First major merger challenge under Trump thwarts AT&T strategy
DOJ asking judge to block megadeal in trial that starts Monday
Will an AT&T-Time Warner Merger Diminish Competition?
AT&T Inc. faces off in court against the U.S. Justice Department Monday in a test of the government’s effort to block its $85 billion takeover of Time Warner Inc. and the phone giant’s bid to become a telecom and media powerhouse that can compete in the age of Netflix and Amazon.
If the grand design of Chief Executive Officer Randall Stephenson prevails, AT&T will emerge as an entertainment giant, with movies, TV and news to feed its 119 million mobile, internet and video customers. If the government wins, it will be the second time in seven years that the U.S. has derailed a major deal by Stephenson and will leave the largest U.S. pay-TV provider and phone company with fewer options for growth.
U.S. versus AT&T is the first major antitrust case brought under President Donald Trump and either outcome will define how the U.S. reviews deals between companies in the same industries that don’t compete directly. A government loss could open the floodgates to a wave of such tie-ups, known as vertical mergers. It will also mean a thumbs up or down for AT&T’s answer to the mounting threat the pay-TV industry confronts in online video giants such as Netflix Inc. and Amazon.com Inc.
“It’s very much going to lay down a marker for the foreseeable future about whether the government is going to go after vertical transactions or not,” said Harold Feld, a senior vice president at Public Knowledge, an advocacy group that opposes the deal. “If the court says no, this doesn’t violate the antitrust rules, I don’t think Comcast would worry about buying Fox assets or Verizon would need to worry if it tries to buy CBS.”
For AT&T, which has seen subscribers stall in its mobile-phone business and shrink outright at its DirecTV division, gaining ownership of Time Warner’s HBO, Warner Bros. studios and Turner TV programming would help ease rising programming costs and open new avenues for ad sales.
“The old ecosystem is being upended by new entrants with new methods of distribution,” said Todd Lowenstein, chief equity strategist at HighMark Capital Management Inc., which oversees about $14 billion in assets and owns AT&T and Time Warner. “The symbiotic TV bundle is at risk and consumers want customization and value for their money.”
The Justice Department’s decision in November to file a lawsuit seeking to block the deal stunned investors who figured the government would follow past practice and approve it, just as it allowed a similar tie-up between Comcast Corp. and NBCUniversal.
Makan Delrahim, the antitrust division chief who brought the case, broke with tradition when he demanded asset sales from AT&T to resolve the government’s concerns that deal would harm competition. For years vertical deals had been approved with conditions imposed on companies to keep markets competitive. In Delrahim’s view, that turns antitrust enforcers into regulators who need to monitor an industry. Assets sales are preferable because they don’t require monitoring and let market forces do their job, he says.
“We have gone through a period, I think mistaken, in which we’ve substituted ongoing regulation of merged firms for structural relief, and I think it’s time that comes to an end,” said Herbert Hovenkamp, a antitrust scholar at the University of Pennsylvania Law School. “It’s not the job of the antitrust laws to regulate conduct to but to condemn anticompetitive conduct.”
To Read More: Why New Roadblock for Dealmaking May Be Vertical: QuickTake Q&A
The Justice Department says the deal will mean higher costs for consumers and less innovation in online video. AT&T, by owning Time Warner’s Turner Broadcasting, would gain leverage in negotiations with rival pay-TV companies that want to carry CNN. While Time Warner would normally worry about losing revenue if it can’t strike a deal with a distributor, the post-merger AT&T could recapture sales as subscribers switch to DirecTV to continue to get Turner content, according to the government.
Owning Time Warner content would also help AT&T snuff out innovative new online competitors, like Dish Network Corp.’s Sling TV, by withholding important programming those rivals need to attract subscribers, the government says.
The Justice Department’s economist, Carl Shapiro from the University of California Berkeley, estimates the merger would give AT&T so much leverage that consumers nationwide would end up paying $36 million more a month, or $436 million a year, for Time Warner programming, like the March Madness college basketball tournament.
AT&T counters that the Justice Department’s analysis shows the potential increases would amount to about 45 cents a month per subscriber, a tiny sum in a country with almost 90 million pay-TV homes. And when errors in the government’s math are corrected, the model actually predicts lower prices industrywide, AT&T said in court papers.
While 45 cents a month may seem minimal, antitrust law doesn’t establish a threshold price increase that makes a merger illegal, said Hovenkamp at the University of Pennsylvania.
"If you can show a $400 million price increase as a result of a merger, it’s not going to be hard to get the merger condemned even if there are questions about how that $400 million is distributed," he said.
Squaring off against Shapiro will be AT&T’s economist, University of Chicago professor Dennis Carlton. In addition to the economists, the government is expected to call several TV and entertainment industry executives who have concerns about the scale of the combination. AT&T’s Stephenson is also expected to testify in the trial, which is scheduled to last up to eight weeks. The companies should still be able to get a ruling in time for their June 22 merger deadline.
AT&T says it’s promised not to black out channels during contract negotiations and would allow price disputes to go to binding arbitration, offers that could weaken the government’s argument that price increases are inevitable. The U.S. argues that AT&T’s promises don’t change the structure of the deal.
Initially, AT&T tried to show the case was based on a personal grudge Trump has against Time Warner’s CNN after his repeated criticism of the news channel. But last month, the judge rejected AT&T’s effort to obtain evidence that Trump and the Justice Department discussed the deal.
Seventeen months after striking the Time Warner deal, AT&T’s media strategy is in limbo while the rest of the industry evolves rapidly. Phone and tablet-toting, entertainment-hungry consumers are shifting away from big cable and satellite TV bills to stream-on-demand services like YouTube and Netflix. About 3 million subscribers, or 4 percent of the total pay-TV customer base, canceled service in 2017.
“It’s been a year and a half, that’s one of the negatives for AT&T,” said Amy Yong, an analyst with Macquarie Capital USA Inc. “You’ve seen Netflix and Amazon take away pieces as they get bigger.”
The case is U.S. v. AT&T Inc., 17-cv-2511, U.S. District Court, District of
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