Author: Andrew Ross Sorkin / Source: New York Times
Several years ago, Sprint’s largest shareholder, SoftBank, quietly approached two of the nation’s top regulators with a question: If Sprint were to merge with T-Mobile, would the government approve it?
The answer was an emphatic no.
“The idea of eliminating a pesky rival may have made sense for Sprint, but not for the American consumer,” Bill Baer, the former assistant attorney general for the Justice Department’s antitrust division, and Tom Wheeler, the former chairman of the Federal Communications Commission, disclosed last year in an essay warning about the prospect of a T-Mobile-Sprint deal. “We made that clear, and Sprint reluctantly ditched the idea.”
Well, fast-forward to this past weekend: Sprint and T-Mobile have disregarded that earlier guidance and announced a merger that they argued would “provide U.S. consumers and businesses with lower prices, better quality, unmatched value, and greater competition.” They contend that AT&T and Verizon need a viable player to battle against, and that unless they merge, the wireless industry will become less competitive.
No matter how much hyperbole Sprint and T-Mobile expend trying to sell the deal, it is hard to see how this merger won’t turn into a battle with regulators. The transaction would reduce the number of wireless carriers from four to three and, importantly, eliminate competition from Sprint, which has held prices down across the industry by operating as the lowest-cost carrier. To some analysts and market experts, it is a textbook example of a merger that would normally be blocked.
“It would not surprise me if they can come up with an economist with a model that says this is all unicorns and cupcakes,” said Michael Kades, formerly a lawyer at the Federal Trade Commission and now the director of markets and competition policy for Washington Center for Equitable Growth. “But the market concentration is presumptively anticompetitive.”
Just look at the share prices of AT&T and Verizon after the deal was announced: They hardly moved. If investors truly believed that a combined T-Mobile-Sprint would be a competitive threat and drive down prices, shares in AT&T and Verizon would have fallen significantly.
T-Mobile and Sprint are going to have to overcome basic math as well. One of the tools regulators use to assess the competitiveness of an industry is a formula called the Herfindahl-Hirschman Index. If the index produces a result of more than 2,500 points, the industry is considered highly concentrated and the government starts poking around. If it determines that a deal would cause the number to jump by more than 200 points,…
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