The trial that will resolve the US Justice Department’s challenge to AT&T’s $85 billion proposed acquisition of Time Warner will begin on Wednesday.
The case, the first major US media merger to go to trial in decades, will indicate how the government may oversee telco and media consolidation going forward.
If successful, the DOJ’s challenge could set a precedent in antitrust enforcement over vertical mergers. AT&T and Time Warner are from different industries, unlike AT&T’s proposed deal for T-Mobile in 2011, which was blocked because it would reduce the number of competitive mobile operators.
The basics
Unlike jury trials or other regulatory investigations that could drag on for months, this bench trial, presided over and decided by a judge, will likely last two weeks, followed by 5-6 weeks for post-trial briefings and for the judge to issue a verdict.
Each side has laid out its case in extensive pre-trial reports, and there’s little additional fact discovery or deviation from those planned arguments.
The economic arguments around anticompetitive vertical integrations can be dense, but the judge presiding over the case, District Judge Richard Leon, was also assigned to the Comcast-NBCUniversal challenge before the DOJ settled with Comcast on a deal where the telco agreed to license content to online competitors, among other provisions.
But the current DOJ antitrust group isn’t interested in settling through a similar arbitration process. The DOJ wants to try the case in court and work out a settlement only if it successfully blocks the deal, which would give the government immense leverage during arbitration.
Most media mergers challenged by the DOJ don’t go to court because the government has a very high win rate, so it makes sense for DOJ attorneys to delay arbitration until a decision is made.
Leon earlier this week, though, allowed AT&T to incorporate its offer of a settlement to indicate good faith. The DOJ had tried to block the offer from inclusion in arguments.
The DOJ case
The government’s case boils down to a straightforward question: Will it make economic sense for AT&T to raise the price of Time Warner-owned Turner Networks, which includes CNN, Turner Sports and TBS, and force competitors to pass on price hikes to consumers?
AT&T is arguing that Turner already fights for the highest rates it can get with telco operators to be included in linear TV packages. If it charges more, it risks getting dropped and losing revenue.
But the DOJ argues that once Turner is nestled within AT&T, those incentives will change. So if rival pay-TV operators refuse the price hike and drop Turner content, it gives AT&T-owned DirecTV a stronger position in the market, said George Hay, a professor and antitrust expert at Cornell Law School.
“The economic theory is clear that there are scenarios where a vertically integrated deal can create antitrust problems,” Hay said.
The DOJ’s plan of attack is to confront AT&T-Time Warner with its own past testimony. The government’s pre-trial briefing cites statements made to the Federal Communications Commission by AT&T before its deal for Time Warner and by DirecTV before its sale to AT&T. Those statements argue against the vertical integrations of competitors, including Comcast’s merger with NBC.
The DOJ says AT&T will make a so-called “’Star Wars’ defense,” in its pre-trial brief. “Everything the government is telling the court is stale and out of context – it is from a long time ago in a galaxy far, far away,” writes DOJ counsel.
The AT&T case
Some industry watchers expected AT&T to make a political argument for improper proceedings by the DOJ, based on President Trump’s statements directing regulators to punish CNN for critical coverage.
But the company’s pre-trial brief confirm that it dropped that line of defense and will argue that it won’t abuse competitors in the pay-TV market and that consolidation with media companies is a necessity for legacy telcos to compete with digital platforms like Google, Netflix and Amazon.
It’s not a coincidence that while the DOJ briefing focuses on “multichannel video programming distributors” (a 60-year old broadcast category where AT&T is the global leader), AT&T centers its argument around a more general “video marketplace.”
“As will be demonstrated at trial, the new video revolution is defined by the spectacular rise of Netflix, Amazon, Google, and other vertically integrated, direct-to-consumer technology companies,” according to the AT&T brief.
The threat of AT&T using Turner to siphon subscribers from rival pay-TV services is blind to the realities of the market, where internet startups are winning new customers and every platform is saturated with content, said Bruce Leichtman, president of the broadband media research firm Leichtman Research Group.
The potential ramifications
If the DOJ successfully blocks AT&T’s merger with Time Warner, Brian Lesser, AT&T’s CEO of advertising and analytics, would lose a content arm meant to be the crown jewel in AT&T’s data-driven ad platform.
Leichtman said it could also have a negative impact on the pay-TV market, since AT&T, the biggest and most-invested in the category, wouldn’t be as incented to increase value for cable TV.
The decision won’t apply retroactively, so even if AT&T-Time Warner is blocked, Comcast’s deal with NBCU, for instance, would be unaffected.
Disney and Fox executives will be eyeing the case, though, since Disney’s pending merger with 21st Century Fox and other Fox holdings like Sky TV could face similar scrutiny.
Hay said the potential impact of the case on vertical integration is overhyped, largely because it’s been so long since a merger of this magnitude has been tried. Smaller mergers in the same vertical categories may be approved even if the AT&T-Time Warner deal is blocked.
The real implications will come if a technology giant like Google makes a bid for a company like Time Warner, Hay said.
The precedent blocking a vertical integration could be debilitating for telco operators and broadcasters as they lose share to tech companies.
“If this gets blocked and that precedent is followed, what [media and telco] deals could go through?” Leichtman said. “It would make it very hard for a legacy company to compete for consumers with the online set.”
