AT&T and T-Mobile merger in jeopardy as Justice Department takes action

The AT&T and T-Mobile merger is a bad deal for Americans, says the US Justice Department. The government filed a lawsuit Wednesday to stop the proposed $39 billion merger.

Its complaint, filed in federal court in Washington, argues that T-Mobile is an important balancing force in the phone industry. Allowing AT&T to gobble up the smaller carrier, it says, would significantly disrupt competition.

“AT&T’s elimination of T-Mobile as an independent, low-priced rival would remove a significant competitive force from the market,” says the complaint. “Thus, unless this acquisition is enjoined, customers of mobile wireless telecommunications services likely will face higher prices, less product variety and innovation, and poorer quality services due to reduced incentives to invest than would exist absent the merger.”

An AT&T and T-Mobile merger would turn the No. 2 and 4 carriers into the market leader. AT&T currently enjoys 26.6 percent of the American mobile phone market, behind Verizon's 31.3 percent. However, once you add T-Mobile's 12.2 percent market share, the newly merged company would out outclass Verizon and eclipse Sprint's 11.9 percent. (While Sprint holds fourth place among mobile subscribers, it's third overall.)

"Such a merger would threaten the viability of Sprint – arguably the more aggressive of the top three wireless carriers in introducing new technology – and solidify the grip of two legacy Bell companies," says Peter Morici, professor at the University of Maryland's Smith School of Business, in a press advisory supporting the Justice Department's suit.

Mr. Morici refers to Sprint's well developed 4G WiMax network, its powerful line of smart phones (such as the upcoming Samsung Galaxy S II), and the way the carrier continues to offer an unlimited data package well after Verizon and AT&T have abandoned theirs.

Indeed, Sprint CEO Dan Hesse has been one of the most vocal opponents of the AT&T and T-Mobile merger.

"The DOJ today delivered a decisive victory for consumers, competition and our country," says Mr. Hesse in a statement today. "Contrary to AT&T’s assertions, today’s action will preserve American jobs, strengthen the American economy, and encourage innovation."

(There are also rumors that a broken deal with AT&T could lead the way for a T-Mobile merger with Sprint.)

Publicly, AT&T expressed shock at the Justice Department's suit.

"We are surprised and disappointed by today’s action, particularly since we have met repeatedly with the Department of Justice and there was no indication from the DOJ that this action was being contemplated," the company said in a statement Wednesday. "We remain confident that this merger is in the best interest of consumers and our country, and the facts will prevail in court."

The carrier argues that its merger with T-Mobile would improve wireless service. Joining forces would expand AT&T's 4G network to include more Americans, it says, and would allow the company to more effectively utilize the wireless spectrum that carries cell phone signals. Such a deal would also bring "billions of additional investment and tens of thousands of jobs," according to AT&T. Just this week, the company announced plans to bring 5,000 call center jobs back the states, should the deal go through.

So now the Justice Department has started swinging, what are the odds that this merger will go through?

"The Department of Justice will prevail," Reed Hundt, a former chair of the Federal Communications Commission, told Yahoo news. "The Justice Department in its entire history has never lost a telecom case of this sort."

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