The unraveling of the T-Mobile/Sprint remedy continues a trend of failed merger consent decrees. One solution, proposed by two antitrust scholars, is to ban agency-negotiated remedies entirely.
Makan Delrahim mastered the art of the deal. In shepherding through the T-Mobile/Sprint merger, Trump’s Assistant Attorney General for Antitrust reportedly ran interference between the merger parties, coached them in their dealings with other regulators, and even shared his personal email with the chairman of Dish, the entity designated by the antitrust agency to replace the loss of the nation’s fourth wireless carrier.
The Department of Justice (DOJ), and ultimately a federal court in February 2020, blessed the merger, in part because the consent decree brokered by Delrahim promised that the short-run harm to competition would be quickly offset by the creation of a new carrier. Or so the story went. To achieve this fundamental market re-design, T-Mobile would have to (1) divest Sprint’s prepaid business (Boost Mobile) and retail locations, (2) provide rights to acquire spectrum from Sprint, and most importantly, (3) provide network access and transitions services to Dish for three years, while the new company builds its own network by 2026. This Rube Goldberg-inspired remedy would lubricate the wheels of justice and cement Delrahim’s deal-making acumen.
Roughly one year after its approval, the consent decree was already proving to be feckless. On an investor call in February, Dish’s chairman, Charlie Ergen, acknowledged that T-Mobile was shutting down its older CDMA wireless network that supports Dish’s Boost customers. Dish revealed that this change would cause a significant disruption to its service and increase its churn rate. Ergen described T-Mobile’s decision to shut down the CDMA network as “anticompetitive.” Pulling the rug out from under Dish would serve to drive Boost customers back to T-Mobile, creating upward pricing pressure on T-Mobile’s prepaid plans.
By July, the remedy was revealed to be a failure: Dish announced it would be replacing T-Mobile with AT&T as its primary partner for providing network access. Because the replacement arrangement was hammered out at an arm’s length, with no regulatory oversight, the resulting access price paid by Dish is presumably at market rates. In contrast, the Dish/T-Mobile access deal brokered by the DOJ was made pursuant to a regulatory review of its merger, and the resulting access prices was presumably below market rates, and thereby more favorable to Dish.
Although Dish got a lifeline, Dish is still worse off relative to the merger plan as conceived by Delrahim, and with Sprint eliminated, wireless competition has been diminished. As noted by freelance reporter Karl Bode, “with Dish bleeding wireless and TV subscribers at an alarming rate, the clock is ticking on Dish’s overall survivability.” Aside from the broken promise to wireless consumers, T-Mobile’s ability to shirk its regulatory responsibility with impunity invites future merger parties to make similar non-binding commitments to justify anticompetitive deals, only later to renegotiate the terms without oversight or review.
If the T-Mobile/Sprint fiasco were an outlier, perhaps our current remedies policy might be salvageable. Alas, such failure is the norm, as regulator-constructed merger remedies generally fail to preserve or restore competition in affected markets. The inadequacy of behavioral remedies is well understood. What was not so clear (until now) is that divestiture remedies often fail as well. The Federal Trade Commission conducted two studies of the effects of divestitures in merger cases in 1999 and 2017, and in both found that a significant fraction of divestitures were failures, even when success was measured by the weak standard of whether the divested assets remained in the market and were financially viable.
For example, in the 1999 study, the FTC found that in nine of the 37 divestitures studied (24.3 percent), the buyers were “not operating viably in the relevant market.” In the 2017 study, the FTC found that for horizontal mergers remedied with structural relief, only two-thirds of the remedies “successfully maintained competition at premerger levels.” Another 15 percent were deemed “qualified successes,” in the sense that it took more than two years to restore competition to its pre-merger state. The study concluded that the structural remedy failed entirely in 19 percent of the divestitures evaluated.
A new article by esteemed antitrust scholars John Kwoka and Spencer Weber Waller, forthcoming in Competition Policy International, explains why divestiture remedies have proven so difficult in practice. Some failures can be attributed to divesting selected assets rather than a fully functional business operation. Other failures resulted from the agency’s informational disadvantage vis-à-vis the merging parties. Or, as in the case of T-Mobile/Sprint and other mergers, the agencies perversely sought to re-design the market, by identifying and assembling a package of assets and restraints to create the necessary replacement competitor. As the authors note: “In this role the agencies have gone well beyond their law enforcement mission. Rather, they have entered into a three- or four-way bargaining process for which they are ill-suited,acting more like a Wall Street investment bank determined to make a merger happen—a role altogether outside their writ.” The authors drive home these lessons by deftly recounting the failures of recent consent decrees in the Ticketmaster/Live Nation, Google/ITA, and T-Mobile/Sprint mergers.
To return regulators to their proper role, Kwoka and Waller propose banning regulator-negotiated remedies altogether, under the rationale that such remedies have proven to be a failure, permit too many anticompetitive mergers, and invite rent-seeking behavior by merging parties. Another harm, not stated explicitly by the authors, is that regulator-negotiated remedies potentially corrupt agency chiefs, to the extent such rents could be shared with regulators upon returning to the private sector.
The authors point out that even under this “no-remedies” rule, nothing would prohibit two potential merging parties from undertaking their own divestiture before filing, in which case the agency would be asked to say yes or no to a merger of two parties that arguably may no longer pose a competitive concern. If the parties are wrong, the agency simply says no. Kwoka and Waller refer to this regime as “Fix It or Forget It” (FIFI), which is also the title of their article.
And if pre-emptive divestitures are permissible under the no-remedies rule, then it would seem little different for potentially merging parties to enter into a binding commitment to divest and bring the merger-plus-commitment to the agency. The commitment could be conditional on agency approval, so the parties would not need to follow through if the remedy was insufficient. Importantly, the merger parties could make no further changes to the proposal, and the agency would be barred from negotiating the remedy would merger parties. If the agency rejects the offer, it could challenge the merger; and once litigation commences, the proposed remedy—and any others—would be off the table.
Kwoka and Waller explain how their FIFI proposal incentivizes the merging parties to propose their best and final offers at the beginning of the process. It also creates incentives for the agencies to “focus their resources on litigation, and not the evaluation of complex and often-changing offers that continue into the litigation phase of any merger challenge.” The FIFI proposal smartly shifts the full responsibility for identifying an appropriate remedy to the merging parties. And it eliminates the risk of agencies “acting as de facto investment bankers in matching buyers and sellers.”
Had this regime been in place in 2019, Delrahim could not have assisted T-Mobile and Sprint in crafting a regulatory fix that would ultimately save the merger. Could the merger parties have figured it out themselves? This seems unlikely, given the stalled negotiations when Delrahim intervened, and given the fact that a third party (Dish) required a regulated (below-market) access arrangement, brokered by the agency. Even if T-Mobile could have designed the same plan, the agency would not have been so invested in the fix, and thus might have been more inclined to challenge the entire arrangement.
While some might characterize Kwoka and Waller’s no-negotiated-remedies proposal to be radical, it is well-conceived. Moreover, it fits nicely with the current antimonopoly zeitgeist, which recognizes that something is fundamentally broken with the deregulatory merger policy that condones the growing concentration of economic power and its attendant social ills.
Disclosure: Hal Singer filed comments with Kwoka and several other economists in the Tunney Act proceeding related to the T-Mobile/Sprint merger. Singer has previously consulted for AT&T and Dish in matters unrelated to the T-Mobile/Sprint merger.