Trial Of The Century Day 1: Tough Day For The Companies

Throughout the course of the trial, we will endeavor to update clients on particularly important days (though not necessarily daily).  Today, we saw a pretty tough day for the companies, as one would expect given that the states are putting on their side of the case.  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.   In addition, 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.  While nothing changed our odds, we can clearly see how the states are setting up their arguments.

States start strong.  Trials are like a football game in which one side plays offense for the first half and then the other side plays offense.  Here, the states, as the plaintiffs, gained some yardage as they had an opportunity to introduce documents from the companies that undercut the companies characterization of the purposes and likely outcome of the merger.

Course-of-business documents, texts, emails put companies in problematic light: The first witness was Roger Solé, Sprint CMO, who was basically a vehicle to introduce several course-of-business documents and text / email correspondence into the record.  The texts and emails were particularly harmful to the companies’ case that the core 4-to-3 deal is not anti-competitive; specifically:

• a text from Mr. Solé to Marcelo Claure, Sprint Executive Chairman (then CEO), referred to potentially squaring valuation differences during DT negotiations by calling out “big synergies not captured anywhere (for reg. reasons)…let’s say +$5 ARPU”;
• another text from Solé made oblique reference to the T-Mobile deal being “an inferior option” to a potential cable/Sprint partnership;
• an email from Marcelo Claure in response to a T-Mobile promotion said “Let’s match it. We have no choice.”

In addition, Mr. Solé and the second witness, Angela Ritters, who runs Sprint’s prepaid/Boost business, both provided evidence about the extent to which T-Mobile and Sprint compete head-to-head, undercutting the narrative that Sprint does not provide a competitive input into the market.  Ms. Ritters was also helpful to the companies case in saying that improving the network would help Boost to grow a lot and that DISH was getting what they needed to be a successful competitor.

The day ended with the testimony of Tim Höttges, DT’s CEO, who the states got to talk about how T-Mobile was able to change consumer perception of their service and rise up from #4 to #3, setting the stage for the states to argue that Sprint could do the same.

The stronger the state case on the deal, the more the companies have to rely on litigating the fix. We believe these, along with the course-of-business documents, are helpful to the states case on the impacts of the unconditioned merger.  Though they do not address the DISH remedy, a stronger case for the states on the unconditioned merger will raise the bar for the companies to have to rely on litigating the fix.  As we have noted before (LINK), new evidence presented at 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.

On Deck for Today.  Tuesday’s witnesses include senior DT management, including the continuing testimony of Tim Höttges (CEO), and then Thorstein Langheim (head of Corporate Development and USA), who could hurt the companies’ case even more if language similar to Mr. Solé’s is found in their correspondence.  One of the defenses that the companies used to downplay Mr. Solé’s correspondence was that Mr. Solé was not responsible for overall strategy, regulatory policy, etc. and was generally unqualified to comment on such matters; we suspect these arguments will be less credible for DT management.

Judge seeking to expedite trial; modest negative for the companies: The judge called off opening statements, and suggested that there were too many witnesses, especially noting that thirteen witnesses were to opine on competition issues, and another six on Sprint’s standalone prospects. (The Judge said “Sprint may be doing badly, but I don’t need six witnesses to explain why”).  We view this as a negative for the companies, as the judge seems set on framing the trial based on a core 4-to-3 with a remedy (see our weekend note for how to watch the trial), as opposed to the companies’ preferred framing of a “world without the merger vs. world with the merger”.  While the Judge asked some questions, he did not give us any sense of his view of the case or any pivotal issues, though of course it is way too early to do so.

Upcoming witnesses include Comcast and Altice; expect Legere later this week:  Additional witnesses for the states that have been announced include Comcast head of strategic development Sam Schwarz and Altice head of wireless Hakim Boubazine.  We expect them to testify about the potential impact of the deal on the wholesale market and perhaps how they were cut out of bidding on the MVNO due to competitive concerns.  DISH will have Charlie Ergen and Tom Cullen and testify for the defense.  The companies said that we would see Legere late Wednesday or early Thursday (though things seem to be running behind already).