WASHINGTON — The Justice Department took the unusual step Wednesday to try to block AT&T’s $39 billion purchase of T-Mobile USA, arguing that the proposed merger would lead to higher wireless prices, less innovation and fewer choices for consumers.
Now AT&T, the nation’s No. 2 wireless carrier, and No. 4 T-Mobile are plotting a legal response to challenge federal regulators.
In its civil antitrust lawsuit, the Justice Department said the merger would stifle competition in the wireless industry. The deal, which is still under review at the Federal Communications Commission, would catapult AT&T past Verizon Wireless to become the nation’s largest wireless carrier, leaving Sprint Nextel as a distant third-place player and certain to struggle.
AT&T quickly signaled that it won’t abandon the transaction, leading to expectations of a fierce court battle.
AT&T has several incentives to take up a legal fight with regulators. In court, the burden is on the Justice Department — not AT&T — to show that the combination would harm competition. If the deal doesn’t go through, the company will be forced to pay T-Mobile a $3 billion break-up fee and give it some wireless spectrum rights.
AT&T said it will ask for an expedited court hearing “so the enormous benefits of this merger can be fully reviewed.”
In a statement, T-Mobile’s owner, the German company Deutsche Telekom, said it is disappointed by the Justice Department’s action and “will join AT&T in defending the contemplated merger.”
The companies could wage a strong defense in court.
Morgan Reed, executive director of the trade group, Association for Competitive Technology, said AT&T has at least one key fact on its side: Deutsche Telekom has said it does not plan to continue to invest in upgrading the T-Mobile network to deliver faster wireless. That means, “T-Mobile is not a competitor anymore,” Reed said.
“T-Mobile has already stepped away from the table,” Reed noted. “We’re at three nationwide wireless carriers no matter what.”
The association, which represents more than 3,000 small and independent application developers, believes the merger would benefit the wireless broadband industry.
In addition, the Justice Department lawsuit portrays T-Mobile as having been a strong competitor in the past, but merger analysis is forward looking, said Washington attorney Robert Bell, who has represented clients in mergers for over 25 years.
“To the extent AT&T can show there’s good reason to believe that T-Mobile is going to be a very different kind of competitor in the future — for example, weaker financially, less innovative —then the lawsuit becomes quite a bit different,” Bell said.
University of Notre Dame law professor Joseph Bauer said he was “pleasantly surprised” by the Justice Department’s challenge of the deal because it has become so rare for the antitrust regulators to block major mergers during the past decade.
During a news conference, Deputy Attorney General James Cole said the merger would result in “tens of millions of consumers all across the United States facing higher prices, fewer choices and lower quality products for mobile wireless services.”
T-Mobile has been an important source of competition, including through innovation and quality enhancements such as the roll-out of the first nationwide high-speed data network, according to Sharis Pozen, acting chief of Justice’s antitrust division.
AT&T and T-Mobile compete nationwide, in 97 of the largest 100 cellular marketing areas, according to the suit filed in U.S. District Court in Washington. They also vie for business and government customers.
The lawsuit says the acquisition would eliminate a company that has boosted competition with low pricing and innovation.
T-Mobile had the first handset using the Android operating system, Blackberry wireless email, the Sidekick smart phone, national Wi-Fi “hotspot” access and a variety of unlimited service plans.
In a statement, Sprint said the Justice Department’s lawsuit “delivered a decisive victory for consumers, competition and our country. By filing suit to block AT&T’s proposed takeover of T-Mobile, the DOJ has put consumers’ interests first.”
Federal Communications Commission chairman Julius Genachowski said the record before his agency “raises serious concerns about the impact of the proposed transaction on competition.”
Although the FCC’s separate review of the proposed merger is still ongoing, the agency has never approved a significant merger that is being challenged by the Justice Department.
Commission member Michael Copps, a Democrat and a staunch opponent of industry consolidation, said he shares “the concerns about competition and have numerous other concerns about the public interest effects of the proposed transaction, including consumer choice and innovation.”
Democratic Sen. Herb Kohl of Wisconsin, who heads the Senate Judiciary subcommittee on antitrust, competition policy and consumer rights, said the suit was an effort to protect consumers “in a powerful and growing industry that reaches virtually every American.”
The lawsuit used some of T-Mobile’s own documents describing its role in the market to explain why the merger shouldn’t take place. In those documents, the company calls itself “the No. 1 challenger of the established big guys in the market and as well positioned in a consolidated 4-player national market.”
T-Mobile said its strategy is to attack other companies and find innovative ways to overcome the fact that it is a smaller company.
T-Mobile “will be faster, more agile and scrappy, with diligence on decisions and costs both big and small,” one company document said. “Our approach to market will not be conventional, and we will push to the boundaries where possible.”
Since AT&T first announced the deal in March, it has insisted that consumers would have a choice of multiple wireless providers, including Leap, Metro PCS and U.S. Cellular, in many markets even if the deal is approved.
The Justice Department rejected that argument. It said regional providers face “significant competitive limitations” because they do not have national networks. The department said the enormous investments and resources needed to acquire wireless spectrum and build a network make it very difficult for new companies to enter the wireless market.
AT&T and T-Mobile also have said the merger would reduce dropped and blocked calls, and speed mobile Internet connections for subscribers. Faster service would result by combining their limited wireless spectrum holdings at a time when both companies are running out of airwaves to handle mobile apps, online video and other bandwidth-hungry services.
Finding more airwaves to keep up with the explosive growth of wireless broadband services is a priority of the FCC and the Obama administration.
But the Justice Department said AT&T could “obtain substantially the same network enhancements … if it simply invested in its own network without eliminating a close competitor.”
Online: Justice Department’s lawsuit: http://tinyurl.com/44lx4qo