BIG ANTITRUST TRIAL: NEWYORK v. DEUTSCHE TELEKOM AG (S.D.N.Y.)

By Laura Wilkinson¹

In the New York v. Deutsche Telekom AG case, California and other states challenged the merger of Sprint and T-Mobile, the third and fourth largest wireless networks in the United States. They did so even after the United States Department of Justice approved the merger on the condition that Sprint sell some of its assets to DISH Network. Just before trial, the trial court ordered that it would not hear opening statements. On this panel, California’s lead counsel and T-Mobile’s lead counsel give abbreviated versions of the opening statements that were prepared, as well as discuss the trial.

PANELISTS

Paula Blizzard is currently a Supervising Deputy General Counsel of the California Attorney General’s Office in the Antitrust Section, where she was California’s lead counsel in New York v. Deutsche Telekom AG. She recently spent two years at the Federal Communication Commission as Deputy Bureau Chief of the Enforcement Bureau, bringing enforcement actions against telecom carriers as well as working on Net Neutrality. From 2000 to 2004, she was at the U.S. Department of Justice Antitrust Division, working on US v. Microsoft and US v. Oracle (Peoplesoft merger). As a partner at Keker, Van Nest & Peters from 2004-2014, she tried all manner of cases, including many patent and antitrust cases. Notable antitrust matters included pharmaceutical pay-for-delay FTC investigations, In Re Tricor Antitrust Litigation, In Re TFT-LCD (Flat Panel) Antitrust Litigation, In re High-Tech Employee Antitrust Litigation, San Jose v. MLB, In re Auto Parts Antitrust Litigation, and NY v. Intel.

George Kary is a Partner at Clearly Gottlieb Steen & Hamilton LLP, where he represented T-Mobile U.S. and Deustche Telekom in New York v. Deutsche Telekom AG. Chambers and Partners has ranked Kary in its top tier of global antitrust lawyers every year for the last decade and Benchmark Litigation named him Antitrust Lawyer of the Year for three consecutive years (2016-2018). Before joining the firm in 1998, Kary served as Deputy Director of the Federal Trade Commission’s Bureau of Competition, where he oversaw merger transactions, including as lead trial counsel for the FTC in its successful challenge of the Staples/Office Depot merger. He received the Brandeis Award, awarded to the FTC’s outstanding litigator.

MS. LAURA WILKINSON:

Good afternoon, everyone, and thank you, Elizabeth, for the welcome. Welcome, everyone, to the big stakes antitrust trial panel. This year, we will focus on the state attorney general’s challenge of the merger of Sprint and T-Mobile. My name is Laura Wilkinson; I’m a senior director and associate general counsel at PayPal, responsible for antitrust. I have the privilege of moderating today’s panel.

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Our esteemed panelists are Paula Blizzard and George Kary. Ms. Paula Blizzard is a supervising deputy general counsel in the Antitrust Section of the California Attorney General’s Office. She was the lead California attorney for the Sprint/T-Mobile trial. Prior to joining the attorney general’s office, Paula was deputy chief for enforcement at the Federal Communications Commission. She was also a partner at Keker, Van Nest & Peters, and previously, a trial attorney at the U.S. Department of Justice Antitrust Division.

And Mr. George Cary is a partner at the Washington D.C. office of Cleary Gottlieb. He has decades of experience in sophisticated antitrust trials, including a significant track record on securing approval from multi-billion-dollar deals. George was the lead trial counsel for T-Mobile and Deutsche Telekom in the Sprint/T-Mobile litigation. His other recent megadeals where he was global lead counsel include DOW Chemical in its merger with DuPont, 21st Century Fox in its acquisition by the Walt Disney Company, Glaxo Smith Klein in its multibillion-dollar transaction with Novartis. Before joining Cleary, George was a deputy director of the Federal Trade Commission Bureau of Competition, responsible for mergers. And before that, he had a long career in private practice.

CASE BACKGROUND

I will briefly begin by setting the stage for today’s presentation. In April 2018, T-Mobile and Sprint announced a plan to merge in a transaction that would combine the third and fourth largest wireless networks in the U.S. The Department of Justice Antitrust Division and several state attorney generals investigated the merger. A year later in July 2019, DOJ and some state attorneys general agreed to approve the merger on the condition that Sprint sell certain assets to DISH Network. Notwithstanding the settlement reached by the DOJ in some states, a coalition of other state attorneys general decided to continue challenging the merger in federal court in the Southern District of New York.

The highly publicized trial took place in December of 2019 before a Judge Victor Marrero. On the eve of trial, the judge decided to forgo the opening arguments. Today, Paula and George are going to present abridged versions of the opening arguments they had prepared for trial so we will get to see and hear what these veteran trial lawyers had planned to present. After their presentations, we’ll get to talk with both of them about the trial and some key takeaways from the court decision.

Please note the disclaimer: Ms. Blizzard and Mr. Cary are here in their personal capacities and not on behalf of the attorney general or any clients. Their opening statements that they will present today are abbreviated versions of what would have been presented at trial. They have been shortened and modified to serve the purposes of this panel. Similarly, my comments will be in my personal capacity and are not those of PayPal.

A few logistics before we begin. If you have any questions for the panelists, please type into the chat as we go along and that will be monitored. Also, both George and Paula will be using PowerPoint presentations so for better viewing, we suggest that you switch to full screen mode. There’s an option to do that on your screen; it’s either on the bottom right or top right of your screen. Please use that to enable full screen mode and you’ll still see the speakers in a thumbnail at the top.

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With that background, we’re ready to hear the opening arguments and we will begin with counsel for the plaintiff’s, the state’s attorney generals, Paula Blizzard. Go ahead, Paula.

PLAINTIFFS’ ABBREVIATED OPENING STATEMENT

MS. PAULA BLIZZARD:

Good afternoon, your Honor. Thank you for the privilege of letting us present this opening statement this morning. Like any real trial, the first question we ask is is the tech working? So I’m hoping everyone can see my slides. Laura, please let me know if you can’t.

MS. LAURA WILKINSON:

Yes, we can.

MS. PAULA BLIZZARD:

Great, thank you. All right. Good afternoon, your Honor. My name is Paula Blizzard. I’m a supervising deputy attorney general in the great and mighty state of California. And we’re here on behalf of the States, representing over 100 million consumers in the United States to explain to you why we brought this case and why we believe the evidence will show that the proposed merger of T-Mobile and Sprint should be blocked.

So we’re going to begin with a couple of things that, to be honest, your Honor, I think you already know, I think the audience already knows, and the most basic of those is that cell phones are integral to everyone’s life these days. I was surprised to learn when we started this case that there are more cell phone lines in use in the United States than there are people. There are more than 300 million cell phone lines today in use in the United States and we use them for everything. We use them to do banking, our kids use them to do their homework, we use them to communicate, text messages, social networking; we use them to check on healthcare. So cell phones are integral and so this merger will affect literally the lives of almost every American.

And for many Americans, let me also add that for some of them, this is their only connection to the internet. So many of us are fortunate to have computers in offices and broadband connections, but many are not and many rely only on their phones to access the internet, to Google, to get their news, to do their homework; things that we take for granted. And so for some, particularly consumers that are used to lower-cost plans, the cell phone and pricing the cell phone plan are crucial to their lives.

So what is the situation in the United States right now? Well, we have four competitors: Verizon, AT&T, T-Mobile, and Sprint. And these are the only four competitors that have cell networks and you can think of them as having, and being the landlords. They own the buildings, they own the networks, they own the actual capacity that is used in this country; only these four. Everybody else you’ve ever heard is offering service, maybe you’ve heard of the Tracfone, they are all just tenants; they’re tenants in the networks, with the landlords being these four. So the only people who have networks are Verizon, AT&T, T-Mobile and Sprint and they control the key infrastructure. And the proposal here is straightforward; that T-Mobile and Sprint will combine and we’ll have three.

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So the question for your Honor is what’s going to happen when we have those three? And we can learn what will happen in any number of ways, one of which is what does history tell us, what is the history of antitrust in economics, theory that’s been around for a hundred years; what does that tell us about a merger that will have three large, equal-sized players at the end? What will happen to prices and integration? We could also look at what has happened in this particular network; what have these companies been doing? Competing vigorously, which I think we can all attest, because we’ve all seen the commercials and the pop-ups on our screens and the ads inside of buses and everywhere that these four competitors compete vigorously.

Now what has happened is the prices have gone down; competition has led to lower prices. This is some data from the Federal Communications Commission, which shows the prices have gone down from 2011, where average subscriber price was $46 a month to $38 a month in 2017. And we also know that even as prices have fallen, the service has increased. So you now have plans where you get much more data, you get much higher speeds; in fact, get a much better product for a lower price. And that is an American success story; that, in fact, is competition—competition means lower prices and more innovation.

Now what’s another way that these companies compete and another thing, that again, I think everybody knows, including yourself, your Honor, already know, which is that cell phone coverage is intensely local. Local – what do I mean by that? Well, here’s a press release. It talks—it’s from Sprint and it talks about Sprint tops the charts in Boston for fastest download speeds and most improved network. So each of these companies goes out of their way in specific global markets to increase their network and we all know that cell coverage varies by geography. You might have great coverage in your hometown; you travel to another part of the country and your network isn’t so good. This is because the Federal Communications Commission gives out the spectrum, the core technology that underlies a network, in small geographic regions. And each of the carriers then builds in their regions and so, the coverage varies. And they market differently in different areas, just like this press release is showing that Sprint tops the charts in Boston. Now, I’m certain that the defendants are going to come and say, "Well, that’s only one price, we have a national price." Well, that’s all well and good but is it the same price for products that are varying across the country and those are really different products because you’re paying a certain price with certain capacity in Boston whereas if you were on the Sprint network and you went to, I don’t know, San Diego—I’ll pick a place—you might get much less coverage. You may have the same price but you’re not getting the same product. And so, again, keep in mind cell coverage is local.

Now the other thing to pay attention to is what do T-Mobile’s executives—in particular, the executives and their Deutsche Telekom majority shareholders—say about this network proposal, say about this proposed merger, before they filed them? So I can tell you that every state when they propose a merger, when they—by the time they get to the regulators, they will say it will increase competition and it will lower prices and we will never, ever stop competing and this is going to be great for American consumers and all those—I’ve never heard an executive say that. Which is why when you look at the case law and you see that the focus is on what were the statements by the executives before the merger; before it was in the regulatory process to get approval? And here we have a document from Deutsche Telekom that just lays it out. What they are focusing on is what they call the Rule of 3, which is that they can get the network down to three competitors. If they can get the market to be only three, then we can reduce price competition. And you’ll see this in multiple documents, again and again, that when they were talking about before they proposed the merger is getting down to the Rule of 3 to reduce the price point.

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Now let me give you a brief overview of what I’m going to do in this opening statement. I’m going to talk about the evidence linked to the presumption. So because we have been looking at mergers for over a hundred years, because we have all this experience, the law and economics have made or created a presumption about what mergers will be anticompetitive. I’m next going to talk about anticompetitive effects. And finally, I’ll talk about the defenses being offered by the defendants. Sprint is somehow a weakened competitor that may leave the market; that the merger will be an issue. In other words, they will build a very efficient network. And finally, the proposed fixes from the FCC and U.S. DOJ that they believe will remedy, what they think they agree with us on, are some fundamental problems with the merger.

So let’s talk about first about this presumption; why is there a presumption? And we said, your Honor, we’ve been down this road before and time and again, if a merger has certain characteristics, the law presumes that it is anticompetitive because those mergers have been found to be anticompetitive over and over again. And there are two main criteria that are used. One is from a binding U.S. Supreme Court case called United States vs. Philadelphia National Bank. And that case holds that concentrations over 30 percent in merged companies together will hold over 30 percent of the market, that those are presumed illegal and the market share here, your Honor, will in fact exceed 30 percent of the proposed merger.

The other thing that gets talked about are these HHIs. Well, what is HHI? It’s the Herfindahl—Hirschman Index and I actually wrote that on a sticky right here, because I always forget what it stands for. So the HHI’s are another way of measuring concentration and they have slightly different levels. These are both in the U.S. DOJ merger guidelines, as well as case law. And they say if these levels are 2,500 or greater or if the increase has been more—and it increases by more than 200, then it’s presumptively unlawful. And the evidence here will again show that this merger satisfies those criteria.

So here’s a preview of what you’ll see from our expert, Professor Shapiro, our expert; showing that the HHI’s are in fact above 2,500, if they increase by more than 200 and the concentration is at 3000. Now, this is for a national market but the other thing I wanted to point out is the local market. So I put up a chart here again and this is from Professor Shapiro’s expert reports and he will testify to these. It looks at a number of these local markets—this chart only shows California and New York—but we pulled all of the states’ markets and they shared the combine share, the market share, of the combined states, they show the increase in HHI, which is over 200, and they also show the HHI with merger, the total number at the end. And all of those were above—if I’m reading it correctly—each one on this page is above 3,400. But I wanted to highlight a few things to again, come back to this idea that while you can have a national market, you could also have local markets, and the law does allow you to have multiple markets; let me be clear on that.

If you look at what is highlighted near the top, California 5, San Luis Obispo, it’s only at 21 percent combined share there and a number of them are much lower than that. In contrast, if you look at California 7, Imperial, which is highlighted in pink, you can see that Sprint and T-Mobile, if allowed in that local market, they’d have a 63 percent share and the numbers are simply off the charts. The increase in HHI is 200 for a total of 4,600. And in fact, California 7, Imperial County, is the most concentrated market in the entire United States, or it will be, if you allow this merger to go.

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Now what are the effects? Even if the market is presumed to be anticompetitive, which legally the evidence will show, we also can show that there will be coordinated effects unilaterally. Coordinated effects are defined in numerous places, but also in Horizontal Merger Guidelines. It’s, "Conduct by multiple firms that is profitable for each of them only as a result of accommodating reactions of the others." So what does that mean? That means when you go from four to three firms and you only have three large firms, each of those firms, when thinking about pricing, relation, where do you stand in markets, for instance, will take into account the reactions of the other two, okay? And what they will do is accommodate; they will signal. They will say, "Oh, it’s my turn now and then you’ll get a turn later." And they will, in short, pull their punches; they will pull their punches and they will not be as aggressive as they might otherwise have been about price or innovation.

Now let me be clear, this is not price fixing, this is not an exclusive agreement, this is not even particular to these firms that I’m talking about. This is not a characteristic of the rise in AT&T or a characteristic of only cell phone companies.

What 100 years of economics tells us is in certain types of markets that are concentrated, when you get above the presumptive level, it is natural, it is normal, it is in some ways standard business practice, good business and each of those large competitors will say, "You know, we’d all be a little bit better off if we didn’t compete quite so hard." That’s coordinated effects. Now, is it true of every industry? No. There were some key factors that were called out again by U.S. DOJ case law that you look at to see is this a market where coordinated effect occur? One of the most important is transparency of pricing. Can you see what the prices are? Can each of the competitors see the other prices? And you know that they can because we see them too; we’re consumers. We see them on the sides of buses, on television, on cable programs, on YouTube advertisements, email ads, social media; pricing is very transparent. Everybody knows what’s the current offer from AT&T and Verizon and T-Mobile.

Second is can they signal their competitors? Well, your Honor, we’re blessed in this case that we’re going to see some emails that would specifically say, "Here is our signal to our competitors. Here is our signal which says," in this quote, "our turn to discount the item." So they can signal, they admit they signal, they do signal, and it’s right in the email.

And one of the most important factors is do you have a small number of competitors that are roughly equal in size and the answer is yes. If the merger goes through, these are the approximate market shares that we will see. They’re approximately equal, they will all look at each other and realize, hmm, that if they can back off a little bit, that we’ll all make more money. Consumers aren’t better off; corporate profit increases.

Now, unilateral effects; what are unilateral effects? Unilateral effects look at what happens when one competitor leaves the market. So this just looks at what happens if strength goes away and I’m going to illustrate this with a little example.

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So here’s an example for a price for a monthly plan: Verizon & AT&T at $40, T-Mobile and Sprint each at $35. And this is roughly comparable; generally, Verizon and AT&T tend to have higher prices, T-Mobile and Sprint tend to have lower prices and a lower segment of the market. So what if T-Mobile is considering raising its prices to $38? So it thinks about this and says, well, I’m still under Verizon and AT&T; that’d be great. I can still say I’ve got a lower price. But Sprint’s at $35 so Sprint undercut my prices so Sprint’s lower price would discipline T-Mobile.

Unilateral effect says what if we take away Sprint? Same example. Now you’ve got T-Mobile saying, well, I can raise my price to $38, I’m still under Verizon and AT&T, but Sprint’s not here so I don’t need to worry about that. So I, T-Mobile, unilateral effect here will be to raise the price. Still might be lower but that $35 plan is gone and for a lot of Americans who need their cell phone plans and need lower cost plans, $35 plan just isn’t available anymore. So I am certain you will hear the defendants say, "Oh, we will never raise prices on the consumer, never, never, never, never. Our consumer would leave us if we did that." Well, the question to ask yourself, your Honor, is where do you go? If Sprint is gone and there are no other networks, everybody else is trapped, these will be the only networks that exist.

Now let’s go on to defenses. This is what the defendants, I believe, are likely to argue, but we’ll hear that in a minute from Mr. Cary. First, they’re going to argue that Sprint is a weakened competitor. Well, your Honor, Sprint has 42 million subscribers. And for those 42 million subscribers, Sprint is just fine. It works for them. It offers them a network price they can afford. It may not be perfect, it may not make their shareholders as much money as they want, it may not make the executives as much money as they want, but it works for the 42 million people. And Sprint is on record, under oath, for a California agency just a few months ago saying, flat out, Sprint is not going to leave the market; they’re not going to go bankrupt. They may not make as much in profits as their executives want, but that doesn’t give them a free pass on a merger that otherwise violates the antitrust law.

Now, defendants are also going to talk a lot about efficiencies and, in fact, I think that will probably be the majority of what they talk about. So what does that mean, efficiencies? Well, let’s take the case we have here, specifically, your network, right? You’re designing a cell network. We’ve got spectrum, you share the airways, you’ve got cell towers, you’ve got backbone; you’ve got all the pieces that make a computer network. And if you went to an engineer and you said, well, you can have a certain percent of the resources, the spectrum tower, or you could have more; I could combine those two companies and you could get twice as much spectrum, twice as many cell towers, and more backbone, you could get more resources. So what would the engineer say? Well, the engineer would say, and I kind of expect him to say in this case, that he can build a more efficient network with more engineering resources. Okay. But this isn’t an engineering class; we’re not here to look at what is the most efficient network. Monopolies can be very efficient if they so choose because they control the whole market. What we’re here to talk about is competition: Competition and prices to consumers and benefits that are passed on to consumers. This is not an engineering question about what is the most efficient network. So you don’t have to take my word for that, however, because you can look at the US Department of Justice for that. The U.S. Department of Justice agrees with us completely that any efficiencies generated by this merger are unlikely to be sufficient to offset anticompetitive effects on American consumers, okay? This is the United States Department of Justice’s complaint. They agree that the efficiencies are not sufficient; they do not offset the bad effects on consumers. And this is why the U.S. Department of Justice required in order for them to settle it had to be four competitors because they agree with us that if the market is only three, it’s not going to be good for consumers. We’ll talk a little bit more about the DOJ fix and DISH in just a moment.

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So who else agrees with us? Sprint. Sprint, in this courtroom in the Seventh District of New York in April of 2019, believed in fact that it had good position, it had good spectrum resources, it had a good approach and what it was going to do was leap-frog its competitors, specifically AT&T. So in April of 2019, under oath, this is from the declaration from a Sprint executive, they believe that not only were they not going to go out of business, that they had a unique opportunity based on spectrum.

And finally, just a few words on 5G. Is this merger about 5G? Can we not get 5G if we don’t have this merger? No, that makes no sense whatsoever because 5G is already here. T-Mobile rolled out 5G a few weeks ago; Sprint also rolled out 5G. So now let me move on to fixes, primarily, the DOJ fix and adding DISH.

So today, Sprint, as a network, as having operated network, as tower and spectrum, it has cell phones that it sells to consumers, that operate on its network; it’s an established player. What is DISH? Well, DISH is a satellite television company. DISH doesn’t have any towers, it doesn’t sell any mobile phones to consumers, it doesn’t use its spectrum—it uses it a little bit. I’m here to tell you how they have a great deal of spectrum; they don’t use it. So Dish’s spectrum, has it been under obligation to build it out? When it gets the spectrum, it’s required to build it and if you know anything about the FCC, that is the law. You can’t get a very valuable resource like spectrum to sit on it like DISH.

What is DISH’s history? DISH has a long history of simply not meeting its commitments. It tells the FCC, it tells the government regulator it’s going to do one thing and it doesn’t do it and there’s a series of deadlines that it missed for specific spectrum deadlines. It misses them, it extends them; they find some way of not building out its spectrum. So that is the history of the company that is supposed to come in and discipline the four.

So who else might agree with us about DISH? Well, you know who agrees with us? T-Mobile agrees with us. This is a letter that T-Mobile submitted to the FCC, a public letter, and T-Mobile says, quote, "DISH has a track record of price increases for its services, speculative warehousing of spectrum, and failing to meet FCC-imposed deadlines to construct the facilities. Indeed, DISH stands out for its efforts to game the regulatory system." This is what T-Mobile thinks about DISH.

Now this is obviously before it entered into the U.S. DOJ settlement; this is before T-Mobile agreed to be DISH’s landlord because how does that settlement work? DISH is going to have to ride on and use T-Mobile’s network until it builds its own. And that is going to take years, so for years, DISH is going to be the tenant on T-Mobile’s network and what T-Mobile thinks of DISH is that they’re gaming. So if any of you have ever had a lease or been a renter, the renter knows if your landlord can’t stand you, you’re going to have a problem.

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So what does Deutsche Telekom thing? Are they worried? "Wow, there’s this U.S. DOJ remedy, we’re going to have a fourth competitor; this is a big deal, it’s a concern." Yeah, no. No. They’re "happy to consider the game," they’re referring here to DISH, "happy consider the game that DISH can play but it’s economically illiterate to argue they actually build it," in the email. "Economically illiterate." And their view was quite simply that in end, that DISH might build something lawyers can use but not something that consumers can use.

So your Honor, we have four competitors; those four competitors have done a great job in offering lower pricing, more innovation, competing heartily against each other to bring a better product to the American consumer. What you’re faced with now is T-Mobile and Sprint merging together, the Rule of 3 coming into play for Deutsche Telekom, pricing going up, a hundred years of economics telling you that this type of market is susceptible to coordinated effects, stepping back, pulling their punches, not competing as heavily; it’s unilateral effects that if Sprint goes away, T-Mobile will not have anyone to discipline them in its place.

And the only real argument is the U.S. DOJ remedy that says, no, no, DISH won’t enter. DISH is not going to enter any time in that—anytime soon because they don’t have a network and that will take years to build; there will not be any debate about that, which is why DISH will simply be a tenant on the T-Mobile network for many, many years to come. And I continue, your Honor, that that is not sufficient enough hope that this network will come into existence to risk the 300 million cell phone lines, 300 million subscribers, that are in the United States today for something as vital as a cell phone. Thank you, your Honor.

MS. LAURA WILKINSON:

Thank you. Now, we will hear from the defendants, George Cary, representing T-Mobile.

DEFENDANTS’ ABBREVIATED OPENING STATEMENT

MR. GEORGE CARY:

Thank you, your Honor. Your Honor, you’ve heard from Ms. Blizzard about presumptions in the law, about Herfindahl-Hirschman Indexes, coordinated interaction, unilateral effects; all of these antitrust buzzwords, which really go to nothing else than setting up a whole series of theoretical considerations that might lead you to a bottom-line conclusion about the transaction.

But antitrust law is not about theory, it’s not about formulas, it’s not about hypotheticals; it’s about real world facts and those real world facts go to one fundamental question: Is the world a better place with the merger or without it? Are consumers better off with the merger or without it? Is competition invigorated by the merger or reduced by the merger? And we’re going to go to the bottom line here. Given that our time is running extremely short, I won’t be able to respond to everything Ms. Blizzard has said but we’re going to get to the bottom line; we’re going to show you, your Honor, that consumers are much better off if this deal happens than if it doesn’t happen and that is what your Honor has to determine at the end of the day: Are you going to punish consumers by blocking the deal or are you going to help consumers by approving the deal? That’s the fundamental question here. And we’re going to show that consumers are better off through a variety of real world, concrete facts.

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First, this merger will generate much more capacity at much lower costs. It’s fundamental, your Honor, that if you get more supply at lower cost, prices go down. It’s supply and demand; we all know this. Not only will costs go down but the quality of the product developed will go up so you’re going to get a lower price, much more supply, and more and better coverage and faster speeds if you allow this deal to go through than if you don’t. If this deal is blocked, DISH, who is sitting on the sidelines with tons, basketballs of unused spectrum, which is the scarce commodity here, will continue to sit on the sidelines because other ingredients that they need, which they will get from T-Mobile and Sprint, the vestitures in this deal, they don’t have. So as a result of the deal, DISH will enter with all of this additional spectrum, increasing supply even more and bringing another low-cost producer into the marketplace. So what this deal is really about is actually increasing competition, not decreasing competition. And we’re not going to ask you to take our word for this; we’re going to spell it out in great detail with concrete facts through our witnesses. Bottom line, prices will go down, quality will go up.

So this chart shows you what happens to the capacity of these networks if you put them together. The pink bar is T-Mobile’s capacity, the yellow bar is Sprint’s capacity, the black bar is the combined capacity of the new network, and as you will see, as the network becomes integrated, as these two networks are put together and we go to 21, 22, 23, and 24, the combined network is going to have much more capacity than the sums of the parts. That is a critical fact here. The combination creates much more capacity from the same scarce resources; resources you can’t just go out and buy in the marketplace. In fact, by 2024, the combined network will have two times the capacity of the stand-alone networks, even assuming that they continue to grow at the rate that they otherwise would be able to grow at. That’s a huge increase in supply in the market. Increasing supply means lower prices at a lower cost.

So how much of a lower cost? Here’s a table and we will give you the backup for this in great detail and again, we’ll explain how it comes about. Again, this is not "trust me," this is "verify with your own eyes," Judge. We will show you what T-Mobile’s costs will be without the merger based upon the capital investment plan of the company. We will show you what Sprint’s costs will be without the merger and then we’ll show you how this combination, by creating this massive new capacity, instantaneously, without huge expenditures, without huge investments, is going to reduce the cost per unit to 1/17th what the other standalone networks could generate. Reducing marginal costs that much is going to price—drive prices down because every additional unit sold will generate much more profit, which incentivizes the companies to drop price to win subscribers to sell those units. You can’t sell more units by raising price; you sell more units by dropping price and bringing more consumers in. And with this cost structure, the companies are powerfully incented to do that.

Not only will the costs go way down, the quality will go way up. So this chart is showing you the speed that people will get under the new T-Mobile, relative to the standalones. In this particular picture, we have it at various speeds. This one is for 200 megabytes per second download speeds. Sprint will serve zero customers at those speeds because of the limitations on their network and we’ll talk about exactly where those limitations come in. T-Mobile will be able to serve 46 million subscribers at those speeds by 2024 without the merger. Combined, by putting together these complimentary resources, 280 million Americans, the very people Ms. Blizzard was speaking about who rely on their phones as their access to the internet, will receive these blistering speeds that are faster than Wi-Fi speeds; that’s not possible without the deal. So the people that are most dependent on their wireless connection to access the internet are the ones who are going to benefit the most here. Without this deal, hundreds of millions of consumers will not be able to get these speeds.

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How does that happen? It happens because each company solves the other company’s problems. There’s a reason T-Mobile is smaller than Verizon and AT&T. There’s a reason that Sprint is 1/3 the size of Verizon and AT&T. It’s because they lack that which they need in order to compete. What does T-Mobile lack? Well, T-Mobile has great coverage. They have the kind of spectrum that covers the country but they are limited in capacity so they can’t serve more consumers. And in fact, when you crowd more consumers onto a network that’s limited in capacity, those consumers get a much worse experience.

It’s like a two-lane road where you have a line of cars, people are turning left, they’re blocking traffic, people are turning right, waiting for pedestrians, blocking traffic; you can’t go very fast, traffic is slowed down. You move to an eight—lane freeway with the same number of cars, now everybody can move very quickly so T-Mobile lacks capacity. That means their service will deteriorate, which means they have to ration that capacity by raising prices.

What does Sprint have? Well, Sprint’s got tons of capacity. Why? Number one, because they have the type of spectrum that is good for capacity, unlike T-Mobile. And number two, because nobody really wants to use Sprint; there are very few customers on Sprint because of the lack of coverage. So when you’re driving from San Francisco to Lake Tahoe, on Sprint you’re going to lose your signal repeatedly. People will not choose that and, therefore, they have a lot of capacity that is available and not being used. Put the networks together and what do you get? You get a network with lots of capacity and great coverage. That’s what consumers want and, by the way, you get it at a much lower cost. That is a huge benefit.

So I’ve talked to you a little bit about spectrum. Let me just say quickly, because we are running out of time, there are different kinds of spectrum. There’s low—band spectrum, which covers great distances; many, many miles. It’s very good for coverage. Think of being in your apartment and hearing the baseline on your neighbor’s stereo that’s cranked up real loud. You can’t hear the music but you can hear that base; that is the low frequency signal and, boy, does it travel.

Mid-band spectrum, on the other hand, has got lots of capacity. There’s not very much capacity on low-band spectrum; lots more on mid-band spectrum. But it doesn’t travel very far so it’s not very good for coverage. And then you have millimeter Wave, which doesn’t go anywhere at all; you have to have a line of sight but it has huge capacity. The best network is one that combines these things. That’s what Verizon’s got, that’s what AT&T has got, and that’s what T-Mobile and Sprint, new T-Mobile, will have with this deal and will not have without the deal.

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So you put them together and what do you get? This is a picture of T-Mobile’s spectrum today as the engineers see it and our engineering expert will explain exactly what this is. You see the big white space in the mid-band range next to T-Mobile. Look at Sprint and at the low—band down at the bottom; big white space. That white space is lack of capacity for T-Mobile, lack of coverage with Sprint. Put them together, now you’ve got a network. Does this increase competition? You better believe it. This is now something that can go head-to-head with AT&T and Verizon and compete with terrific quality but also at such lower prices that they can win subscribers by lowering prices. You don’t have to compromise quality to get low prices anymore with this deal.

I’m going to skip over low-band. Ms. Blizzard said—I’m sorry, 5G—Ms. Blizzard said 5G is going to be out there. Well, you know, yeah, it’s going to be out there; the question is is there going to be a lot of it for everybody or a little bit for those who can afford to pay premium price like Verizon was charging for 5G? T-Mobile’s not going to charge extra for 5G, unlike Verizon, if this deal happens because they’ll have all this 5G capacity that they otherwise won’t have. That is a huge cost savings to American consumers and, again, closes the digital divide by making that capacity available to everybody, not just a select few. Twice the 5G spectrum with the deal.

Our engineering expert will explain to your Honor exactly how this happens. And this a formula that tells you what the capacity of the network is. You will not hear the states dispute this formula; this is from standard engineering techs. Everybody agrees with this. Capacity is the number of cell sites times the amount of spectrum times the efficiency. If you can increase any one of these, you get more capacity form the same inputs. By combining these networks, you increase all of these: 11,000 new cell sites, 190-megahertz new spectrum, more 5G means more efficiency. So pre-deal, you’ve got limitations on capacity. With the deal, you get this huge stadium with much reduced costs and the incentives are going to be powerful to fill up that stadium by charging lower prices and attracting customers from AT&T and Verizon. Lower prices, higher quality, good for consumers.

How does it happen? Our engineering expert will explain this but it’s really straightforward. We’ll show you the math because it sounds like magic when you just hear it but I’ll show you the math, we’ll walk through the math, and hopefully, that will give you a very intuitive sense of what’s happening here.

So you have cells and on those cells you have spectrum, the blue signals there. Each phone that you see here is representative of a unit of capacity, so let’s see it’s 100 phones or 1,000 phones or whatever. The spectrum is of a particular frequency; it’s like channel four in San Francisco, channel four in L.A.; you can’t have them interfere with each other. You can show different programs on using that same spectrum in the two cities; local news in L.A., local news in San Francisco.

If you add a tower in San Luis Obispo and you turn down the power so they don’t interfere, now you can show a third program, local news in San Luis Obispo. Cell phones work the same way. By splitting cells, you add capacity using the same spectrum. What does this deal do? This deal does 11,000; 11,000 cell splits.

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So here’s the math again: Right now, you’ve got T-Mobile, two phones, you’ve got Sprint, two phones. You combine these networks, put all of the Sprint, Spectrum on T-Mobile towers, all of the T—Mobile spectrum on Sprint towers, now you end up with eight phones using exactly the same spectrum. And again, very importantly, spectrum is the limiting resource here; there’s not very much of it. People need it for TV, radio, military defense, etcetera; it’s a scarce resource. You double the capacity by combining these networks. So pre-merger, two plus two; post-merger, capacity is now eight. More capacity, same resources; that cuts in half the cost of running the network. That’s what’s happening here, your Honor.

That’s not the only efficiency. Another efficiency is using the right tool for the right job. So we talked about the different characteristics of the spectrum. So today, T-Mobile has to use its—excuse me, Sprint has to use its mid—band spectrum to cover the broadest area because it doesn’t have low-band spectrum. T-Mobile has low—band spectrum that it wasted, in some sense, because it needs to use it to supply the phones close to the tower where it’s characteristics of propagation are not really necessary. Put these two together and now you can use the right tool for the right job and that, too, adds to the capacity of the network.

And then finally, networks are built for certain capacity. My screen seems to be stuck, okay, there we go. Networks are built for certain capacity but every network sees a situation where unexpected demand puts a strain on the network, which reduces quality. Those are the dark red peaks that you see but that happens at different times with different customer bases. So Sprint’s peak usage is at different times from T-Mobile’s. You put the two networks together and the valleys in Sprint’s network accommodate the peaks in T-Mobile’s and now you can accommodate more traffic without making huge incremental expenses. That means costs go down, lower costs, more supply means lower prices, increased competition.

Now, Ms. Blizzard says efficiencies don’t matter, they don’t count, this is not engineering; this is about competition. Well, that’s not what their expert says. Their expert says a full analysis takes into account efficiencies; yes, it does. That’s what their expert says and that’s because efficiencies can make it for more competitive, right? Answer: Correct. It creates an ability and incentive to compete more aggressively if you realize efficiencies through a merger, correct? Yes, that’s correct. Merger-specific efficiencies, particularly ones that lower marginal costs, would generally affect those to cause the firm to be more competitive, more aggressive, everything else equal. So all that we’ve discussed is not—again, is concrete and their own expert admits that it’s necessary to look at that to determine the effects of the deal.

So what do we have here? Twenty—three billion dollars in marginal cost efficiencies, $80 billion in quality improvements, dialing the speed and the lack of downtime, etcetera, from the network synergies, combined $102 billion compared to Dr. Shapiro’s estimate that all of the things that Ms. Blizzard talked about might lead to $18 billion in potential consumer injury, which he speculates might occur. But, as you will see, he will not be able to tell you that these are likely to occur; he’ll just tell you they might occur.

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Bottom-line, net benefit to consumers from this deal, $85 billion. If this deal is blocked, consumers are worse off by $85 billion. Very quickly, again, capacity up, cost down, prices down, good for consumers. We are not, as Ms. Blizzard suggested, arguing that Sprint is a flailing company or a failing company; we are arguing that their market share is declining because they are not competitive. They’re not competitive because they don’t have good coverage. They can’t get good coverage because there is no low-band spectrum available to them. So if the question is is Sprint alone a better competitive situation than combined, the answer’s no. We talked about DISH. DISH has spectrum; it has more low-band spectrum than Sprint. It has as much mid-band spectrum as Verizon. That spectrum has been sitting on the sidelines waiting for towers, waiting for customers, waiting for retail. Guess what they’re getting through this divestiture? They’re getting towers, they’re getting customers, they’re getting retail. So they will now have the tools to allow them to compete and they will have every incentive to do that because this spectrum they’re sitting on is worth about $20 billion and they’re going to forfeit it if they don’t deploy it. So they will add to the marketplace.

In conclusion, with the merger, more capacity. Without the merger, less, strained with rationed higher prices. With the merger, lower costs. Without the merger, higher costs and higher prices. With the merger, faster speed, better coverage. Without the merger, none of that. And then finally, with the merger, a brand new competitor bringing an additional huge amount of spectrum into the market that’s been sitting on the sidelines, adding to supply, adding a fourth player. This is good for consumers, your Honor. Stopping this merger will stop progress, slow 5G, hurt consumers, and raise their prices. Thank you.

MS. LAURA WILKINSON:

Thank you. Thank you, both, for excellent presentations and since we have the benefit of having the judge’s opinion in this matter now, in the few minutes that we have, let me ask one question. You each presented a lot of evidence, alluded to your economic experts, and during the trial, you presented a lot of economic evidence and the judge’s opinion seemed to rely quite a bit on the testimony of the merging company’s officials. What do you say is the role of economic evidence versus testimony in antitrust litigation going forward? Either one of you?

MR. GEORGE CARY:

Well, I’ll kick it off because I have very strong views about this. I think that the judge did exactly the right thing here, obviously, and the reason for that is the following. As we pointed out in the slide that we put up of Professor Shapiro’s testimony, the key here was getting the judge to understand that efficiencies are not this foreign concept; we’re not introducing something that’s not part of the holistic analysis. Professor Shapiro was our best witness on that point. Obviously, Professor Katz, our own expert, made the same point; you have to consider efficiencies. Once the judge understood that, then the question is are there or are there not efficiencies? And the technical experts were the ones that answered that question and they did it, again, through textbook network engineering and physics of history. So the role of an expert is to help the judge understand the significance of the fact evidence; that’s the role. And we believe that Professor Shapiro and Professor Katz did exactly that. The judge applied the methodology that both endorsed and he did that by looking at the factual evidence and applying the lens that Professor Shapiro and Professor Katz both agreed was the right lens.

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MS. LAURA WILKINSON:

So, Paula, do you want to add to that or maybe also talk about whether you think not having opening arguments impacted the trial?

MS. PAULA BLIZZARD:

Sure. Um, so let me just say that on the economics question, and speaking only for myself, obviously not for the AD’s office, I think if you look writ large at the role economics more or less over 100 years, we as antitrust lawyers are relying on it too much. And it’s usually used by defendants to argue their case. I think, perhaps, going forward a little less reliance on economics would be helpful.

And then turning to the opening statements, so first of all, I did go over on my time; the judge probably would have cut me off and so, George, I owe you another opening statement sometime when you can do it full length. And in addition, I want to correct something from the beginning which is this wasn’t my opening statement; this was Glenn Pomerantz’s opening statement. So the states hired Munger, Tolles & Olson and we could not have done it without them; they did phenomenal job assisting us, working with us, and most of this opening was Glenn would have done it; I’m sure he would have done it better. But being a client, I usurped him and am doing it for this presentation.

I do think that it hurt us significantly not to have an opening. As the government, you don’t have your own executives, you don’t have your own network. You have experts and then you have the witnesses, perhaps even third parties. But essentially, cross—examining people from the start and if you don’t have an opening, it’s very hard to frame the case and get momentum and I speak of that generally, not specific to this case. The role of plaintiffs, if you told them you don’t get an opening and you have to start on cross, they would say, wow, that’s hard. I think we might have changed the order of the witnesses; we would have started, perhaps, with one of your experts with the narrative on the outset; it’s always something a trial lawyer considers. But it was perfectly within the judge’s rights to cancel the openings, it happens, and it did. And certainly, as all of you know, credit to George and his team.

MS. LAURA WILKINSON:

Thank you. Thank you, both, for excellent presentations. We are at time so we need to end this program because there’s more programming as part of this presentation today, so thank you both for joining panel and enjoy the rest of your day. Thank you.

MS. PAULA BLIZZARD:

Thank you. Thank you, Laura. Thank you, George.

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Notes:

^1. Laura Wilkinson is Associated General Counsel of Global Antitrust for PayPal. Before that she was a partner at Weil, Gotshal & Manges LLP, and Clifford Chance. She also served as Deputy Assistant Director of the FTC’s Bureau on Competition. She has extensive experience concerning mergers and acquisitions, and counseling on antitrust compliance. She sits on the Board of Trustees of Cornell University and the Board of Directors of the non-profit Legal Momentum.