Genachowski intends to put the AT&T/T-Mobile deal through a long hearing. | AP Photos AT&T/T-Mobile deal: What went wrong?

FCC Chairman and friend-of-the-president Julius Genachowski may not have killed AT&T’s hopes of buying T-Mobile on Tuesday. But he sent an unmistakable message: It’s going to be a cold day in hell before the Obama administration approves anything like what the company proposed.

Genachowski announced Tuesday he intends to put the AT&T/T-Mobile deal through a long and excruciatingly expensive administrative hearing — after the companies get through the long and excruciatingly expensive court case the Department of Justice has already lined up.


The upshot: Even if AT&T overcomes the odds and wins in court and before the FCC, the deal won’t be approved for at least a year or more.

It’s not at all clear that AT&T and T-Mobile are willing to wait that long.

Faced with giving T-Mobile $3 billion in cash and another couple of billion in airwaves and other concessions if the deal falls through, AT&T has been searching for a way to settle with DOJ, and now it will have to find a way to win over FCC authorities, too — maybe by restructuring the deal or offering concessions to preserve consumer choice in overlapping markets.

AT&T is still reviewing its options. But the company’s Senior Vice President Larry Solomon had fighting words for Genachowski’s move, labeling it “yet another example of a government agency acting to prevent billions in new investment and the creation of many thousands of new jobs at a time when the U.S. economy desperately needs both.”

Market analysts are more dubious. “We believe it is now time for AT&T to concede defeat and withdraw the merger,” wrote Craig Moffett, senior analyst at Bernstein Research, in a note to clients Wednesday.

One thing is clear: The Obama administration feels emboldened when it comes to its legal and political power to stuff a $39 billion deal that once seemed like a slam-dunk.

Here’s why.

The timing was terrible.

When AT&T announced its mega-deal in March, a number of political dynamics were on its side. The White House had made a big deal about the importance of near-ubiquitous mobile broadband, which AT&T promised the acquisition would help accomplish. The administration was trying to create a friendly dialogue with corporate America about the sluggish economy, and the government had just a few months earlier given the green light to another major telecom merger between Comcast and NBC Universal.

But the climate in Washington took a turn for the worse over the past six months and anti-business sentiment has spread, fueled by the Occupy Wall Street movement putting the spotlight on oversized corporate influence.

“Occupy protesters everywhere should take heart that one of the most politically well-connected corporations does not always get whatever it wants from the U.S. government,” said Cathy Sloan, vice president of the Computer and Communications Industry Association. “This is one company that is not going to get a pass.”

Despite AT&T’s carefully orchestrated lobbying campaign, which won over many state attorneys general and members of Congress, the public hostility toward corporate interests has been growing. That was evident in the consumer backlash against Bank of America’s proposed debit card fees and word that consumers were withdrawing savings from big banks and turning to smaller credit unions.

While the White House is not directly involved in the reviews by the DOJ and FCC, the agencies’ leaders are appointed by the president.

And after the fallout on Wall Street, there’s seemingly little downside to the administration taking a more populist stance on AT&T.

AT&T’s lobbying backfired.

The company’s lobbying tactics have historically served it well — it’s received regulatory approval for nearly a dozen mergers over the past 15 years. But this time, it fell short.

After announcing plans to acquire T-Mobile, AT&T ramped up lobbying spending and hired legions of outside consultants and public relations firms. It also gave money to a slew of organizations in order to line up supporters of the deal. That led to a public fallout at the Gay & Lesbian Alliance Against Defamation when its president and six board members resigned after the organization sent a letter supporting the deal. GLAAD was one of several groups supporting AT&T’s bid that had received donations from the AT&T Foundation.

The company also promised economic rewards by saying the deal would create jobs.

“AT&T fought mightily to direct attention away from the obvious competition issues posed by the deal, lobbying Congress, the public and the FCC in an effort to bring pressure to bear on the Justice Department and the FCC to not pursue the case,” said Andrew Gavil, a law professor at Howard University.

The FCC’s decision, coupled with the DOJ’s lawsuit, “may suggest how difficult it is to politicize an issue of law enforcement,” Gavil said.

At the same time the FCC took on AT&T/T-Mobile on Tuesday, the agency announced it approved a lower profile deal for AT&T’s purchase of spectrum from Qualcomm.

Even though it won its quest for Qualcomm's spectrum, some say AT&T’s lobbying efforts with regard to T-Mobile may have hurt its larger effort.

“Maybe it’s a Solyndra backlash, but I tend to think that AT&T’s lobbying resources just ended up being more of a liability than asset in this entire merger process,” said Justin Serafini, a vice president at Height Analytics, a Washington-based investment research firm.

The deal’s jobs promises fell flat.

Trying to shore up support for the deal, AT&T and its labor union supporters claimed the acquisition would add up to 96,000 jobs to the economy and promised to bring back 5,000 call center jobs once the deal closed. It spent millions blanketing Washington-area TV stations with commercials touting the benefits of the deal. While the job-creating promises were politically popular on Capitol Hill, the FCC ultimately didn’t buy them.

“The record clearly shows that — in no uncertain terms — this merger would result in massive loss of U.S. jobs and investment,” said a senior FCC official.

The FCC first voiced its skepticism of the jobs claims last month when it sent a letter to AT&T asking for more data to back them up. Public interest groups and Sprint, which filed its own law suit with the DOJ to block the deal, launched a campaign to refute AT&T’s jobs rhetoric. The whole point of a merger is to create business efficiencies, they said, which nearly always results in job losses rather than gains.

“AT&T’s sleight of hand commitments cannot hide the basic fact that if this merger were approved, there would be thousands fewer American jobs than if it were blocked,” wrote Free Press research director Derek Turner in a letter filed with the FCC just before the agency announced its plan.

But the Communications Workers of America, which represents AT&T employees, responded to the FCC's Tuesday action by labeling it “a job killer” and remained firmly behind the idea that the rollout of wireless broadband would be a path to secure jobs for workers.

The jobs question will carry more weight at the FCC than the DOJ, which focuses primarily on antitrust arguments. The FCC’s examination will consider a wider range of issues — including jobs— in deciding whether the deal is in the public interest.

But AT&T’s top lobbyist blasted the FCC’s assertion that it would kill jobs as being hypocritical. The FCC recently said its $4.5 billion broadband subsidy program would create 500,000 jobs over the next six years. Yet it concludes that AT&T’s larger investment of $8 billion, in addition to job commitments, would have the opposite effect.

“This notion, that when government spends money on broadband it creates jobs, but when a private company spends money it doesn’t, is clearly wrong on its face, and raises questions about the credibility of anyone at the FCC who would make such a claim,” said Jim Cicconi, AT&T’s senior vice president for external and legislative affairs.

Antitrust regulators were on a roll.



If regulators in Washington had any doubt about taking AT&T to the mat, Justice’s victory in another antitrust case apparently wiped it away. After losing a 2004 case seeking to stop Oracle from acquiring PeopleSoft, and a series of merger-friendly appellate court rulings in recent years, antitrust experts say Justice had appeared gun-shy about challenging big transactions in court.

In fact, there were criticisms that some big mergers were approved with conditions — Comcast-NBCU and Google-ITA, for example — instead of being challenged.

But all that changed when the department went to trial to block H&R Block’s proposed merger with the maker of TaxAct — and won a resounding victory in late October.

Though AT&T rejects the comparison, that deal would have left the tax preparation product market with two dominant players, just as critics say would be the case if AT&T gets its way.

Public interest groups seized on the similarities between the cases.

Andrew Jay Schwartzman, of the Media Access Project, noted that the judge in the H&R Block case found the deal “would be removing a ‘maverick’ which, she found, has functioned as an aggressive competitor which consistently constrained prices.” In the AT&T case, that maverick is T-Mobile, which is an aggressive low-cost carrier.

The tax case “demonstrates that the government is willing and able to successfully litigate to the finish,” said a source knowledgeable about DOJ’s case against AT&T/T-Mobile.

Robert Lande, a professor of antitrust law at the University of Baltimore School of Law who opposes the AT&T deal, agreed.

“Certainly any victory in court has to be a major morale boost for DOJ and stiffen their back psychologically,” he said, “in terms of whether they settle on wimpy terms or forge ahead with their attempt to completely block the merger.”

An election year is no time for a legal battle.

The deal has been on life support ever since the DOJ sued to block it two months ago, and the FCC’s call to hold an administrative hearing has some critics ready to pronounce it dead.

“I don't know if AT&T abandons or proceeds to trial at this point,” said Serafini, of Height Analytics. “I would think the latter but they need to pull up all aces at this point.”

Taking a firm stand against a giant like AT&T may bolster liberal support for the Obama administration going into 2012. Then again, the FCC’s action could also be a preventative strike that convinces AT&T to abandon the deal and remove it from any election year politics. Obama already faces a drawn-out Supreme Court battle over health care and another court case against AT&T could also provide GOP campaign fodder.

The timing also worked for Genachowski, as the FCC is currently down one Republican commissioner to give Democrats a 3-1 voting advantage on any near-term action regarding AT&T.

But AT&T is now the wild card. It may continue to fight for the deal as long as possible to avoid the handsome breakup fee it owes T-Mobile if the deal doesn’t get regulatory approval by September of 2012.

“It’s a sizable breakup fee, even for AT&T,” said Christopher King, analyst at Stifel Nicolaus. “T-Mobile is the one that gets hurt by dragging this process out forever because they’re stuck in limbo. At some point it behooves T-Mobile to cut its losses and move forward.”

AT&T’s lawyers were supposed to have a meeting at the DOJ earlier this week to discuss settlement options, but DOJ pushed it back to next Monday, according to a source familiar with the situation. “The ball is in their court, as it has been,” a knowledgeable source said of AT&T’s prospects of settling. “The FCC action just raises the bar higher.”

AT&T may have incentives to drag out the process, “but there are also genuine political costs of pursuing the case to the bitter end,” wrote Moffett. “After all, AT&T will have to do business with the DOJ and FCC in the future.”

Tony Romm, Mike Zapler, Michelle Quinn and Elizabeth Wasserman contributed to this report.

This article first appeared on POLITICO Pro at 3:45 p.m. on November 23, 2011.