Antitrust Law Daily Justice Department files suit to block AT&T/Time Warner merger
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Tuesday, November 21, 2017

Justice Department files suit to block AT&T/Time Warner merger

By Lynn Stanton, TR Daily

The Department of Justice’s Antitrust Division filed a lawsuit Monday to block AT&T, Inc.’s proposed $108 billion acquisition of Time Warner, Inc., saying that the combined company "would hinder its rivals by forcing them to pay hundreds of millions of dollars more per year for Time Warner’s networks, and it would use its increased power to slow the industry’s transition to new and exciting video distribution models that provide greater choice for consumers."

The lawsuit against the vertical merger drew criticism from pro-market parties but praise from public interest and consumer advocates. "This merger would greatly harm American consumers. It would mean higher monthly television bills and fewer of the new, emerging innovative options that consumers are beginning to enjoy," said Assistant Attorney General Makan Delrahim of the Department’s Antitrust Division in the announcement of the lawsuit filing.

The complaint, which was filed in the U.S. District Court for the District of Columbia, says, "The proposed merger would result in fewer innovative offerings and higher bills for American families."

"First, the merger would result in higher prices for consumers of traditional subscription television because it would give the merged company the power to raise the prices that competing video distributors pay to it for Time Warner’s popular TV networks for no reason other than that those networks would now be owned by AT&T/DirecTV. Time Warner’s networks are some of the most valuable in the country. As Time Warner has told its shareholders, its Turner networks include three of the top five basic cable networks; Turner also has one of the top news networks. And HBO is the ‘[w]orld’s leading premium pay TV brand.’ Time Warner’s networks own the rights to hit shows such as Game of Thrones, as well as the current and future rights to ‘marquee sports programming,’ including NCAA March Madness, substantial numbers of regular season and playoff games of Major League Baseball and the NBA, as well as the PGA Championship. AT&T has concluded that Time Warner’s networks have ‘world-class ability to attract and sustain audiences with premium content,’" the lawsuit continues.

With regard to newer, online video services, the lawsuit says, "Time Warner’s Turner networks are extremely important for many emerging video distributors—its own analysis ranks those networks as tied for second behind only Disney in their ability to attract customers to emerging platforms. Turner benefits from the traditional pay-TV model but has also, previous to the announcement of this merger, secured a position for its networks as ‘anchor tenants’ for virtual MVPDs, which are growing competitors to AT&T/DirecTV. After the merger, the merged firm would likely use Turner’s important programming to hinder these online video distributors—for example, the merged firm would have the incentive and ability to charge more for Turner’s popular networks and take other actions to impede entrants that might otherwise threaten the merged firm’s high profit, big-bundle, traditional pay-TV model. The merger would also make oligopolistic coordination more likely. For example, the merger would align the structures of the two largest traditional video distributors, who would have the incentive and ability to coordinate to impede competition from innovative online rivals and result in higher prices. In short, the merger would help the merged firm’s bottom line by extending the life of the old pay-TV model, but harm consumers who are eager for new innovative options."

As for the unusual decision to seek to block a vertical merger, the lawsuit says, "Section 7 of the Clayton Act prohibits mergers if ‘the effect of such acquisition may be substantially to lessen competition.’ This includes vertical mergers, as Congress made plain in the 1950 amendments to the Clayton Act. A vertical merger may violate the antitrust laws where the merging parties would—by means of their control of an input that their competitors need—have the incentive and ability to substantially lessen competition by withholding or raising the price for that input. The competitive conditions in this industry and specific facts of this vertical merger make it unusually problematic. It is well-recognized within the industry that popular programming is something traditional video distributors need to compete effectively. AT&T itself has previously stated that access to some of the most popular television programming is ‘critical to preserve and promote competition and diversity in the distribution of video programming.’ This merger would give the combined firm control over AT&T/DirecTV’s massive video, wireless, and internet distribution network as well as Time Warner’s popular and valuable TV networks and studio. It would give the merged firm the power to make its current and potential rivals less competitive. The effect of the merger would likely be substantially to lessen competition. It would violate the antitrust laws and therefore should be enjoined."

The lawsuit also uses the words of AT&T against it, quoting Directv, now part of AT&T, in its opposition to the combination of Comcast Corp. and NBCUniversal.

"With respect to a similar, but smaller, purchase of a programmer by a distributor (the Comcast acquisition of NBCU), DirecTV stated that ‘a standard bargaining model can be used to determin[e] the likely increase in price that would result from vertical integration,’" the lawsuit says.

In a statement, Assistant Attorney General Makan Delrahim of the Antitrust Division said, "AT&T/DirecTV’s combination with Time Warner is unlawful, and absent an adequate remedy that would fully prevent the harms this merger would cause, the only appropriate action for the Department of Justice is to seek an injunction from a federal judge blocking the entire transaction."

AT&T called the department’s decision to file the lawsuit "inexplicable" and predicted it is doomed to fail, noting that the Justice Department "has not successfully blocked a vertical merger in court in nearly 50 years."

During a press conference late this afternoon, AT&T Chairman and Chief Executive Officer Randall Stephenson professed to being "surprised" to be in this position. "When we announced this deal, the best legal minds in the country agreed that this merger would be approved," he said.

He suggested that with the millions of consumers watching online video from Netflix, Amazon, Google and Facebook, the Antitrust Division is mistaken in attributing market power to a combined AT&T–Time Warner.

"We don’t intend to settle this matter out of simple expedience," Mr. Stephenson said.

He also addressed speculation that President Trump’s criticism of Time Warner’s CNN has played a part in the Justice Department’s decision.

"There has been a lot of reporting and speculation whether this is all about CNN. And frankly, I don’t know. But nobody should be surprised that the question keeps coming up, because we witnessed such an abrupt change in the application of antitrust law here. But the bottom line is we cannot and we will not be party to any agreement that would even give the perception of forfeiting the First Amendment protections of the press. So any agreement that results in us forfeiting control of CNN is a non-starter. We believe quite strongly that any divestiture of AT&T assets or Time Warner assets is not required by the law. And we have no intention of backing down from the government’s lawsuit. We are in this to win," Mr. Stephenson said.

President Trump said recently that he has not pushed the sale of CNN as a condition to AT&T’s getting the Administration’s approval to buy Time Warner, as some news reports had indicated DoJ was demanding.

"Well, I didn't make the decision. That was made by a man who's actually a very respected person—a very, very respected person," Mr. Trump told reporters. "I did make a comment in the past as to what I think. I do feel that you should have as many news outlets as you can, especially since so many of them are fake. This way, at least you can get your word out. But I do believe you should have as many news outlets as you can. Now, with that being said, I didn't make a statement on it, but I made that statement long before at the very early part. So we'll see how that—it will probably end up being maybe litigation, maybe not. We'll see how it all plays out."

During the presidential election, Mr. Trump said that if he won, the Justice Department would not approve the deal.

David McAtee II, AT&T’s senior executive vice president and general counsel, said in a statement, "Today’s DOJ lawsuit is a radical and inexplicable departure from decades of antitrust precedent. Vertical mergers like this one are routinely approved because they benefit consumers without removing any competitor from the market. We see no legitimate reason for our merger to be treated differently."

Mr. McAtee added, "Our merger combines Time Warner’s content and talent with AT&T’s TV, wireless and broadband distribution platforms. The result will help make television more affordable, innovative, interactive and mobile. Fortunately, the Department of Justice doesn’t have the final say in this matter. Rather, it bears the burden of proving to the U.S. District Court that the transaction violates the law. We are confident that the Court will reject the Government’s claims and permit this merger under longstanding legal precedent."

Daniel Petrocelli, an attorney from the law firm of O’Melveny & Myers retained by the merger partners for the antitrust proceedings, who also participated in the press conference, called the lawsuit "a serious and very troubling departure" from decades of antitrust jurisprudence. He emphasized that "in a merger case like this, the DoJ has the burden of proof. It has to prove that it will harm competition. It has to prove that it will harm consumers."

He said that he has been representing AT&T and Time Warner in the DoJ merger review proceeding over the past year, and that the record before the department "could not be more clear" that the merger presents no harm to competition and no harm to consumers.

He played a tape of Mr. Delrahim saying of the proposed merger on some unspecified occasion, "I don’t see this as a major antitrust problem."

"Nothing has changed since Mr. Delrahim gave those remarks," Mr. Petrocelli said.

Although the participants in the press call referenced "solutions" they had been willing to offer, they declined to specify what those offers were.

TechFreedom President Berin Szoka said, "This marks the first time that a vertical merger has wound up in court since 1978. The Reagan Administration’s 1984 Non-Horizontal Merger Guidelines set a high bar in blocking vertical deals—and for good reason: because horizontal deals actually eliminate rivals, antitrust review there turns on relatively straightforward weighing of costs and benefits. But in vertical deals, antitrust analysis is far harder: the effect on competition more attenuated, the government’s theories are more conjectural, the defendants’ efficiency arguments are generally stronger, and American courts have been more skeptical that market forces will not be adequate counteract any market power created by the deal. DOJ will have an uphill battle in proving that this deal will really foreclose competition."

Regarding a statement by Mr. Delrahim in favor of blocking mergers or requiring divestitures, rather than relying on "conduct remedies," Mr. Szoka said that "sometimes, it’s less harmful to let mergers go through with carefully targeted conduct remedies than to block acquisitions entirely. That’s particularly true in tech markets: Big companies always struggle with disruptive innovation—the ‘Innovator’s Dilemma.’ The less clear it is what the market will look like in the future, the more important corporate acquisitions are to acquire new talent, business paradigms and customer relationships. Undoubtedly, part of AT&T’s motivation is that premium video content seems likely to be the killer app that drives consumers to adopt 5G video service."

He also predicted that "given the President’s regular complaints about CNN and revelations that Jared Kushner pressured Time Warner to fire 20% of CNN’s staff in retaliation for the network’s ‘unfair’ coverage of the Administration, judges will inevitably be more skeptical of the government’s arguments. Whatever the merits of Delrahim’s arguments for preferring structural remedies over conduct remedies, structural remedies will look more politically motivated if they mean selling off politically sensitive media assets like CNN."

Reacting to the news, Public Knowledge President Gene Kimmelman said, "We welcome this effort by the Department of Justice to protect competition in the video industry. Ever since this deal was announced, we sounded the alarm on the dangers it could pose to consumers, and it is gratifying to see antitrust enforcers respond."

He added, "Although there is some controversy over the political environment surrounding the transaction, media consolidation in general and this transaction in particular is not in the interest of the American public. The Department of Justice has drawn a line in the sand against this violation of the Clayton Act, and we believe the courts will side with the government by preventing further media consolidation that drives up prices for consumers and undermines the competitive marketplace of ideas."

Free Press President and CEO Craig Aaron said, "Blocking this merger is the right thing to do—and we hope the Justice Department is doing it for the right reasons. This deal would give AT&T way too much power to undercut competitors and raise costs on TV viewers and internet users everywhere."

Mr. Aaron added, "The harms from vertical mergers are very real, where a distribution company like AT&T buys its programming suppliers. These kinds of transactions let media companies exercise even more control over both content production and distribution."

"However," he continued, "we remain very troubled by President Trump’s threats to punish outlets like CNN that have aired critical coverage of the administration. The Justice Department must demonstrate that Trump’s saber-rattling has nothing to do with this suit. It could start by giving the same level of scrutiny to other mega-deals like Sinclair’s proposed merger with Tribune. But the bottom line is that the public would be best served if this merger is scrapped."

Companies: AT&T, Inc.; Time Warner, Inc.

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