Friday, February 17, 2017

Sprint Merger with T-Mobile US Would Not Likely be Approved

At the risk of being later proved quite wrong, a prediction: the proposed SoftBank offer to merge Sprint with T-Mobile US “ain’t gonna happen,” new administration or not, because the antitrust objections likely already are too great.

Many speculate that a more business-friendly presidential administration will make a difference. That might well be a positive, for other firms that want to merge. It will not be a positive for this specific transaction, for simple technical reasons. The big problem is not necessarily the Federal Communications Commission, but the Department of Justice, which will use its standard antitrust tools, as well as the Federal Trade Commission, which also uses the same screening methodology for evaluating market competition.

To be sure, Sprint attorneys will be told to argue for a new definition of the market Sprint and T-Mobile US are in. That could lead to a different set of numbers. Some day, that might even be an argument many would accept. It is unlikely to be the case here, as the Sprint merger with T-Mobile US would be a classic horizontal combination in an existing market that has not yet been transformed in ways that obliterate the differences between media firms and content distributors.

Or, Sprint attorneys might argue, the “relevant market” is voice services, triple play or access services. That argument has yet to win acceptance, and though it someday will happen, that time is not yet here.

Sprint merging with T-Mobile US already would fail to pass the numerical measures DoJ--and many other antitrust regulators globally--always use.

The Herfindahl-Hirschman Index (HHI) is a commonly accepted measure of market concentration,  calculated by squaring the market share of each firm competing in a market, and then summing the resulting numbers, and can range from close to zero to 10,000.

The closer a market is to being a monopoly, the higher the market's concentration. A market with just one supplier (such as the old monopoly telephone business) would have an HHI value of 10,000.

If there were thousands of firms competing, each would have nearly zero percent market share, and the HHI would be close to zero.

The U.S. Department of Justice considers a market with an HHI of less than 1,500 to be a competitive marketplace, an HHI of 1,500 to 2,500 to be a moderately concentrated marketplace, and an HHI of 2,500 or greater to be a highly concentrated marketplace.

As a general rule, mergers that increase the HHI by more than 200 points in highly concentrated markets raise antitrust concerns, as they are assumed to enhance market power under the section 5.3 of the Horizontal Merger Guidelines jointly issued by the department and the Federal Trade Commission.

Consider a hypothetical four-company market with this shape:

Firm one market share = 40%
Firm two market share = 30%
Firm two market share = 15%
Firm two market share = 15%

Such a market would be deemed "highly concentrated," though at a relatively low level by global standards, with an HHI in the 2950 range.

The current structure of the U.S. mobile market (third quarter 2016) looks like this:

Firm one market share = 35%
Firm two market share = 32%
Firm two market share = 17%
Firm two market share = 14%

The point is that when the DoJ looked at the proposed AT&T acquisition of T-Mobile US, and the proposed Sprint acquisition of T-Mobile US, DoJ found that the HHI scores already had become too concentrated. When the AT&T deal to buy T-Mobile US failed, the HHI was something in excess of 2800.

Matters were not too different when Sprint tried to buy T-Mobile US last time.

To be sure, HHI scores--in and of themselves--are not the reason the mergers were scuttled. But the burden of proof on the acquirer becomes more acute. And given T-Mobile US success in driving more competition, the burden of proof arguably will be higher than in the past. True, Sprint will argue that the newly-merged company could, in principle, attack with more ferocity.

That could happen. But most observers would likely agree that the big advantage of having only three providers leading the market is that the firms could improve profit margins, and therefore competitive attacks would moderate. That certainly is what every equity analyst is likely to argue.

Providers globally might well agree with the “less is more” argument, from the standpoint of competition becoming more sustainable, as three big profitable firms are better than four, where at least one of the firms becomes increasingly less able to sustain itself at a profit.

But the market environment, and thinking about the market, likely will incorporate the likelihood of new competitors entering the market in a way that strengthens Sprint and T-Mobile US without reducing the total number of leading contenders. Those vertical combinations obviously will include the assets of Charter, Comcast and Dish Network.

That noted, antitrust officials will have to work with “what is,” not “what could happen,” or even “what everyone expects will happen.” So the  big issue will be prospects for sustaining competition in a market with three providers, not four. That will be a tough sell.

No comments:

When Better Broadband Might Not Help

The Wisconsin Economic Development Corporation, in detailing the impact of the Covid-19 pandemic on various sectors of the Wisconsin economy...