Although AT&T has withdrawn its application to buy T-Mobile USA for $39 billion while it regroups and evaluates its options, the FCC isn't letting it go without a spanking: the Commission and its staff have released a 109-page report this week laying out findings based on the merger documentation that had been filed back in April. Not interested in poring through some of the driest literature on the planet? We can't say we blame you — so we've boiled down the key facts, figures, and quotes. Here are the highlights.

The lowdown

Although the FCC and the Department of Justice have been conducting their own independent investigations into the proposed merger, it's no secret that Chairman Genachowski of the FCC and his commissioners have been paying close attention to the DOJ's lawsuit and the claims it lays out:

Staff thus finds, as has DOJ, that the proposed transaction would likely lead to a substantial lessening of competition in violation of the Clayton Act. A transaction in violation of the Clayton Act would not be in the public interest.

The Clayton Act governs several aspects of competitive corporate behavior, and mergers and acquisitions are a big part of that. "Substantially lessen competition" is the key phrase that you see come up time and time again in both the DOJ and FCC reports, and that's because it's the exact verbiage used in the Clayton Act — it's the benchmark the government is looking to test when deciding whether to approve the deal. In fact, the FCC's report points out that the "DOJ's parallel review of the proposed transaction focused solely on the competitive effects of the acquisition."

Clayton Act concerns aside, that leads into the other major portion of the FCC's review: compliance with the revised Communications Act of 1934, the 335-page bible that dictates virtually all aspects of telecom regulation in the United States today. Specifically, the law lays out that the FCC must consider all applications brought before it with regard to whether the "public interest, convenience, and necessity will be served by the granting of such application." To that end:

...with respect to certain discrete alleged harms unique to the FCC's public interest analysis, Staff finds that substantial and material questions of fact exist as to the nature and extent of those potential harms.

Critically, the burden of proof lies on AT&T and Deutsche Telekom to prove that the merger is in the public interest, rather than the burden lying on the FCC to prove that it isn't. That little detail significantly raised the hurdles from day one. And here it is in black and white:

...we conclude that the Applicants have failed to meet their burden of proof to show that the proposed transaction is in the public interest.

In other words, the FCC feels that there's both a competitive problem and a potential public interest problem in AT&T's proposal — and in its present form, that makes the merger a no-go. Interestingly, the Commission cites various petitions to deny repeatedly over the course of the response — it received over 50 in total, it says, from various companies and organizations — so it would seem that the efforts of Sprint and others paid off to some degree. It's also notable that the FCC makes fairly extensive use of outside information in the course of rendering a decision: throughout the report you can find references to coverage maps from American Roamer, throughput analyses from Root Metrics, and so on. You might expect an organization like the FCC to be almost entirely insular — particularly in a situation like this — but they've sucked in a lot of third-party data here.

Now, let's look at some of the details.

Keeping the market competitive

You might recall one of AT&T's more bombastic claims in its April filing was that T-Mobile played a "diminished market role" and that it's "struggling for relevance." The FCC shoots that down early in its response — page 9, to be exact — saying that the transaction would eliminate "a nationwide rival that has played the role of a disruptive competitive force in the marketplace."

The FCC crunched the numbers and discovered that the Herfindahl-Hirschman Index — a widely-accepted indication of how competitive a market is — is high enough to warrant concerns of anticompetitive effects in 99 of the top 100 wireless markets . The one exception? Omaha, Nebraska, where T-Mobile doesn't operate.

T-Mobile's balance sheets just don't support what the FCC calls "the bleak short-term outlook... that AT&T has portrayed in its submissions," pointing out that the carrier pulled in $5.4 billion in earnings last year on revenue of $21.3 billion (and it remains profitable as of Q3 '11). The Commission also cites the fact that both carriers use HSPA+ as evidence that T-Mobile isn't way behind the times, and it goes onto say that speeds are "expected to be comparable for the next several years." Unfortunately, this part dives into some redacted statements and there's no mention of LTE, but we'd love to see the documentation that the FCC is using to assert that these guys will be at speed parity for the foreseeable future — it's an interesting claim.

The FCC again cites confidential documentation to claim that T-Mobile's "aggressive, pervasive" deployment of HSPA+ caused AT&T to accelerate its own deployment of the technology . Looking back on developments in 2011, it's interesting to note that AT&T didn't really start pushing HSPA+ hard until early this year after T-Mobile was riding the "4G" marketing wave with its own HSPA+ deployments in 2010.

As an aside, the FCC reaffirms its definition of "nationwide" wireless provider here, which — as usual — encompasses the Big Four: Verizon, AT&T, Sprint, and T-Mobile all offer coverage for at least 90 percent of the US population, "have the most advanced networks, and offer the newest handsets and devices." The next five largest regional carriers combined account for roughly six percent of American wireless subscribers and revenues, which would seem to make AT&T's claim that it's more worried about competing with "rapidly growing mavericks like MetroPCS and Leap and other providers" than with T-Mobile pretty absurd. Indeed, the FCC ends up with this damning conclusion: " for several reasons, a regional provider cannot practically replace the competition lost from the departure of T-Mobile , and thus counteract or deter the exercise of post-merger market power through repositioning or expansion beyond its footprint."

On pages 32 and 33, the Commission also rattles off a couple examples of plan tweaks AT&T has made in recent years in direct response to T-Mobile, further damaging AT&T's claim that it doesn't view T-Mobile as a viable competitor.

In a footnote, the response notes that Genachowski circulated a draft approval of AT&T's purchase of 700MHz spectrum from Qualcomm on November 22nd — that acquisition is being considered independently of the T-Mobile deal, although the FCC took the Qualcomm buy into account when calculating just how much spectrum AT&T could end up holding in individual wireless markets . Needless to say, it appears the Qualcomm deal will go through, regardless of whether AT&T eventually manages to file a T-Mobile proposal to the Commission's liking.

We're reminded that T-Mobile's plans and branding would go away as a result of the deal. The terms of the agreement between AT&T and Deutsche Telekom specify that AT&T could continue to use the T-Mobile name for 18 months after close, and existing T-Mobile subscribers would be required to switch to an AT&T plan "if they choose to upgrade service, add a line, switch to an iPhone or other subsidized devices or simply wish to change plans." Since these subscribers are effectively squeezed into obsolescence over time, the FCC says "we disagree with AT&T's contention that pre-merger T-Mobile customers would be protected from price increases by being allowed to stay on their existing contracts indefinitely."

Here's an interesting fact: "[the FCC's] analysis of local number porting indicates that many AT&T customers view T-Mobile products as their second choice, and vice versa ." We'd imagine that has to do with the GSM-CDMA rift as much as anything.

Though perhaps no organization has been more vocally opposed to the acquisition than Sprint — and the FCC cites Sprint's petition to deny repeatedly — the Commission concludes that Sprint would probably end up in cahoots with AT&T on the "coordinated exercise of post-merger market power." In other words, it thinks that Sprint would succumb to rising plan pricing rather than foiling it . Why? It postulates that Sprint would stand to gain some ex-T-Mobile subscribers once the deal closed; the report also suggests that Sprint's customer conquests would be more expensive in the long term, since AT&T and Verizon customers have historically been more loyal than T-Mobile subscribers have. Without T-Mobile to poach, things get pricy.

The FCC repeatedly expresses concern that the elimination of T-Mobile from the marketplace would leave AT&T as the sole national provider of GSM wholesale services, which is a pretty legitimate concern considering the importance of GSM on a global scale. Here's where it gets interesting, though: citing some redacted information, the FCC says that "T-Mobile had developed plans to increase its provision of wholesale services to a variety of different entities." Of course, we already know that T-Mobile had been in talks with Cablevision about a possible quad-play deal for its subscribers, but this could mean lots of things: e-readers? Industrial equipment? MVNOs? At any rate, the fact that T-Mobile thinks it has enough capacity to spare to ramp up wholesaling of its airwaves is an interesting revelation in its own right.

The benefits of the merger — or lack thereof

The Commission spends several pages tearing apart AT&T's mathematical model for predicting whether prices will rise or lower in the years 2014 and 2015 should the acquisition go through. The language is, in places, downright damning — for instance: "The Applicants' economic model has at least three basic problems that render unreliable its prediction of the consequences of the transaction." Terms like "serious flaw," "critical flaw," "unreasonable," and "not rational" appear in here, too. The FCC really doesn't like these models.

"The Applicants also assumed in the economic model that if a single firm raised its price, 40 percent of the customers that leave in response would choose to no longer have a cell phone rather than switch to a competing provider." That... doesn't seem right.

AT&T made a very big deal about immediate network improvements resulting from the merger — in fact, it's been essentially the core element of AT&T's public-facing PR campaign. Yet here's another downer from the FCC: "Although we requested it, the Applicants did not provide the backup materials necessary to verify the engineering analysis of signal quality and 3G roaming improvements fron integrating the networks ." The report goes on to call out apparent errors in AT&T's math and its assumptions about future cell site density that would directly lead to overstating network improvements.

Says the FCC: "we are unable to adjust the Applicants' models for all of the other structural problems we have identified so the estimates that we have calculated should not be considered predictive of the likely pricing impacts of the proposed transaction." In other words: "we think AT&T's models are so broken, we can't fix them and run the numbers again."

Though the report is overwhelmingly opposed to AT&T's and Deutsche Telekom's claims, there's at least one glimmer of consensus: "we agree with Applicants' high level assessment that the combination could result in technical efficiencies — by adding spectrum and cell sites, a network can become more efficient."

The Commission puts forth an interesting proposal as an alternative to buying T-Mobile in order to alleviate AT&T's capacity crunch in key markets, saying that it could lease, co-locate, or acquire T-Mobile towers . In some redacted percentage of affected markets, T-Mobile already leases its towers from a third party like Crown Castle or American Tower — AT&T could simply do the same.

It appears that AT&T provided the FCC with some insight into the potential sunset of its 2G GSM network , though the juicy details — dates, for instance — are naturally redacted. The Commission ends up using this nugget of information against it, arguing that channel pooling efficiencies from dumping both AT&T's and T-Mobile's 2G service onto the same channels would be eliminated when the 2G network shut down anyway.

Similarly, it seems that the FCC had access to AT&T's confidential projections for its LTE penetration by 2016 ; the figures were presented in support of the carrier's claim that the combined company would have higher LTE penetration over the same period. The FCC disagrees: "We find this assumption counterintuitive for several reasons and believe it has a significant misleading effect on the benefits of the proposed transaction."

Another key tenet of AT&T's claims has been that T-Mobile has "no clear path" to LTE deployment as an independent company. While the FCC admits that it's "less certain" that a rollout will happen, it also contends that it's not impossible — particularly in light of the additional AWS spectrum T-Mobile is set to receive if the deal doesn't go through.

Perhaps a great example of not serving the public interest, the FCC points out that AT&T plans to "eliminate the jobs of most T-Mobile customer representatives and the complementary infrastructure," which would lower the number of reps per customer and consequently lower the quality of care — never mind the fact that job elimination is generally an unfortunate situation.

Regarding AT&T's claims that it wouldn't build out LTE to any more than 80 percent of the population in the absence of the merger, the FCC calls them out in several areas, noting that its hand will eventually be forced by competition from others (Verizon, primarily) anyway and that history has shown that it ends up getting to 100 percent deployment on new network technologies over time with a full 3G overlay on track for 2012 . The Commission also makes the obvious point that planning an 80 percent build-out today doesn't mean the company won't revisit the matter the next day, month, or year.

The FCC concludes that the transaction will result in a net loss of direct jobs and that it won't consider the theoretical creation of indirect jobs based on the increased deployment of LTE, just as it threw out Sprint Nextel's similar suggestion regarding deployment of broadband data in the 2.5GHz spectrum (of course, that merger ended up going through).

And that's it — from our initial read-through, it seems like a comprehensive drubbing of almost every aspect of AT&T's initial filing. Of course, that filing is now formally pulled from consideration, and it seems likely that the company intends to file a follow-up before too long — possibly involving heavy divestitures — so this likely won't be the last 100-page decision the FCC needs to write in the next few months.