AT&T argued several months ago that its proposed $39 billion buyout of T-Mobile USA posed no danger because the US wireless market features "sharply declining prices, dazzling innovation, soaring output, enormous product differentiation, new entr[ies], and fierce advertising."

The US government disagrees. Today, the Department of Justice filed suit in DC's federal court, arguing that the merger violated antitrust law. "AT&T’s elimination of T-Mobile as an independent, low- priced rival would remove a significant competitive force from the market," said a copy of the US complaint seen by Bloomberg.

This morning, Deputy Attorney General James Cole spoke at a press conference announcing the lawsuit, and he summed up the basic reason for government opposition:

Right now, four nationwide providers account for more than 90 percent of the mobile wireless connections in America, and preserving competition among them is crucial. For instance, AT&T and T-Mobile currently compete head-to-head in 97 of the nation’s largest 100 cellular marketing areas. They also compete nationwide to attract business and government customers. Were the merger to proceed, there would only be three providers with 90 percent of the market, and competition among the remaining competitors on all dimensions—including price, quality, and innovation—would be diminished. As can be seen in the Department’s complaint, AT&T felt competitive pressure from T-Mobile. One example cites an AT&T employee observing that “[T-Mobile] was first to have HSPA+ devices in their portfolio we added them in reaction to potential loss of speed claims.” So as you can see, a merged AT&T and T-Mobile would combine two of the four largest competitors in the marketplace, and would eliminate T-Mobile, an aggressive competitor, from the market.

According to the government complaint, T-Mobile saw itself as a gadfly that competed heavily with the other major carriers. According to documents obtained by the DOJ, T-Mobile viewed itself as "the No. 1 value challenger of the established big guys in the market and as well positioned in a consolidated 4-player national market." The company planned to compete by being "faster, more agile, and scrappy." AT&T's repeated claims that T-Mobile really didn't compete with it were unconvincing.

Two weeks ago, we pondered whether the deal was in trouble, noting that a majority of telecom analysts believed the buyout would actually happen. Perhaps sensing danger, AT&T began dangling tiny carrots before regulators; today, for instance, the company announced plans to bring 5,000 call center jobs back to the US if the T-Mobile deal was approved.

That looks less likely now, with one of the two regulators on the deal coming out in stark opposition. The FCC is conducting a separate examination and has not yet reached a decision, but FCC Chairman Julius Genachowski hinted in a statement that he was leaning the same way.

"By filing suit today, the Department of Justice has concluded that AT&T's acquisition of T-Mobile would substantially lessen competition in violation of the antitrust laws," he said. "Competition is an essential component of the FCC’s statutory public interest analysis, and although our process is not complete, the record before this agency also raises serious concerns about the impact of the proposed transaction on competition. Vibrant competition in wireless services is vital to innovation, investment, economic growth and job creation, and to drive our global leadership in mobile. Competition fosters consumer benefits, including more choices, better service and lower prices."

Groups that opposed the merger, such as Public Knowledge, were quick to rejoice. "Fighting this job-killing merger is the best Labor Day present anyone can give the American people," said Public Knowledge Legal Director Harold Feld. "AT&T's effort to recreate 'Ma Cell' by holding rural broadband hostage and threatening American jobs deserves nothing but scorn. The FCC should move as quickly as possible to follow the lead of the Department of Justice and reject the merger."

Free Press also applauded the measure. "Blocking this merger is a major victory for the public interest," Free Press CEO Craig Aaron said in a statement. "The Justice Department clearly based their decision on the facts, and, as Free Press has argued from the start, the overwhelming evidence shows that this merger would lead to higher prices, few choices for consumers, and massive job cuts."

AT&T was predictably not pleased. Wayne Watts, Senior Executive Vice President and General Counsel for AT&T, released the following statement: