in the June 18 notice of ex parte communication referenced above, Charter explained why CPUC action by August 13, rather than its next meeting scheduled for September 3 (that is, a mere 12 days before HSR clearance expires), is "necessary."

As Free State Foundation President Randolph May and I explained in comments submitted to the FCC, and as every other reviewing body has concluded, the combination of these two companies will benefit competition – and, in turn, consumers.

The time for regulatory arbitrage has run out.

The CPUC should act before the DOJ's HSR clearance runs out, too.

FSF Files Comments on FTC and DOJ Merger Enforcement

On April 21, the Free State Foundation submitted comments to Federal Trade Commission and the Department of Justice in response to their Request for Information on Merger Enforcement. The comments were written by FSF President Randolph May, Senior Fellow Andrew Long, and Legal Fellow Andrew Magloughlin. FSF's comments recommend that the FTC retain a case-by-case merger review process that weighs the totality of the circumstances, including merger-specific efficiencies and other contextual factors such as market structure and dynamic innovation. 

FSF's comments focus on the lessons to be learned from the T-Mobile/Spring merger, since it "exemplifies the probative value of an efficiency-centered, case-by-case approach." The introductory section of FSF's comments explain:

As predicted, that merger already has led to substantial pro-consumer efficiencies, including expedited deployment of next generation 5G service, network quality improvements, and continued downward pressure on prices. It also has confirmed the folly of relying on narrow market definitions in complex, dynamic markets. Indeed, that no consumer harm resulted is likely because, viewed through the appropriate lens – that is, the broader "broadband market" rather than the outdated mobile-only market – the T- Mobile/Sprint merger did not constitute a "4-to-3" merger as some alleged. 

Additionally, FSF's comments stated that "any revised guidelines should not adopt presumptions of harm." As the comments explain: 

There is no clear empirical evidence that vertical mergers are harmful on net. But there are numerous examples where predictions of harm have not materialized, including the AT&T/Time Warner, Comcast/NBC Universal, and AOL/Time Warner mergers, combinations with which Free State Foundation scholars are very familiar. The inaccuracy of those often overheated pre-merger prognostications of harm confirms that a case-by-case approach remains preferable to presumptions of harm for vertical mergers. 

FSF's comments to the FTC and DOJ on merger enforcement is available here.

Now Available: Videos of FSF Conference Keynotes from Jeffrey Rosen, Christine S. Wilson, and Robin Colwell

The Free State Foundation held its Twelfth Annual Telecom Policy Conference last Tuesday at the National Press Club in Washington, DC. Perhaps you were unable to attend "Broadband Beyond 2020: Competition, Freedom, and Privacy," either in person or via Facebook live stream. Or maybe you were one of the many in the audience and would like to take a second look. In either case, we have good news: the morning keynote addresses are now available on our YouTube page.

After a Welcome and Introduction by Free State Foundation President Randolph J. May, Jeffrey Rosen, Deputy Attorney General of the United States, kicked things off with remarks that touched on technological innovation, antitrust, and Section 230 of the Communications Decency Act of 1996. Alden Abbott, General Counsel of the Federal Trade Commission, afterwards provided his Reactions.

Next up was FTC Commissioner Christine S. Wilson, who gave a speech entitled "Free Markets, Regulation, and Legislation: A Place for Everything, and Everything in Its Place." Commissioner Wilson discussed the benefits of free markets, competition, and deregulation; the "toxic outcomes" that can result from heavy-handed regulatory regimes; and the need for federal privacy and data security legislation. Two Members of FSF's Board of Academic Advisors – Theodore Bolema, Executive Director of the Institute for the Study of Economic Growth in the Department of Economics at Wichita State University, and Tim Brennan, Professor of Public Policy and Economics at the University of Maryland – followed up with their Reactions to her remarks.

Robin Colwell, Special Assistant to the President for Economic Policy, gave the final keynote before the lunch break. Ms. Colwell discussed the critical role that broadband plays in the economy and Americans' lives; pending legislation; efforts to address the digital divide; and 5G. Michelle Connolly, Professor of the Practice of Economics, Duke University, and Member of FSF's Board of Academic Advisors, then offered her Reactions.

MEDIA ADVISORY: Senators Warren, Sanders, and Booker Improper Request Infringes First Amendment Rights

With regard to the letter dated June 24 sent by Senators Warren, Sanders, and Booker, to the Department of Justice and the FCC, the following statement should be attributed to Free State Foundation President Randolph May:

“Senators Warren, Sanders, and Booker wish to use Sinclair Broadcast Groups’s acquisition of 21 Regional Sports Networks and Fox College Sports from Walt Disney Company as a means to pressure Sinclair to alter what the Senators characterize as Sinclair’s 'partisan political messaging.’ In the context of matters involving principally sports programming, they say they are concerned about Sinclair’s efforts 'to inject conservative-tinged coverage into local markets.’

Of course, neither the Department of Justice nor the FCC has any business judging the content of Sinclair’s programming to assess whether it is 'partisan' or ‘ onservative.' For either agency to do what the Senators ask is inconsistent with the First Amendment’s guarantee of free speech and freedom of the press. The Senators know better — or surely should if they wish to run for president. Aside from whether their characterizations of Sinclair’s programming are even accurate, their purpose, an improper one, is to use government power to influence Sinclair’s editorial discretion.

It’s sad that Senators Warren, Sanders, and Booker are trying to misuse the agencies in this way. The media, which have an interest in promoting a proper understanding of the First Amendment, ought to call them out for it."  

More Momentum for New T-Mobile Following Hawaii Commission's Approval

It's been reported that Hawaii state regulators approved the proposed T-Mobile/Sprint merger. As it now stands, the proposed merger has received approval from 18 of the 19 purportedly required state public utility commissions (PUC). That leaves only California's PUC. To repeat what I wrote in a February blog post, California's PUC should promptly complete its review of the T-Mobile/Sprint merger.

Randolph May and I have described the potential 5G benefits of the pending deal in the Free State Foundation's initial public comments and other publications, including our Perspectives from FSF Scholars paper, "T-Mobile/Sprint Merger Offers Public Interest Benefits: Likely Presents a Fast Track to 5G." In that paper, we explained that the merger, if approved, would enable accelerate deployment of a nationwide 5G network. New T-Mobile would strongly challenge mobile wireless market leaders AT&T and Verizon, providing consumers and enterprises faster mobile broadband speeds, increased network data capacity, and lower per-megabit prices. 

Moreover, Sprint faces serious financial challenges. Absent the proposed merger, Sprint faces potentially significant future financial and competitive decline as a standalone provider. (See this blog post and FSF's reply comments for more on this point.)

Now that FCC approval of the proposed T-Mobile/Sprint merger (with conditions) has been signaled by Chairman Ajit Pai and two other commissioners, the U.S. Department of Justice ought to provide its approval, and soon. As FSF President May was quoted in TR Daily on May 19:

[W]ith the new commitments that T-Mobile/Sprint have now offered, the case for concluding there are public benefits from the merger has become even stronger. There is an imperative that the U.S. lead the world in the race to deploy 5G networks, the super-fast next-generation of wireless networks. And there is also an imperative that high-speed broadband be accessible more ubiquitously to rural Americans. The new T-Mobile-Sprint conditions should help the U.S. achieve both of those imperatives… I hope the FCC and the Department of Justice will move forward now with dispatch in completing their merger reviews.

Considering Sprint's Decline and the T-Mobile/Sprint Merger

Did you see Sprint's latest financial reports? Here is the Wall Street Journal's May 7 story, "Sprint Reports Steepest Decline of Cellphone Customers in Years," which contains the gory details.

In short, Sprint lost far more postpaid customers than anticipated. As the WSJ lead put it: "Sprint lost 189,000 of its most lucrative phone connections in the first three months of the year, the steepest such decline since at least 2015." The net loss attributable to Sprint was $2.17 billion for the quarter. You can peruse the entire report for more facts and figures.

I'm willing to stipulate, of course, that in an ideal world – or more to the point here, in an ideal market – the existence of more viable competitors is preferable to the existence of fewer viable competitors. I understand that.

But, unlike the proverbial wheat market used to explain supply and demand in an Econ 101 course, the telecommunication marketplace, of which wireless is a segment, is not a textbook teaching ideal. It is a real-world marketplace with a market structure that necessarily is influenced by – if not dictated by – the tremendous investment and financial resources required to build-out and expand ubiquitous network facilities.

So, Sprint's ongoing financial difficulties have real-world financial and marketplace implications. Sprint's chief executive said, in the aftermath of the latest earnings report, that absent approval of the T-Mobile/Sprint merger, Sprint may have to narrow its coverage.

I take no pleasure in the travails of any person – or any company.

Nevertheless, it would be blinking reality for the Department of Justice and the FCC not to take account of Sprint's financial difficulties in the context of considering the T-Mobile/Sprint merger. In initial comments filed in August 2018 in the FCC's proceeding to review the proposed merger, I (along with my Free State Foundation colleague, Seth Cooper) said this: "It appears unlikely that T-Mobile and Sprint separately would have the capital resources necessary to invest in and timely deploy nationwide 5G networks that could compete effectively with AT&T and Verizon."

And in the September 2018 reply comments this: "Sprint’s recent financial history and analysts’ projections reveal that a standalone Sprint would likely be less competitive and perhaps not even viable in the 5G era."

Sprint's financial condition hasn't improved since those FCC comments were filed. Nor have its prospects as a sustainable wireless competitor in the broadband marketplace.

With all the focus, rightly, on enhancing the U.S.'s prospects for 5G leadership, and aside from all the other reasons, it would be foolish for U.S. authorities to rely on formulaic shibboleths, such as "no 4 to 3 mergers," when the sustainability of one of the four increasingly is in doubt.

DOJ Antitrust Division May Be Off-Base on T-Mobile/Sprint Merger

Here is a MEDIA ADVISORY that I distributed a short while ago:

The following statement may be attributed to Free State Foundation President Randolph May:

"I was disappointed to read the report in today’s Wall Street Journal that the T-Mobile-Sprint merger may be encountering resistance from the Department of Justice’s Antitrust Division. If this is true, it is problematic because I fear that the Antitrust Division may be relying on an outdated static view of the relevant market rather than one that reflects today’s market dynamics. The T-Mobile/Sprint combination will likely make the wireless market even more competitive by creating a stronger third place competitor behind Verizon and AT&T. Increasingly, it looks like a standalone Sprint will play a diminishing role as a competitive check. 

But I fear the DOJ staff may be making a more fundamental mistake by not appreciating the extent to which wireless companies now compete in a larger broadband market that includes both wireline and wireless companies using various technology platforms. Clearly, wireless and wireline broadband services increasingly are substitutable — including for streaming video services at an exponentially growing rate — and 5G deployment will only accelerate this convergence trend that has uprooted the old legacy market definitions.

The Antitrust Division made a mistake in the AT&T/Time Warner case in not taking a realistic view of recent marketplace changes that should have alleviated its supposed competitive concerns. I hope it doesn’t make the same mistake with T-Mobile/Sprint because it is hung up on applying an outdated view of the marketplace dynamics."

The T-Mobile/Sprint Merger on Day 122

On April 29. 2018, T-Mobile and Sprint announced that they had entered into an agreement to merge. On July 18, 2018, applications seeking Federal Communications Commission approval of the merger were accepted by the agency, initiating a pleading cycle for those wishing to oppose, support, or just comment on the merger proposal.

So, July 18 is the date the FCC's famous (or infamous, depending on your view) "shot clock" began ticking. Under the Commission's self-imposed shot clock, the agency has 180 days to act on applications seeking approval of mergers. For various and sundry reasons, including a government shut-down, the Commission can pause the clock. If you look at the clock now, you will see it has been stopped at "Day 122" while the Commission seeks public comment on additional information submitted by T-Mobile and Sprint.

My purpose here is not to complain about the "shot clock" generally or the pace of the FCC's review of the T-Mobile-Sprint proposed merger – although I'll reserve the right to do so later if it seems appropriate. Rather my purpose is to offer – briefly – a few thoughts on where matters stand as we approach the one-year mark of the merger announcement, albeit only on Day 122 of the stopped shot clock.

At some point in the merger review process, it is not unusual for competitors of the merger applicants to become more vocal in their opposition to the merger. In fact, it is unusual if they don't. Of course, the competitors' opposition is couched in "public interest" lingo, not overtly protectionist lingo – such as "please, Mr. Commissioner, protect me from having to compete against a stronger post-merger competitor."

Let me be frank: In my view, T-Mobile and Sprint have succumbed to such special pleading in the past based on just such a "competitor protectionist" reflex. And, to be sure, they have had plenty of company from other market participants seeking to use the regulatory process to protect their positions.

But any party's past behavior in this regard is irrelevant. The Commission (and the Department of Justice, of course) need to keep in mind that a primary objective of the public interest analysis is to determine whether the merger will have an adverse impact on competition, not on competitors. These are two entirely different things, but they are often conflated, deliberately or otherwise.

As my Free State Foundation colleague Seth Cooper and I have explained in detailed substantive comments and reply comments filed with the FCC, in this instance the proposed merger is likely to enhance competition in the wireless broadband market and also in the overall broadband market. Indeed, as we explain at some length in those comments, given the growing cross-platform competition between wireline and wireless providers employing differing technologies, and especially with the advent of 5G networks, it is this broader broadband market that, more properly, is the relevant market for purposes of analyzing the merger's competitive impact.

Another matter of which to be wary beginning right about now in the merger process are increasingly vocal cries for the imposition of various and sundry merger conditions from competitors and other parties. They have a right to plea for this or that condition, of course. And the "public interest" standard under which the merger is judged at the Commission, as opposed to the competition standard at DOJ, is sufficiently indeterminate that all manner of objections and proposed conditions are claimed to fit under the public interest umbrella. These include, by way of one example, the notion that the Commission should condition merger approval on elaborate commitments regarding job retention, maintenance of employee counts for certain types of positions and in certain locations, and so forth. However commendable the commitments already offered by T-Mobile and Sprint with regard to these matters, concerns like these relating to job protection should not be at the core of the Commission's public interest analysis.

Please note: This is not to say matters like these are unimportant or totally outside of the public interest ambit, but they shouldn't be at the core. At the core of the merger review analysis should be consumer welfare– or put even more simply without the gloss of the economists' lingo: Overall, and over time, are consumers likely to benefit from the efficiencies and synergies associated with the merger?

At this point in the review process, I don't have any reason to alter the view expressed in the comments filed with the FCC on August 27, 2018:

[T]here is strong evidence that the proposed T-Mobile/Sprint merger, if approved, would greatly benefit consumersand enterprises by enabling faster mobile broadband speeds, higher data capacity, and reduced per-megabit prices. A combined “New T-Mobile” would have the resources to rapidly deploy a nationwide 5G network and to compete more effectively against AT&T and Verizon, presently the two largest wireless carriers. On its face, the proposed merger appears to satisfy the public interest standard.

Note the emphasis on consumers in our original FCC submission.

Now, one final but yet important point: In the D.C. Circuit's recent opinionin United States v. AT&T, Inc. affirming the District Court decision refusing to block the AT&T/Time Warner merger, the court repeatedly pointed to the trial court's reliance on "real-world evidence" over proffered "quantitative" economic models divorced from real-world data. Each merger is different, of course. Nevertheless, fairly read, the D.C. Circuit's opinion should be a caution for antitrust and regulatory authorities not to be overly seduced by theoretical economic models prepared by the "quants" that are divorced from the dynamic realities of today's communications marketplace.

Certainly, at a time when cable operators and Internet web giants like Google, along with regional carriers, are competing for customers in the wireless marketplace, it would be wrong for regulators to put much weight on static quantitative models purporting to suggest that there must be at least four nationwide facilities-based wireless operators in order to protect consumers.

This would be the equivalent of committing analysis by shibboleth-paralysis.  

With all the foregoing in mind, on Day 122, I continue to hold that the proposed merger of T-Mobile and Sprint likely will benefit consumers.

EU Commission Approves T-Mobile-Tele2 Merger in the Netherlands

No doubt that in analyzing market impacts and competitive concerns, every proposed merger is different. The analysis is necessarily fact-intensive, or should be. Unfortunately, there are some who generally fall back on well-worn mantras, such as "big is bad," or in the case of the wireless market, "less than four facilities-based competitors" is unacceptable.

With this in mind, I find the EU Commission's approval of T-Mobile NL's acquisition of Tele2 NL very interesting. EU Commissioner Margrethe Vestager, cdertainly no slouch when it comes to antitrust enforcement, said: "Access to affordable and good quality mobile telecom services is essential in a modern society.  After thoroughly analysing the specific role of T-Mobile NL and the smaller Tele2 NL in the Dutch retail mobile market, our investigation found that the proposed acquisition would not significantly change the prices or quality of mobile services for Dutch consumers".

Key facts: The merger involved the third and fourth largest wireless operators in the Dutch retail market. After the merger, the combined company would have approximately a 25% market share. The EU Commission certainly didn't accept the notion, accepted in some quarters as almost religious dogma, that a national wireless market must have at least four facilities-based carriers in order to be effectively competitive.

Now, back in the states, T-Mobile's proposed merger with Sprint would combine the third and fourth largest carriers. After the merger, their combined share of the facilities-based wireless market would be approximately 30%, still trailing either of the two largest U.S. providers, Verizon and AT&T, in market share. 

Also, noteworthy, turning back complaints from mobile virtual network operators that they would be disadvantaged, the EU declared: "[T]he investigation showed that any potential change in conditions for virtual mobile network operators due to the proposed merger would not have a serious impact on the level of competition in the Dutch mobile telecoms market."

Again, I am not saying, of course, that the EU's decision should dictate the outcome of the FCC and the Department of Justice T-Mobile-Sprint transaction reviews. As I said at the outset, the analysis of each merger is fact-intensive.

I am just saying…that the EU Commission decision is worth considering.

P.S. For much more regarding the context in which the proposed T-Mobile/Sprint merger should be evaluated by the U. S. authorities, see the Free State Foundation's comments and reply comments filed in the FCC's transaction review proceeding.

Judge Denies Motion by Department of Justice to Exclude Evidence AT&T and Time Warner Plan to Present in Merger Trial

The federal judge presiding over the Department of Justice’s challenge to the AT&T-Time Warner merger has denied the motion by the DOJ to exclude evidence the merger parties plan to present at trial. That evidence is an offer to agree for seven years to arbitration in any Turner Networks carriage disputes with cable systems and other programming distributors that compete with ATT’s DirecTV and U-Verse. The combined companies would also agree not to “black out” these channels while the dispute is before an arbitrator. This offer appears to be modeled after the behavioral relief that DOJ and the Federal Communications Commission imposed in their settlement of their antitrust challenge to the Comcast-NBC merger in 2011.

This ruling could be important at trial. In its pre-trial brief, the DOJ indicates that it will rely on case studies to show the economic impact of programming that is removed from cable system when programming providers and distributors fail to reach agreements on prices. DOJ intends to argue that AT&T’s power to withhold Time Warner programming will give it market power over competing programming distributors who know they will lose customers if they cannot deliver Time Warner programming. If, however, the final decision on prices in programming carriage dispute is made by an arbitrator and blackouts are prevented during the arbitration process, then much of the harm alleged by DOJ would not occur.

The trial briefs is set to begin Monday, March 19, 2018. For a substantive analysis of the merger and the context in which it should be reviewed, see my February 8, 2018 Perspectives from FSF Scholars entitled “The Proper Context for Assessing the AT&T/Time Warner Merger.” For my review and assessment of the arguments made by the DOJ and the merging parties in their pre-trial briefs filed last week, see my recent blogpost entitled “Department of Justice Pre-Trial Brief Describes A Case Against AT&T/Time Warner Merger That Will Be Difficult to Win.”

Department of Justice Pre-Trial Brief Describes A Case Against AT&T/Time Warner Merger That Will Be Difficult to Win

The Department of Justice and AT&T-Time Warner have released their pre-trial briefs regarding the DOJ’s antitrust challenge to the AT&T/Time Warner merger. The trial briefs lay out the cases each side expects to present at the upcoming trial, which is set to begin Monday, March 19, 2018. Put simply, for a vertical merger, the Department of Justice is seeking unprecedented relief in the modern antitrust era, and proving its case is likely to be very difficult.

The proposed merger is a vertical merger of Time Warner, a programming content provider that sold off its cable systems years ago, and AT&T, a programming distributor through its DirecTV, U-Verse, and Internet-based services. The last time the U.S. government went to court seeking structural changes to a vertical merger was in 1979, when the Federal Trade Commission lost its challenge to truck trailer manufacturer Fruehauf’s acquisition of a brake component supplier.

The DOJ is insisting that behavioral remedies would not be effective and structural relief is needed, which might mean blocking the merger entirely or requiring the parties to sell off DirecTV or the Time Warner channels that are central to the merger transaction. Since 1972, every vertical merger challenge by the federal government was either unsuccessful or was settled out of court, usually with behavioral restrictions rather than structural changes. Thus, the DOJ is facing the additional burden of not only having to prove that the proposed merger will lead to anticompetitive harm, but also that these anticompetitive concerns are sufficient to justify the first court-ordered structural relief in a vertical merger case since 1972.

I previously pointed out how the Complaint filed by the DOJ in November 2017 was light on details about how the DOJ planned to litigate the case, and heavy on conclusory claims about anticompetitive outcomes and quotes from mostly unidentified documents from the merging parties suggesting motive. I noted that the DOJ will have to provide actual market evidence of how the anticompetitive harm would occur.

In its pre-trial brief, the DOJ provides much more information about how it plans to litigate the case. The brief indicates that DOJ will rely on case studies to show the economic impact of programming that is removed from cable systems when programming providers and distributors fail to reach agreements on prices. DOJ intends to argue that AT&T’s power to withhold Time Warner programming will give it market power over competing programming distributors who know they will lose customers if they cannot deliver Time Warner programming.

DOJ’s basic theory is that AT&T will use its new leverage from the Time Warner programming to harm content providers who compete with AT&T’s programming distribution services. In short, DOJ alleges that AT&T after the merger will have an incentive to raise prices for Time Warner programming, knowing that some or most of the competing content providers will pay the higher prices. And if content providers don’t pay the higher prices for Time Warner programming, DOJ claims that AT&T will recapture some of its lost revenues when a portion of the customers from those non-paying content providers subscribe instead to DirecTV or U-Verse because they want the Time Warner programming badly enough to switch.

DOJ’s characterization of the possible anticompetitive harms may be plausible in theory, but it suffers from many shortcomings. First, it is possible to describe equally plausible theoretical ways in which the anticompetitive strategy described by the DOJ would harm the merged parties more than it would help them, which DOJ will have to disprove in order to make its case before the court. It seems unlikely that AT&T would spend over $100 billion (including assumed debt) for the Time Warner channels only to damage their value by limiting access to these channels in order to increase the market share of DirecTV and U-Verse.

Second, there are good reasons to believe that changes in the market, many of which have occurred since some of the case studies cited in the DOJ brief, make it much less likely that anticompetitive strategies that may have worked in the past would work today. The DOJ brief mocks these arguments as the “Star Wars’ defense” because the merging parties claim, “everything the government is telling the Court is stale and out of context–it is from a long time ago in a galaxy far, far away.” Nonetheless, consumers are becoming far more willing to cut the cord and look to Internet platforms for information and entertainment. By early 2017, Amazon Prime subscriptions climbed to 80 million and Netflix surpassed 50 million, and 64% of TV households subscribed to Amazon Prime, Hulu, or Netflix. And the 2014 dispute over DirecTV’s carriage of The Weather Channel (TWC), which ended after three months when DirecTV refused to pay TWC’s higher rate and TWC folded, illustrates how owners of content providers have less leverage than in the past.

Third, the DOJ brief specifically identifies the HBO channels as valuable Time Warner content that the combined company could use to place competing distribution services at a disadvantage. But those channels are already available in many different ways, including through the online SlingTV and Hulu services. The HBO Now app is currently pre-loaded on all Apple TV for users of iPhones and iPads, and similar apps can be uploaded to Android, Amazon Fire, and Kindle devices. If a competing cable service were to lose access to HBO, its customers likely could find it elsewhere, and at a similar price to what their cable service charged. Eliminating access to HBO through all of these distribution services after the merger would hardly go unnoticed by consumers.

Finally, the AT&T and Time Warner brief asserts certain economic efficiency benefits that will allow them to better compete in the broader content deliver market with the much larger Google and Facebook. The merging parties claim: “In total, AT&T projects merger synergies of more than $2.5 billion in annual synergies by 2020 and more than $25 billion in total synergies on a net present value basis.” DOJ will have the burden of showing that these efficiency benefits are less than the cost of any anticompetitive effect DOJ can demonstrate.

For a substantive analysis of the merger and the context in which it should be reviewed, see my February 8, 2018 Perspectives from FSF Scholars entitled “The Proper Context for Assessing the AT&T/Time Warner Merger.” Free State Foundation President Randy May and I also discussed the challenges faced by the DOJ in bringing this case shortly before the DOJ filed its challenge here.

T-Mobile/MetroPCS Merger Clears DOJ, Still Faces FCC Review

According to news reports, the U.S. Department of Justice has declined to raise any objections to the proposed T-Mobile/MetroPCS merger. The FCC's review of the merger is still ongoing.

FSF President Randolph and I filed comments in the FCC's merger review proceeding. We did not specifically endorse the proposed merger but emphasized the kinds of considerations that should guide the FCC's analysis. A December blog post, "The FCC, Merger Reviews, and Job Protection" cautioned the FCC against misusing its review authority to achieve policy goals extraneous to existing statutory and regulatory requirements.  (See also "FCC Should Reject CWA's Job Protection Pleas.")

The FCC's self-imposed 180-day shot clock for the proposed T-Mobile/MetroPCS merger runs until April 24. Hopefully, the FCC will reach its decision without delay.

Address Problems with Wireless Applications, Not Regulations

News outlets have recently covered New York Senator Charles Schumer's urging wireless providers to deactivate stolen cellphones. The Senator is also reported to have sent letters urging the FCC and DOJ to study the United Kingdom's policies for deactivating stolen cellphones.

It's one thing for policymakers to merely urge wireless providers to take certain concerns into account in their business practices. But it's quite another thing to impose new regulations. Urging the FCC and DOJ to consider UK policies sounds like setting the groundwork for new regulations.

Considering the dramatic and dynamic innovation and growth of wireless in recent years has taken place in a light-touch regulatory environment, one should always think twice before imposing new regulations on wireless. When markets are characterized by rapidly changing technology, even well-meaning regulation has the potential to stifle innovative and impose costly controls.

And when it comes to wireless, the lesson for policymakers is that they should never underestimate the app. Wireless apps offer consumers countless ways to obtain functionalities for their own needs. As the FCC's latest Wireless Competition Report points out, "several application stores have launched within the last three years, with each offering thousands of applications for download." The total number of apps downloaded from the Apple App Store surpassed 6.5 billion by September 2010, and by that same time, "the Android Market had over 80,000 available applications and had passed one billion downloads." Ubiquitous, creative, and customizable wireless apps thus provide useful tools as well as ready solutions to problems, rendering well-intentioned regulatory mandates pointless, if not harmful.

Prior calls for FM chipset mandates in wireless devices or "bill shock" regulations miss the fact that wireless apps can deliver many of the same functionalities in an individualized manner that proposed regulations supposedly promise. Similarly, while advanced wireless devices may be attractive items to thieves, those devices also provide their own capabilities to for wireless consumers to protect themselves. There are a number of wireless apps available for consumers to password protect their devices and data, to lock down their devices remotely, and to track the location of their devices.

It's also worth remembering that once a wireless device is reported stolen, typically wireless providers terminate the customer's service to that device. That protects the consumer from incurring charges on the stolen device and sharply reduces the value to the thief who then has a device lacking service though the customer’s account.

When a wireless app can do the job, regulation becomes redundant and perhaps even irresponsible. So in the case of stolen cellphones, policymakers should always consider the ready consumer protections offered by wireless applications before taking a more heavy-handed approach by imposing new regulations.

Saying No to Merger Review Regulation by Arbitration

The latest and most far-fetched attempt to bog down the proposed AT&T/T-Mobile merger is the subject of a handful of recent press reports. A law firm has been recruiting customers and filed arbitration claims on their behalf against AT&T in a number of jurisdictions across the country in an attempt to try to get arbitrators to tie up the deal.

Apparently, the law firm argues that AT&T customer contracts regarding individual billing disputes gives arbitrators the ability to decide antitrust claims under the Clayton Act. On the face of things, it seems bizarre to suggest that arbitrators are empowered to decide antitrust issues concerning AT&T/T-Mobile. Not surprisingly, AT&T has now filed lawsuits in those same jurisdictions to put a stop to the ploy.

AT&T/T-Mobile is already subject to review by two federal agencies – the U.S. Department of Justice as well as the FCC. DOJ's merger review, in fact, includes an antitrust analysis, focusing on anticompetitive concerns. Regardless of one's views of the competitive merits of the AT&T/T-Mobile merger, those merits are best assessed through the federal regulatory process we have in place. And antitrust issues, in particular, are here best left to DOJ.

We've previously raised concerns about unnecessary duplication of federal merger review processes, as well as the drawbacks from saddling telecom mergers – including wireless mergers – with assorted state regulatory reviews. Now we see yet another unhelpful and most likely harmful obstacle to a sound merger review process, this time through a misuse of the arbitration process to disrupt AT&T/T-Mobile.

Tying up proposed mergers by ginning up lawsuits premised on strange notions of arbitrator activism is bad policy. And it's hardly the best approach to ensuring careful market analysis and promoting overall consumer welfare. In the end, the only good that could come of this legal excursion would be an eventual court appeal and definitive precedent to stand in the way of any similar future attempt to roadblock proposed telecom mergers.

States Should Defer to DOJ on Antitrust Reviews of Interstate Wireless Mergers

Recent press reports point out that a handful of state attorneys general offices are now undertaking their own respective antitrust reviews of the proposed AT&T/T-Mobile merger. The reviews being conducted by Arizona, Florida, Hawaii, Illinois, Minnesota, NewYork, Pennsylvania, Texas and Washington come on top of the pending review of the merger by the U.S. Department of Justice's Antitrust Division and the review proceeding at the FCC.

Late last year I described the unnecessary and costly nature of duplicative state public utility commission (PUC) reviews of telecom mergers in a Perspectives paper titled "Multiple Government Regulatory Reviews Burden Telecom Mergers with Too Many Conditions." In that paper I pointed out that:

The existing multi-level, multi-agency telecommunications merger review process involves costly, time-consuming, redundant reviews by federal and state regulators. And it often results in merging carriers being subjected to numerous approval conditions that are unrelated to specific harms posed by such mergers.

Telecom mergers are already subject to review by two federal agencies – the FTC or DOJ as well as the FCC. Thus, I concluded that:

Once market power concerns are addressed by FTC-DOJ reviews, a law of diminishing returns kicks in with regard to subsequent FCC and state PUC merger reviews. There is little reason to expect seven, thirteen, or two-dozen government agencies will provide an optimum outcome that would not otherwise be reached through reviews conducted by one, two or even a few government agencies.

For similar reasons, I also made the case why state PUCs should stay out of the AT&T/T-Mobile merger in a blog post from June titled "State Regulators Should Refrain from Reviewing Wireless Mergers."

Most – if not all – of those same considerations that weigh against state PUCs creating a multi-state regulatory review pile-up on proposed interstate wireless mergers also weigh against state AGs creating their own multi-state review pile-up on such mergers. State antitrust analyses of intrastate conduct and effects based on consumer welfare criteria possibly might embody more disciplined approaches to interstate wireless mergers than state PUC "public interest" standards.

Nonetheless, state antitrust reviews pose similar concerns regarding expensive, repetitive, delay-prone processes that are most likely unnecessary in light of DOJ's antitrust review process.