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The AT&T/T-Mobile Merger Conundrum: Increase Efficiency AND Create Jobs?

The AT&T/T-Mobile Merger Conundrum: Increase Efficiency AND Create Jobs?

How did the proposed AT&T and T-Mobile merger, which many viewed as so certain when announced, end up on life support? Is it because of the decision by the Department of Justice (DOJ) to challenge the merger in court? Or maybe because of skeptics’ claims regarding the likelihood of the merger “creating jobs?”

Those factors certainly played a role, but another reason the merger reached the brink of collapse is arguably because the current jobs crisis made it impossible for AT&T to justify the merger to antitrust authorities while also making it palatable to politicians and the FCC with its broader “public interest” standard.

For antitrust purposes, AT&T had to demonstrate that it would not substantially reduce competition and that if it did, the increased efficiency of a merged company would greatly outweigh those costs. For political purposes, in an era of persistent unemployment AT&T decided it had to demonstrate that the merger would create jobs.

Horizontal mergers between large competitors, such as the proposed one between AT&T and T-Mobile, are generally subject to tough antitrust scrutiny. Antitrust policy is indifferent to the effect of a merger on jobs, instead focusing on the effects of the merger on competition and consumers while weighing those effects against the potential economic benefits of a more efficient merged firm.

As the DOJ-FTC Horizontal Merger Guidelines note, “Competition usually spurs firms to achieve efficiencies internally. Nevertheless, a primary benefit of mergers to the economy is their potential to generate significant efficiencies and thus enhance the merged firm’s ability and incentive to compete, which may result in lower prices, improved quality, enhanced service, or new products” (p.29).

The efficiency argument is always a high bar in a merger case since “the antitrust laws give competition, not internal operational efficiency, primacy in protecting customers” (p.31). One way the merged company might increase efficiency would be to lay off large numbers of workers if it believed it could maintain service quality while doing so. By appearing to take that option off the table and arguing that the merger was, in fact, good for jobs, AT&T raised the efficiency bar even higher than it normally is.

It is, of course, possible to increase employment and efficiency if the firm increases output by more than it increases costs. AT&T made an argument consistent with that outcome in its filings by contending that spectrum constraints are distorting investment decisions at both AT&T and T-Mobile.

AT&T’s biggest claim regarding jobs was that the merger would lead to more jobs through better mobile broadband. However, the empirical link demonstrating that broadband increases employment—rather than simply being correlated with higher employment—has not been rigorously established, as Georgetown Professor John Mayo and I demonstrate in a paper published earlier this year.

As a result, even if DOJ were willing to consider effects external to the firms, industry, and direct consumers, the speculative nature of the claims would probably cause the DOJ to disregard them. As the Merger Guidelines note,

Efficiency claims will not be considered if they are vague, speculative, or otherwise cannot be verified by reasonable means. Projections of efficiencies may be viewed with skepticism, particularly when generated outside of the usual business planning process. (p.30)

The FCC is more sympathetic to the effect on jobs than DOJ, but the staff report made it clear that it expected the merger to result in a net loss of direct employment and was highly skeptical of the claims regarding the indirect effects on employment (see Section V(G), beginning at paragraph 259 for the jobs discussion).

In short, even setting aside the substantive questions of the net effects on competition, consumers, and broadband availability, the merger was always going to be an especially tough sell in the current economic and political climate.

To win the day, AT&T had to convince antitrust authorities that improved efficiencies by the merged firm would outweigh any resulting reduction in competition while simultaneously convincing politicians that the merger was good for jobs. But convincing DOJ that the company would increase employment risked signaling to DOJ that the merger was not about efficiency, and convincing the FCC that the merger was good for efficiency risked signaling to the FCC that the merger would not produce jobs.

Unable to thread that needle, AT&T’s strategy collapsed. Whether it will succeed with a new strategy remains to be seen.

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