In another busy week, we have already published notes on C-Band (LINK) and legal issues relating to DISH’s licenses (LINK). In this note, we focus on last week’s developments on the upcoming trial about the big wireless merger. We discuss why John Legere’s upcoming resignation incrementally undercuts his credibility as a witness, how the DOJ’s surprising motion, and unsurprising loss, to disqualify the states’ outside counsel reflects Delrahim’s nervousness about the trial and incrementally undercuts the companies’ argument that the court should defer to the DOJ’s judgement, and why it might be that discovery issues focus on DT/TMUS communications. We also provide a mediation on Presidential involvement in our sector, prompted by his impact on the C-Band process and his suggestion that Apple should help with America’s deployment of 5G networks. Finally, we plan on being off the coming week (and would be very thankful if the fates make that possible) but want to wish all our readers a wonderful Thanksgiving Day holiday.
Legere News Incrementally Undercuts His Value as Witness. The week began with TMUS’ CEO John Legere announcing that he would step down from his CEO position on May 1, 2020, to be replaced by the current president, board member, and Chief Operating Officer, Mike Sievert. We will leave it to others to opine on the impact on the company (LINK). We will simply opine on the impact of the trial. As we have noted before, one of the most favorable elements of the trial for the companies is that, in our view, there would be two very compelling witnesses—John Legere and Charlie Ergen—for the vision and details of how TMUS and DISH would bring competition to the market. There will be no analogous witnesses who will testify as to how, if the deal is blocked, they would personally restructure Sprint so as to facilitate competition. There will be expert testimony on different paths Sprint could take, but in a courtroom setting, such testimony is not nearly as good as an experienced CEO personally drawing the map they intend to follow for the Judge.
Legere’s announced retirement incrementally reduces his value on the witness stand.Sievert could well testify but, meaning no disrespect to Sievert, we think Legere is more tested and compelling in public forums facing hostile questioning. Sure, sometimes a young kid, like Juan Soto of the Nationals, does great in his first play-off (sorry for another Nationals reference but apparently there is a new DC law requiring at least one Nationals reference a week, to remind people thinking of DC about something other than impeachment.) When it comes to the big game, however, it’s better to bet on veterans. It does not change any of the core antitrust facts or analysis but, as would be true of any setting, the credibility of one making projections of what will happen is undercut if the person has no personal role in making those projections come to pass.
State Counsel Allowed to Proceed; What Was DOJ Thinking and Will it Matter? As expected (LINK), the Magistrate denied the DOJ’s motion to disqualify the states’ outside counsel and his law firm. The Magistrate clearly came prepared to make that decision and conveyed that it was not a close call. While the press coverage emphasized the Magistrate ruling on the basis of the late timing, he cited several other grounds for quickly dismissing the DOJ motion.The Court acknowledged that it was being particularly tough on the DOJ counsel, saying “I'm sorry if I'm being hard on you, but it really is a sticky situation, I think, and I just don't know how you reconcile having come in here at this date. You were informed in April that Mr. Pomerantz and his firm were going to be lead counsel in this case. He made an official appearance two months later in June. You had plenty of opportunity to do your investigation. You had some interim discussions with plaintiffs about the issue, and if a motion was going to be made, if any application was going to be made, it had to be made much earlier.” But it was not just on the question of timing. The Court also said “The potential prejudice to the Division is slim to none. The Division has not identified in any way in the correspondence, what is a very large set of correspondence over much time, they have not identified in any way how they could really be hurt and any particular information or group of information that would cause any injury to them whatsoever, particularly when we are talking about what Mr. Pomerantz learned, if anything, that's relevant here in 2011 over his two-month period at the Division.” The court also undercut the DOJ claim by noting that “any relevant information regarding T-Mobile or Sprint or other parties from the 2011 matter is either already or largely already in the public domain or subject of discovery in some way.” The Magistrate also denied the DOJ’s motion to intervene. Obviously, this is good news for the states. Having to change out counsel at this time would have materially affected the odds at trial. The motion, however, does raise two questions: given the Magistrate’s quick and complete rejection, why did the DOJ even bother, and second, does that rejection affect the odds at trial?
What does the effort tell us about the DOJ thinking? As to the first question, the effort was a relatively quick bit of lawyering, and had it succeeded it would have significantly improved the odds of a DOJ win. Therefore, one could view the effort as emanating from a simple cost/benefit analysis. We think, however, that is the wrong way to view the effort. The DOJ thinks institutionally, and we would guess the DOJ staff was strongly opposed to the motion. First, losing such motions hurts the broader reputation of the DOJ as a litigant who takes into account broad implications of arguments and not just short-term tactical consequences. Moreover, if successful, it would have made it far more difficult and expensive for the DOJ to hire outside assistance in the future. In light of that, we think the effort likely resulted from Mr. Delrahim’s own concern that the states are well positioned to winWe understand that Mr. Delrahim has told people the states only have a 20% chance of winning. We think he is way low. We also think that if he really believed that, he would have never pressed for his staff to file this motion. Finally, as we saw in Delrahim’s confident predictions on the AT&T trial and appeal, his predictions are tied to his advocacy rather than reflecting a cold-hearted analysis. and his willingness to use any DOJ resources to shift the odds, even if the precedent would hurt the DOJ as an institution in the long-run.
Will the loss hurt the companies’ chances at trial? Ordinarily we don’t think a party’s arguments on discovery and other pre-trial motions affects a judge’s view on the merits. Here, however, the companies have signaled that they will be relying heavily on the DOJ’s reputation as the nation’s leading expert on competition. We think the DOJ’s motion, and the Magistrate’s reactionThe Magistrate is not the Judge but there is a fair amount of communication between them on important issues. The immediacy of the Magistrate’s decision suggests he had already conferred with the Judge and the Judge was fully on board with quickly dispatching with the DOJ’s arguments.suggest that deference to the DOJ has its limits and that deference was probably taken down a peg by virtue of this effort.
Discovery Battles Continue with DT/TMUS Communications at Issue. The status conference also addressed additional discovery issues, both relating to DT/TMUS, with one win for the companies and one decision to be made later.
Companies Win on Pre-May ’18 Documents. In a win for the companies, the Magistrate denied the states access to every document from pre-May ’18 from Deutsche Telecom that appears on a privileged log. The Magistrate viewed the states’ request as a fishing expedition.
Magistrate continues review of some DT/TMUS Communications. The Magistrate also agreed to look at 30 or so documents sought by the states to determine whether they are subject to the attorney-client privilege and whether the states should be able to use them at trial and have an opportunity to depose a Deutsche Telecom executiveThe executive in question is Mr. Thorsten Langheim, who is responsible for Deutsche Telekom’s U.S. business as well as Corporate Development, Portfolio Strategy and Group Mergers & Acquisitions activities. about them. As the information about the nature of the document remains confidential, we cannot opine on its importance.
Why are DT/TMUS communications important? We find it interesting that there are a number of disputes about DT/TMUS communications. While internal communications are sometimes probative of economic analysis that determines whether a merger violates the Clayton Act standard that the effect of the deal “may be substantially to lessen competition,” more often, as was the case in the AT&T/TWX trial, the critical evidence involves the expert testimony. Here, however, the trial will be about the fix. We think the communications, which apparently relate to “the status of negotiations with the government” may go to the questions of whether or not the parent company was comfortable with the fix because it believed it would not create a competitor that would threaten the benefits of TMUS’ acquisition of Sprint.
Presidential Involvement and Sector Performance
With a number of investors still reeling from the FCC decision to itself auction the spectrum, apparently due to a Presidential phone call,We discuss the official story or our view of the phone call in footnotes 8 and 9 below. and with the President continuing to make comments related to how America needs to lead in 5G deployment, we thought we would offer a brief meditation on the impact of the President intervening in policy debates.
What is the impact of having a President care about a sector? While the answer would depend on many factors, one might generally think it’s a good thing. Presidential involvement likely comes with a belief that a sector’s performance is important to the overall economy and therefore the President will likely drive policies that improve performance.
Key impact: volatility. That logic is not borne out by history. Presidential involvement can result in many different kinds of outcomes.There is a long history here, which we will not detail, but we could cite numerous examples of involvement that arguably helped or hindered sector growth. While the facts of Trump’s intervention here are, and are likely to remain, a mystery,The initial FCC story was that the President call Pai but just asked questions, rather than offering an opinion. Forgive us a healthy bit of skepticism. We have not read all the White House memoirs of this Administration, but we know of no one who has ever described a meeting with the President in which he merely asked questions and did not offer his opinion and/or instructions. Chairman Pai continued with the official version in his post-FCC meeting press conference, saying did not express a view on the merits of the proceeding at all and that “it did not affect our decision.” We admit to a certain sadness that Pai did not take advantage of the situation to simply say “It was a perfect call. Perfect!” we feel confident in saying that the FCC, as an institution, was heading for a CBA auction and then quickly reversed direction after a Presidential phone call.Given Pai’s comments on Presidential involvement in the net neutrality debate during the Wheeler FCC and the release of a Senate report on the topic, we understand why he would be so adamant in claiming the President did not affect his thinking. But looking at the totality of what we know, we would be less than honest if we merely accepted that statement. (Among the many tells is the silence of Commissioner O’Rielly, a loud and clear advocate of a CBA run auction. If it were merely Pai deciding to have a FCC run auction, we feel certain he would have been vocal in opposition. But his silence suggests a higher power at work.) Whatever one’s view of what Trump told Pai, however, for investors, the principal lesson is that any policy that can grab the President’s attention, for whatever reason, is subject to an intervention that could quickly lead to a reversal or an unanticipated project fork in direction.
We think this illustrates how Presidential involvement is not inherently a good or bad thing, but it is inherently a source of volatility. We think this is true for a number of reasons, but the key ones relate to the President’s unique ability to act without process, on the basis of little understanding of the factual record, in a manner inconsistent with long-standing institutional understanding of an issue, and with a general indifference as to the nature of subsequent actions required to carry out the Presidential wishes.To be clear, while President Trump is unique in many ways, we think this sentence is likely to be true for most Presidents, particularly on issues involving a lot of technical information to resolve. For example, in terms of President Trump’s recent call to Chairman Pai on C-Band, we don’t know exactly what he communicated, but we can feel confident the President was not asking about the transition process, compression technology, the cost of filters, the time to deploy fiber and other issues about which the FCC staff has been gathering information to undergird their recommendations to the FCC leadership.
Do We Really Want Apple Designing 5G Networks? While the C-Band decision is one example, we were also struck by the news this week that the President asked Tim Cook and Apple to help with the deployment of 5G, tweeting “They have it all - Money, Technology, Vision & Cook!” We don’t want to read too much into it but would guess everyone who reads this would understand that while Apple is the best in the world in many things, building networks is not one of them. As Tim Cook himself said, “Our expertise doesn’t extend to the network... generally, the things Apple likes to do, are things we can do globally. We don’t have the network skill.” We admit to having no idea what the President is thinkingThis is often the case. Whether that is because he is a “stable genius” and we are not, or it is due to some other factors, we leave it to readers to decide. but we think he actually doesn’t either, beyond thinking that associating himself with the Apple brand is a good thing. But we could see Apple now having an outsized influence on a variety of 5G related issues, particularly in areas of security.
Not the first time. We have seen this story of President interest while still lacking core knowledge before. Back in May, the New York Times reported that “Mr. Trump has been deeply involved, quietly meeting with American telecommunications executives at the White House and weighing different versions of the executive order. He has insisted that the United States must “win” at the 5G competition, only to be told that no American firms make the core switches that will direct 5G internet traffic.” In other words, despite his heavy involvement in 5G issues, he was unaware that no American companies could produce the core input that he defined as critical to America winning. In that case, the briefings did not result in any immediate moves that affected stocks, but it did lead to some coordinated Presidential and FCC actions.It lead to a joint press conference with the President and Chairman Pai in which the pair announced “two new steps” that together would position the United States as a leader in deploying 5G wireless networks. The announcements related to a spectrum auction and a fund for rural broadband deployment. We think most would agree that the announcements were not new (the auction planning began in 2013 and the fund was simply renaming the existing rural fund) or about 5G leadership (the spectrum was high-band which is not where the battle is, and success in rural, whatever its social value, is irrelevant to American leadership.) While the press conference may not have achieved its stated policy objectives, it did get the two a lot of good press and it did not materially interfere with any ongoing policy process.
Meanwhile, a bipartisan consensus that the Administration’s 5G efforts need something more. Last week there was a letter from eight senators calling on the White House create a new position to coordinate policy on 5G. Citing the lack of a “coherent national strategy”, the Senators suggested that such a position was necessary to prevent the United States from falling behind other countries, particularly China. Our point is not to weigh in on the debate but to note that the President has already weighed in on a variety of 5G subjects, but not all, as is clear from the internal administration battles on spectrum policy. Our point is that if the President chooses to appoint such a person, we can expect to see better coordination but we might at the same time see greater volatility, as the President is capable of focusing on a single piece of the 5G puzzle, instead of balancing a number of competing concerns.
Look for more Presidential activity and volatility ahead. In short, this President believes issues related to 5G are important to his Presidency. He will seek to insert the White House into issues where he believes there is an upside for him to do so. That may lead to policies about which reasonable people can disagree, but we think it creates a general volatility into the sector. We think this will be most pronounced in the C-Band process and expect that now that he has intervened once, he may well do so again. We also think it could play out in other issues related to 5G, including those related to Huawei, tariffs, universal service, and tax policy, among others.