Last week, the merger of T-Mobile US and Sprint cleared what was widely seen as the last major hurdle to a successful closing: U.S. District Court Judge Victor Marrero rejected the claims of a group of state attorneys-general that the merger of T-Mobile US and Sprint would reduce competition.

With that ruling, T-Mobile US could be looking at closing the merger as soon as April 1, although there still some moving parts: a separate legal approval for the related Dish Network settlement (which includes asset divestment to Dish of Sprint’s prepaid businesses, some 800 MHz spectrum and access to wireless infrastructure sites so that it can become a fourth facilities-based competitor) and approval from the California Public Utility Commission.

The 170-page ruling by Marrero covers past, present and future: he goes through some of the telecom history that brought both parties to the point of merging, the current competitive state of the industry, the arguments that he found unpersuasive versus what was compelling, the reasoning on which he based his decision, and some strategic points from New T-Mobile’s vision for how it’s going to operate—which ultimately persuaded Marrero that it won’t harm wireless competition in the U.S.

Here is the second part of a story series documenting key highlights, tidbits and testimony from the trial, as outlined in the judge’s ruling. (Read Part One here.)

While T-Mobile US was capitalizing on the windfall from its failed 2011 merger with AT&T, Sprint has been in a downward spiral. But both carriers’ responses to their respective situations was to lower prices and offer unique plans. Marrero wrote that Sprint’s “trajectory over the past decade has ben largely downward … due in part to several questionable technological changes.” By 2013, it was “on the edge of insolvency” and Marcelo Claure was brought in to try to turn the company around. Part of Sprint’s turnaround strategy was to compete on plan pricing, which Marrero wrote “at least temporarily helped to lower prices in the industry and accelerated the adoption of pro-consumer services such as unlimited data plans.”

The ruling also pointed out that the courtroom evidence presented during the case suggested that “while Verizon and AT&T have high quality networks, neither MNO is distinguished for innovation of beneficial consumer services, such as unlimited data plans or the bundling of services such as Netflix with their mobile wireless services. … To the extent Verizon and AT&T have implemented measures such as these, these moves have frequently been reactions to innovations first made by T-Mobile or Sprint.”

But Sprint “has struggled to retain the customers it initially attracted with its aggressive offers due in large part to its underlying poor network quality.” It is also $37 billion in debt.

Sprint considered a variety of would-be merger partners, but kept coming back to T-Mobile US. “Because of its poor past performance and uncertain future prospects, Sprint has considered merging with T-Mobile and various other carriers on multiple occasions,” Marrero wrote. Sprint and T-Mobile US previously considered merging in 2010 and 2014, with talks revived in 2017 and then breaking down again. Sprint also considered merging with Dish Network, Comcast and Charter Communications, the judge wrote, as well as trying to find strategies that would extend its life as a standalone company, such as its attempt to “find cost-effective ways to develop its network such as reaching innovative partnerships with MVNOs to use small cell to fill gaps in network coverage,” Marrero wrote, referencing Sprint’s partnership with Altice.

During the 2017 merger talks, Marrero wrote, “Sprint viewed a merger with T-Mobile as a sustainable path forward given its financial struggles and tarnished brand image, both of which hindered its ability to adequately invest in its network and provide superior service.” T-Mobile US, meanwhile, “saw a merger with Sprint as an opportunity to avoid exhaustion of its capacity and thus maintain its aggressive pro-consumer strategies. Both parties also envisioned that the merged firm … would have comparable scale to its two largest competitors, AT&T and Verizon.”

After merger talks broke off in late 2017 and both carriers put out statements saying that they would remain standalone companies, Marrero wrote, Sprint’s then-CFO Michel Combes was in charge of a diagnostic assessment which “concluded that a merger with T-Mobile was a more strategically sound path forward than operating on a standalone basis or merging with any alternative market competitors.” So merger talks resumed in March 2018, resulting in the current merger deal.

Should wireless competition between the national carriers be evaluated on a local or national level? In arguing whether the merger would negatively impact the consumer wireless market in the U.S., one of the hotly debated points was the level at which competition should be considered. Do national carriers compete on a national level, on a local level, or both? The state AGs wanted local market competition to be considered, given that the Federal Communications Commission issues licenses on a local-market area, that network quality varies at a local level and that carriers market and advertise locally—and consumers purchase locally and rely on local service, so that, say, a consumer in New York could not go to California, purchase wireless service and have a different user experience once they arrived home in New York. But T-Mobile US and Sprint argued that carriers price nationally, make engineering decisions nationally and “advertise in large part” on a national scale. Marrero decided that both legal and regulatory precedent from the FCC and DoJ in making decisions about competition on a Cellular Market Area (CMA) level meant that both the national market and CMA-based markets were the relevant geographic markets in the case.

The merger, by industry-neutral measures, does result in a highly concentrated wireless market—particularly in certain local markets. Marrero cited several possible measures by which the court could assess the merger. It could use one metric which assumed that a market was “presumptively anticompetitive if one firm would have more than 30% market share,” or rely on the Herfindal-Hirschman Index used by the Federal Trade Commission and DoJ to assess the impact of mergers, where a merger resulting in a score increase of more than 200 points and a total HHI score of over 2,500 is considered presumptively anticompetitive.

The Sprint/T-Mobile US merger meets both of those thresholds. One of the subject matter experts testified during the trial that the New T-Mobile would have 37.8% of the national market share by subscribers or 34.4% by revenues. The national HHI would increase by 679 points for a total HHI score of 3,186. Specific markets will be even more dominated by the merged company, according to the ruling: Los Angeles, California, will have an HHI score of 4,158 and New T-Mobile will have market share as high as 57%. In New York City, the post-merger HHI was 4,284. Those figures, Marrero wrote, “are more than enough to establish a presumption that the proposed merger would be anticompetitive.” But a presumption, he went on, is “not conclusive proof of a transaction’s likely competitive impact” because in order for them to play out, “real-world conduct” resulting in “actual effects” would have to happen. And, he noted, depending on actual actions, “highly concentrated markets can nevertheless be quite competitive.”

Stay tuned for Part 3, coming tomorrow. 

 

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