By Gautham Nagesh and Brendan Sasso - 08/31/11 04:23 PM EDT
The Justice Department filed suit in federal court Wednesday to block AT&T's $39 billion acquisition of T-Mobile USA.
In an antitrust filing, Justice said the merger of the two companies would stifle competition in the wireless market.
"We filed this lawsuit because we feel that the combination of AT&T and T-Mobile would result in tens of millions of consumers all across the United States facing higher prices, fewer choices and lower quality products for their wireless mobile services," Deputy Attorney General James Cole said at a press conference Wednesday.
The Justice Department said the deal would harm consumers because T-Mobile has been a "disruptive force" in the marketplace with aggressive, low-cost cellular plans. The Justice Department cited T-Mobile's status as an "aggressive competitor" both in pricing and technological innovation as an important reason to block the merger.
“Consumers across the country, including those in rural areas and those with lower incomes, benefit from competition among the nation’s wireless carriers, particularly the four remaining national carriers," Cole said. "This lawsuit seeks to ensure that everyone can continue to receive the benefits of that competition."
AT&T has consistently maintained the merger would result in a more efficient use of spectrum, and has promised to deploy next-generation wireless broadband to 97 percent of the country if the deal is approved. T-Mobile parent company Deutsche Telekom has said it lacks the resources to build out its network in the U.S. and has suggested a takeover of the firm is inevitable.
AT&T is contractually obligated to pay T-Mobile $3 billion in cash, along with spectrum and other incentives, if the deal is blocked.
The case will now go to a federal court, where a federal judge will determine whether the deal would violate the Clayton Antitrust Act. AT&T released a statement indicating the company plans to challenge DOJ’s suit in court.
“We are surprised and disappointed by today’s action, particularly since we have met repeatedly with the Department of Justice and there was no indication from the DOJ that this action was being contemplated,” said Wayne Watts, AT&T senior executive vice president and general counsel.
“We plan to ask for an expedited hearing so the enormous benefits of this merger can be fully reviewed. The DOJ has the burden of proving alleged anti-competitive affects and we intend to vigorously contest this matter in court,” Watts said.
“We remain confident that this merger is in the best interest of consumers and our country, and the facts will prevail in court.”
The Federal Communications Commission is also reviewing the proposed deal to determine if it is in the public interest. FCC Chairman Julius Genachowski released a carefully worded statement that echoed Justice’s concerns without promising any definitive action from the commission.
“By filing suit today, the Department of Justice has concluded that AT&T's acquisition of T-Mobile would substantially lessen competition in violation of the antitrust laws,” Genachowski said.
“Competition is an essential component of the FCC’s statutory public interest analysis, and although our process is not complete, the record before this agency also raises serious concerns about the impact of the proposed transaction on competition.”
The commission’s next step could still have a large impact on whether the deal is ultimately approved, though observers agree it would be unlikely for the FCC to approve the deal outright after the Justice Department voiced objections. The FCC could choose to hold its decision until after the court case is resolved, a process that could be extremely lengthy.
The merger had faced strong opposition from a number of Democrats on Capitol Hill, most notably Sens. Herb Kohl (Wis.) and Al Franken (Minn.). Several other Democrats had expressed skepticism about the benefits of the deal for consumers.
The strongest opposition has come from consumer and public interest groups, which claim approving the deal would be tantamount to allowing the Ma Bell telephone monopoly to once again stifle innovation in the telecom market. Most cheered Wednesday’s announcement.
“We have consistently warned that eliminating T-Mobile as a low-cost option will raise prices, lower choices, and turn the cellular market into a duopoly controlled by AT&T and Verizon,” said Parul P. Desai, policy counsel for Consumers Union.
“The lawsuit filed by DOJ today proves that it has serious concerns and believes the best way to protect millions of consumers nationwide is by blocking the merger.”
“To the White House and DOJ’s credit, they stayed above the political fray and crunched the numbers. The numbers just don’t work out for AT&T,” said Public Knowledge President Gigi Sohn.
The nation's largest telecom union, Communications Workers of America (CWA), has backed the merger because AT&T is unionized, while T-Mobile is not. AT&T argues the merger would help the company deliver next-generation wireless services across the country, and pledged this week to bring more than 5,000 jobs back to the United States if the merger is approved.
“The decision by the U.S. Department of Justice to seek to block the merger of AT&T and T-Mobile USA is simply wrong,” said CWA in a statement.
“In a nation where workers’ rights are routinely violated, as occurs everyday at T-Mobile, the DOJ apparently believes that workers should be on their own instead of having a fair choice about union representation,” CWA said.
Sohn called the estimated cost of building out AT&T’s network “totally damning.”
“One of our arguments from very beginning is that AT&T could do everything they are promising without taking out a competitor,” Sohn said, arguing that the filing proved that by showing the cost of the broadband pledge to be roughly a tenth of the cost of buying T-Mobile.
T-Mobile’s position as a low-cost leader appears to have been a driving force in the Justice Department’s decision to sue. According to the complaint, T-Mobile was the first wireless carrier to introduce an Android handset, BlackBerry wireless email and the Sidekick messaging device. The company was also the first to market a nationwide 4G network.
"Such investments in new network technologies — spurred by competition among the Big Four — are valuable to consumers as they increase the efficiency of spectrum use and allow for more mobile wireless service output," regulators wrote.
The complaint pointed to an internal AT&T document that referred to T-Mobile as an "immediate threat."
AT&T's stock was down nearly 4 percent at the time of this posting, while Sprint was up 8 percent.
—This story has been updated.