Judge Questions Dish Fix at T-Mobile/Sprint Trial

Marrero asked if getting Boost Mobile’s approximately 9 million customers is enough of a base for Dish. It's "a good starting point," said DT CEO Timotheus Hottges. Marrero asked, "What if it doesn't go beyond that starting point?" Hottges said Dish Chairman Charlie Ergen has a seven-year wholesale deal to make the transition and "all the ingredients" to become a big wireless threat to T-Mobile, AT&T and Verizon. Marrero said in the lower Manhattan court that "what you're suggesting is that you're going to be building this player" and then fighting it so Dish “doesn't succeed too much.”

Marrero asked if Hottges saw coming out of the regulatory process with still four carriers and having to divest Boost as a "monkey wrench." Hottges said that’s correct, but DT still sees the deal as beneficial.

There were concerns within DT in 2014 about whether Dish could build wireless network infrastructure from nothing, Hottges said under plaintiff questioning. "This has completely changed" after DOJ's remedy, he said. The "biggest risk" to T-Mobile with the deal is creating a strong competitor in Dish, said Hottges, joking he wishes he ran the satellite company. T-Mobile is giving Dish "rock bottom” wholesale rates, and the MVPD will make profits from day one, he said. "This is a very big concession."

Board member Thorsten Langheim doesn't deny DT was skeptical of Dish as late as June. DOJ's agreement makes Dish's success likely, he said now.

It's "absolutely not the fact” that reducing price competition was one reason to combine with Sprint, Hottges said, but it “might have been the case” that someone at DT raised that as a plus. There might be potential to increase value by reducing price competition, but it's not an assumption, Hottges said. The U.S. wireless market is more complex than four carriers; it also includes companies like Google and TracFone, he said. T-Mobile 5G also will be a fixed broadband alternative, he said.

The regulatory environment "will never be better" to clear a four-to-three deal, T-Mobile CEO John Legere texted Hottges in January 2017, showed a states’ exhibit. Hottges didn’t deny Legere said it. Munger Tolles’ Glenn Pomerantz, representing the states, noted that Legere "didn't say it was like a 10 to nine merger because you have to include all the” mobile virtual network operators (MVNOs). Pomerantz also showed a 2011 DT slide deck referring to “the rule of three" as a transaction benefit because of potential to reduce price competition. Defendants objected to the document because they said Morgan Stanley prepared it for discussion, and it isn't an official DT document or admission. The judge deferred ruling on the contested document.

Avoiding a cable buy of Sprint was one reason for T-Mobile to do it, but there were "many more important reasons," Langheim said. He didn't deny writing that being No. 1 of three carriers was better than No. 3 of four. He said it's important to consider other players in the market beyond the top four. Sprint “may be crying wolf,” but T-Mobile "will be fine" if the deal isn’t completed, he said.

Hottges testified the combination is needed to compete with the top two carriers that have a significant lead. It's “the only way for sustainable competition with AT&T and Verizon," he said: T-Mobile wants to be No. 1. Prices will go down, the CEO stressed. Hottges has been working toward this deal for 10 years, and T-Mobile can’t promise same benefits without it, he said.

Assessing Day 1

“We’re feeling great” about the first day of the trial, T-Mobile President Mike Sievert said at a UBS conference Tuesday. “We have a fantastic case.” The judge has been very clear the trial won’t extend beyond Dec. 23, the executive noted. “It’s really a matter of getting the case told and told very clearly.”

Sievert said a settlement remains possible. “There a potential for settlement right up until the verdict, which we expect is actually some weeks after the trial itself,” he said. “There’s plenty of reasons why that might make sense.” Like T-Mobile, states want to make sure the market is more competitive and is good for workers and consumers, he said: “We’ve been very clear” the company “will need more people, not less.” Sievert will succeed Legere.

If the judge’s view on the Dish fix were settled, he wouldn’t have asked as many questions, Cowen analyst Paul Gallant told us after watching the hearing on day two. States worked hard Tuesday to rebut the carriers’ argument that the judge should count more than the top four carriers when assessing the size of the market, he noted.

States had a good day one, New Street’s Blair Levin told investors Tuesday. “The states used the witnesses to introduce texts and emails that were helpful for the states’ argument that the unconditioned 4-to-3 merger violates the law, that T-Mobile and Sprint are direct competitors, that Sprint has other options to the merger, and that the deal could result in increased prices,” the analyst said: “The judge declined to hear opening statements and sought to curtail the witness lists, making it more difficult, in our view, for the companies to re-frame the core arguments.” Most new evidence in the trial “is likely to favor the states, who have yet to make their case in a public forum the same way the companies have at the FCC and DOJ,” he said.

T-Mobile Chief Technology Officer Neville Ray said the carrier is starting to deploy Sprint’s 2.5 GHz spectrum on T-Mobile cellsites. Permitting takes the most time, he said. “We have a lot of sites with leases and with permits ready to roll. … We can move now very, very quickly with 2.5 deployment,” Ray said.