On August 31, the Department of Justice (DOJ) brought suit to block the proposed merger of AT&T and T-mobile, the second and fourth largest mobile phone service providers in the nation. The DOJ asserts that the combination would result in “higher prices, fewer choices, and lower quality products.”
The DOJ’s argument is bolstered by the observation that T-mobile has been an engine for innovation and competition in the market in the past, as it was the first carrier to bring Android-powered handsets to market and to introduce various unlimited service plans. However Deutsche Telekom, the company that owns T-mobile, has stated that that it no longer plans on investing capital in the U.S. mobile phone service market. This statement, if credible, would make it more difficult for a court to conclude that T-mobile would be able to continue to serve as a source of competition and innovation in the future.
Prasad Krishnamurthy, Assistant Professor of Law at Berkeley Law School, has noted that the DOJ’s case is also strengthened by the fact that entry into the mobile phone service provider market is particularly difficult. Building a national network of coverage is tremendously expensive, which presents a substantial barrier to entry for any potential competitors and increases the stakes for preserving the competition that currently exists in the market.
Both AT&T and T-mobile have expressed a willingness to contest the DOJ’s case. The agreement between the two companies includes a $3 billion “break up” fee, payable to T-mobile if the proposed merger is not realized. Professor Krishnamurthy views the “break up” fee as a credible commitment on the part of AT&T to expend large sums of capital on the issue, as it has (at least) $3 billion to lose.
Before the AT&T T-mobile merger was announced, there were rumors that T-mobile was planning on merging with Sprint, the third largest mobile phone service provider in the nation in terms of market share. The proposed AT&T T-mobile merger would leave Sprint a distant third behind Verizon and AT&T, which could potentially lead to future struggles for Sprint and possibly further integration in the mobile phone service provider market.
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