Telecoms Face Antitrust Threat

Wireless Market, Generic Drugs Reviewed as Justice Department Steps Up Enforcement By AMOL SHARMA The Department of Justice has begun looking into whether large U.S. telecommunications companies such as AT&T Inc. and Verizon Communications Inc. are abusing the market power they have amassed in recent years, according to people familiar with the matter. The review, while in its early stages, is an indication of the Obama administration's aggressive stance on antitrust enforcement. The Justice Department's antitrust chief, Christine Varney, has said she wants to reassert the government's role in policing monopolistic and anticompetitive practices by powerful companies. The law that covers such behavior, the Sherman Antitrust Act, has been used in the past against giants ranging from Standard Oil to Microsoft Corp. It lay essentially dormant during the Bush years, with the agency bringing no major case. The telecom industry is among several sectors now coming under scrutiny. Others include health care and agriculture. The Justice Department is already cracking down on certain agreements. It recently filed an objection to plans by airlines in the global Star Alliance to cooperate more closely on international routes and fares. It has targeted payments large pharmaceutical producers sometimes make to generic-drug makers to delay cheap copies of medicines. In addition, Ms. Varney is investigating Google Inc.'s settlement with authors and publishers over its Book Search product. The telecom review isn't a formal investigation of any specific company, and it isn't clear it will ever become one. The review is expected to cover all areas from land-line voice and broadband service to wireless. One area that might be explored is whether big wireless carriers are hurting smaller rivals by locking up popular phones through exclusive agreements with handset makers. Lawmakers and regulators have raised questions about deals such as AT&T's exclusive right to provide service for Apple Inc.'s iPhone in the U.S. Big carriers say limiting exclusive deals would hurt innovation. The department also may review whether telecom carriers are unduly restricting the types of services other companies can offer on their networks, one person familiar with the situation said. Public-interest groups have complained when carriers limit access to Internet calling services such as Skype. Through a spate of consolidation and organic growth, AT&T and Verizon have become the two dominant players and have a great deal of clout with equipment makers. Combined, they have 90 million land-line customers and 60% of the 274 million U.S. wireless subscribers. They operate large portions of the Internet backbone. Past antitrust regulation played a major role in shaping the telecom sector. The U.S. pursued a landmark antitrust case against AT&T, resulting in the 1984 breakup of the "Ma Bell" telephone monopoly into regional carriers. One of those, SBC Communications Inc., later led a merger roll-up, and by 2006 had reconstituted the giant now known as AT&T Inc. Verizon, created in 2000 in a merger of GTE Corp. and Bell Atlantic Corp., bulked up through deals such as its 2006 acquisition of MCI Inc. Its wireless unit, a joint venture with Vodafone Group PLC, acquired Alltel Corp. early this year. Some antitrust experts said the U.S. would have a tough time opening a Sherman Act case against telecom providers and showing a company was abusing market power. "It would be a very hard case to make," said Donald Russell, a Washington attorney who reviewed a number of telecom mergers as a DOJ antitrust lawyer in the Clinton administration. "You don't have any firm that's in a dominant position." "Investigations don't necessarily lead to court cases," said Ketan Jhaveri, an attorney with Simpson Thacher & Bartlett LLP who once worked on the Justice Department's telecom antitrust task force. He noted that antimonopoly litigation consumes a lot of resources. "What you'll probably see is a lot of investigations opened, but they'll bring cases where they have the best shot of succeeding in litigation and clarifying the law," Mr. Jhaveri said. He added that the scrutiny itself might help deter anticompetitive behavior, even if suits aren't filed. Harold Feld, from the consumer advocacy group Public Knowledge, said the telecom review reflects the Obama administration's philosophy on antitrust. Traditionally, he said, the government has tried to show that a single firm had monopolistic power; but Mr. Feld said it is possible for more than one company to exercise monopoly-like power in sectors like telecom. He argued Verizon and AT&T had thrown around their weight in a variety of ways, from gobbling up radio spectrum to charging high fees for other companies to connect to their networks. Conducting an initial informal review of whether the largest wireless carriers are abusing their market power after a wave of consolidation.PHARMACEUTICALS: Says deals in which drug makers pay to delay generics should be presumed unlawful.Major telecom companies say the industry is very competitive, both in land lines, where cable and phone companies are dueling fiercely, and in the wireless sector, where there are four major national carriers. They also argue that regulation of specific areas of telecom, including exclusive handset deals, would harm innovation. The debate over exclusive handset deals has been escalating. The Federal Communications Commission said last month it will investigate them. That followed a congressional hearing that spotlighted the complaints of small carriers that said they are being shut out. "This is the outcome of indifference on the part of the government to the concentration of power in the hands of a few," said Jack Rooney, chief executive of Chicago-based U.S. Cellular, in a recent interview. U.S. Cellular has 6.2 million customers, mostly in rural areas. AT&T, with the iPhone deal, isn't alone in striking exclusive arrangements. Verizon is the exclusive provider of Research In Motion Ltd.'s touch-screen BlackBerry Storm in the U.S. Sprint Nextel Corp. will be the only carrier with the Palm Inc. Pre until early next year. The carriers say such exclusives enable them to take risks on expensive new smart phones and bring them to market at discounted prices. The deals limit the ability of manufacturers such as Palm, Apple and HTC Corp. to distribute their devices widely. But some analysts say those companies benefit by getting a significant share of a carrier's marketing and sales resources. "If you are launching an absolutely new product to the market, pairing up with a Tier 1 carrier gives you instant visibility and buzz and a first-rate marketing campaign," said Andy Castonguay, a wireless analyst at Yankee Group. Paul Roth, AT&T's president of retail sales and service, told Congress last month that the billions of dollars the company invests in its network and services would be put at risk if government were to "impose intrusive restrictions on these services or the way that service providers and manufacturers collaborate on next-generation devices." Mr. Roth said there is plenty of competition and innovation in the wireless industry. Verizon said it has tried to negotiate deals with some small rural carriers, including Cellular South, on certain handsets made by LG Electronics Inc. and Samsung Electronics Co., but the sides haven't been able to agree on final terms. "In the absence of regulation and political interest, we are showing that we're willing to change our business relationship with rural carriers," said a Verizon Wireless spokesman, Jeffrey Nelson. Jon Muleta, former wireless bureau chief of the FCC, said exclusive handset deals won't be an issue the government can pursue on antitrust grounds unless major handset makers say they're being forced into the deals. "The equipment providers enter into these deals willingly," Mr. Muleta said. —Elizabeth Williamson contributed to this article. Write to Amol Sharma at amol.sharma@wsj.com