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In Praise of Smallness: Why AT&T’s Merger With T-Mobile Would Have Been a Disaster

Some commentators have attributed the FCC’s decision last week to block the $39 billion merger of AT&T and T-Mobile to the spread of anti-corporate sentiment in the wake of the Occupy Wall Street protests. “Imagine if the government didn’t take sides” lamented the conservative blog Red State. “Because AT&T really is getting an unfair deal. … It’s a show trial: the verdict was decided in advance.” But the merger was so flamboyantly anti-competitive that both the Justice Department and the FCC had little choice but to block it, making it only the second proposed merger that the FCC has decided to block on similar grounds in the past 40 years. Indeed, the FCC’s recent decision wasn’t an anti-capitalist attack or a slouch towards socialism, but a robust defense of old-fashioned free market competition.

When AT&T and T-Mobile announced their proposed merger in March, they faced a problem: The second largest wireless provider in the U.S. was proposing to merge with the fourth largest provider, creating a virtual duopoly for mobile services that would have reduced the available choices to AT&T and Verizon. Under antitrust law, this dramatic decrease in choice for consumers was hard to justify. So AT&T—whose monopoly over the American telephone system was famously dismantled during the Reagan administration—decided to go on a PR offensive that raised the bar for chutzpah. It produced a blizzard of ads claiming that the merger would “create up to 96,000 American jobs.” On its face, the claim was implausible: The whole point of a merger is to create “efficiencies”—a euphemism for firing people—and in its submission to the FCC, AT&T emphasized the jobs that would be created by the merger without also counting the jobs that would be eliminated. Moreover, Deutsche Telekom now owns T-Mobile: If the merger had been approved, it would effectively be a $20 billion transfer to the German government, which would use it to create new jobs in Europe, not America. After considering AT&T’s confidential figures, the FCC had no hesitation in concluding that the merger would kill a “significant number” of American jobs in the short term. 

But the merger would also kill jobs in the long term as well. By reducing competition in the mobile market, the FCC concluded, the merger would reduce the incentives for innovation that create new products and services and the new jobs that are required to produce them. In the past few years, America has led the world in mobile innovation—from smart phones, tablets, and operating systems—and it would be crazy to choke that off by voting for consolidation over competition. In reaching this conclusion, FCC chairman Julius Genachowski was influenced by The Power of Productivity, a book by William Lewis, former director of the McKinsey Global Institute, which argues that the most important thing governments can do in promoting the competition that leads to innovation and economic growth is to get the market structure right. In other words, by preventing a handful of firms from dominating the market in the first place, the government can avoid the need for intrusive regulation of the giant firms that remain. Genachowski’s emphasis on preventing a few firms from dominating the field unifies his opposition to the AT&T merger with his insistence on network neutrality, which prohibits large Internet service providers from using their power over the network to discriminate against their competitors, preserving competition on the Internet.

This view that maintaining a competitive market structure is the best way to promote innovation may not have the economic populist ring of “We are the 99 percent.” But it would have appealed nevertheless to the greatest opponent of Wall Street in the twentieth century, Louis Brandeis, who was also the patron saint of anti-trust law. Brandeis, who denounced the “curse of bigness,” understood better than anyone the political and economic dangers of allowing the creation of giant monopolies with no connection to the communities they serve. He would have been pleased by the FCC’s decision to resist AT&T’s lobbying campaign and to prevent it from dominating the telecom market in the twenty-first century so soon after its twentieth century monopoly was dismantled.

Jeffrey Rosen is legal affairs editor of The New Republic.