DoJ Sues to Block AT&T-Time Warner Vertical Giga-Deal

DoJ Sues to Block AT&T-Time Warner Vertical Giga-Deal

AT&T and the Department of Justice are headed to federal court over antitrust issues with its Time Warner merger. The stakes look as high as 1984, when the DoJ won its antitrust case and broke up Ma Bell.

Now the antitrust civil suit is over the AT&T/DirectTV-Time Warner merger, valued lately between $85 billion to $108 billion, which the DoJ’s civil antitrust lawsuit says would hurt competition and result in higher prices and less innovation for millions of Americans.

According to the 23-page complaint, filed in the United States District Court for the District of Columbia Monday, the combined company would use its control over Time Warner’s “valuable and highly popular networks to hinder its rivals by forcing them to pay hundreds of millions of dollars more per year for the right to distribute those networks.”

And, this being AT&T, the DoJ is worried about competition and the combined companies’ power to slow the industry’s transition to new and exciting video distribution models that provide greater choice for consumers, resulting in fewer innovative offerings and higher bills for American families.

The deal has created “strange bedfellows” of conservative and liberal-leaning groups joining in their opposition to the merger, which the Breitbart columnist known as Virgil notes also that Google-Facebook content distribution competition is at play, albeit not in the deal, as is the demise of local broadcasting with these mergers:

Today, just two digital companies—Alphabet (Google) and Facebook—have formed a duopoly; they now take in more than 60 percent of all the advertising in America. This duopolistic control has siphoned away money from every other media sector, including television (Those two Silicon Valley companies, of course, are notorious for their liberal politics and algorithm-based biases—but that’s a tale for another time.).

And it takes note of President Donald Trump’s comments on the merger in October of 2016, when he said:

“As an example of the power structure I’m fighting, AT&T is buying Time Warner and thus CNN, a deal we will not approve in my administration because it’s too much concentration of power in the hands of too few.”

CNN’s hostility to the President speaks for itself if you watch the network on any given day. The president often pushes back on Twitter about CNN’s coverage of the administration.

But with conservative and liberal groups finding common ground in their opposition to the merger, much more is at play here.

We’re way past the term mega-mergers in these tie-ups among cable and video network providers for control of data, video, voice and all the content that travels over their networks of wired and wireless varieties and around the globe.

These are giga-media deals that want to capture audience share wherever it goes, including wayward cord-cutters and mobile-video watchers fleeing bloated and pricey cable bundles for just the content they want to consume.

Vertical deals are one of the paths to keep those customers, no matter how they consume content, be it over the cable-networks’ (DOCSIS 3.0) standard or Internet Protocol (IP) networks. Wherever users flock to escape the expensive bundle of programming they have to buy just to enjoy Game of Thrones on HBO or live sports, this merger tie-up would be ready to assist them as they look for other means of content distribution.

As more content, and live sporting events are streamed over the web, vertical integration deals, such as this one that marries up suppliers of content with distributors of content, are likely to get more scrutiny than they historically receive from antitrust law and policies compared to horizontal deals that tie up producers of the same or similar good, such as car companies consolidating their market share.

AT&T/Direct TV and Time Warner get that, as does the DoJ, which points out.

As AT&T itself has expressly acknowledged, distributors with control over popular programming “have the incentive and ability to use . . . that control as a weapon to hinder competition.”  And, as DirecTV itself has explained, such vertically integrated programmers “can much more credibly threaten to withhold programming from rival [distributors]” and can “use such threats to demand higher prices and more favorable terms.”

By way of history, this fight would bring AT&T back into court to face its DoJ nemesis from the 1984 antitrust ruling that led to the Bell breakup, which begat AT&T and “Baby Bells,” the seven regional Bell operating companies formed after the break-up.

Economic historians might be looking back at the Regional Bell Operating Companies (RBOCs) to understand where we are today in the great merging of data/voice/video distribution in the hands of fewer providers.

The path wends through some of hard lessons learned from the battles among regional the regional Baby Bells and data-networking start-ups. The Bells were obligated to allow competitive start-ups to access their networks and compete with them at the same time, while allowing media cross-ownership ushered in as a result of the 1996 Telecommunications Act.

It didn’t turn out well for the start-ups in data networking, known as competitive local exchange carriers (C-LECs), which went down in flames when the dot-com bubble burst. They had other problems, such as too much capital chasing too few profits and dot-com mania for deals. But the prospect of a data and networking provider also competing with its supplier, the Baby Bells, was the real killer. Why not just own the whole caboodle instead?

The DoJ’s complaint gets at the stakes with the vertical deal:

“The combination of AT&T/DirecTV’s vast video distribution infrastructure and Time Warner’s popular television programming would be one of the largest mergers in American history.  Time Warner’s network offerings include TBS, TNT, CNN, Cartoon Network, HBO and Cinemax, and its programming includes Game of Thrones, NCAA’s March Madness, and substantial numbers of MLB and NBA regular season and playoff games.”

We’ll see you in court, says AT&T.

David R. McAtee II, the company’s general counsel, says 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.”

Bloomberg points out that the deal could be put a damper on mergers and acquisitions, too:

“I think this has put a wet blanket over consolidation around the whole space,” Christopher Marangi, co-chief investment officer of Gabelli Funds, said in a Bloomberg TV interview. “A lot of companies are going to be watching this case very closely.”

It has this media observer going back to another era in landmark antitrust cases, 1984, because it resulted in a break-up of Ma Bell. One of the remedies bandied about on the AT&T/Time Warner hook-up is that it would be forced to sell off some of the assets in the merger deal, such as CNN. AT&T has pushed back on that.

Update: But why stop at 1984? We could argue it actually feels like 1914, given that the DoJ’s case cites the Clayton Act of that vintage, which is an extension of the Sherman Act of 1890 and the Federal Trade Commission Act of 1914, which restricts “the formation of cartels and prohibits “other collusive practices regarded as being in restraint of trade.”

James Rosen of Fox News boils it down in his concise way that the future of antitrust policy and case law are at play in this case, given that one of the largest internet and telephone providers is intent on acquiring a well-known producer of content.

We’re about to see a 21st Century wallop of a fight over who controls a significant portion of media, content, data access and voice services in our country and the world — and who controls much of the pipes to not only push it, but charge competitors for access.

Infrastructure Plans in Need of Finance Ideas
Setting the Lens on a $1-Trillion Infrastructure Plan
With Tax Cut Bill Signed, a Shift to Infrastructure
Would-Be Terror Attacker Charged With Terrorism
Ahead of Tax Reform Bill, a Revving Economy