A federal judge is expected to rule Tuesday on whether to block AT&T’s $85 billion Time Warner merger, in what has become America’s most closely watched antitrust trial in decades.
The opinion by Judge Richard Leon could determine AT&T’s future in digital entertainment as the company seeks to go toe-to-toe with tech titans such as Facebook, Google and Netflix. But the stakes are equally high for the Justice Department, which has not litigated a case of this kind since the Nixon administration. A court victory for the government, analysts say, could symbolize the beginning of a tough new era in antitrust enforcement. But an AT&T win could give pause to regulators — and perhaps deter them from blocking mergers in the future that might otherwise be deemed anticompetitive.
Though the Justice Department has sought to tamp down concerns about the AT&T case being a bellwether, analysts widely anticipate more deals to be announced in the event of an AT&T court victory, particularly mergers involving corporations that primarily operate in different industries. These types of so-called vertical deals are becoming more popular. In recent months, Verizon has purchased the digital media companies AOL and Yahoo. Amazon.com expanded its grocery business by buying Whole Foods. (Amazon chief executive Jeffrey P. Bezos also owns The Washington Post.) Comcast, meanwhile, is gearing up to fight Disney for control over 21st Century Fox.
“Everything’s on the line now for the Department of Justice,” said Gene Kimmelman, a former DOJ antitrust official who now leads the consumer advocacy group Public Knowledge. “They either come out as enormous victors … or they’ll face an avalanche of new transactions if they lose this case.”
Analysts predict a wide range of possible outcomes in the trial. Leon could determine the merger poses a competitive threat and block the deal outright, siding with the Justice Department. He could rule for AT&T and approve the entire acquisition without conditions, making it possible for the deal to close by June 18. Or he could strike a middle ground, imposing his own changes to the deal or asking the two sides to help him tweak it.
No matter how he rules, the full implications will take time to digest — and will likely hold implications for a string of other mergers and acquisitions on the horizon. Leon has previously said to expect at least a 200-page written opinion.
The lengthy decision reflects the grueling six-week legal assault that government lawyers mounted against AT&T and Time Warner this spring in a dim, windowless Washington courtroom. Both AT&T and the Justice Department declined to comment for this story.
The merged firm, prosecutors argued, would anticompetitively unite AT&T’s massive distribution infrastructure — its cellular and wired broadband networks — with Time Warner’s premium content including HBO, Warner Bros. and Turner Broadcasting, whose assets include the cable channels CNN, TBS and TNT.
AT&T executives defended the merger in court as a major strategic shift for the telecom giant, one that could prove as significant as the company’s decision more than a decade ago to enter the market for broadband and mobile data. In reinventing itself for an age of streaming media, AT&T aspires to deliver more television content over Internet connections to mobile and digital devices. With the viewing data it gathers from smart TVs, computers, tablets and smartphones, AT&T plans to build a targeted advertising empire resembling that of the Web’s biggest ad giants.
That effort could be aided by another major milestone this week: The official repeal on Monday of the federal government’s net neutrality rules. The rules, targeted for elimination by the Federal Communications Commission in a vote last year, had banned providers like AT&T or Verizon from prioritizing their own content over that of other websites. And they had laid the foundation for more stringent — though now also repealed — privacy regulations governing ISPs’ handling of customer data.
Winning the antitrust case could allow AT&T to capitalize on that deregulation, analysts say.
“Consumer groups are worried that the court will give AT&T powerful new content, and that the FCC will let them monetize it in anticompetitive ways,” said Paul Gallant, an industry analyst at Cowen & Co. “But investors are more sanguine. They like the hedge of AT&T owning content.”
Antitrust attorneys litigating the Time Warner case relied on complex economic models and testimony from AT&T’s competitors to outline a nightmare scenario in which AT&T could allegedly use its newfound control over Turner Broadcasting to unfairly benefit DirecTV, AT&T’s own subscription television service.
Turner’s control over live sports, news and other desirable programming would encourage AT&T to seek more money for that content when licensing it to competing TV services, the Justice Department argued. Those higher prices would allegedly be passed along to consumers to the tune of hundreds of millions of dollars per year. Meanwhile, the attorneys said, DirecTV would reap rewards by luring away any customers dissatisfied with the price hikes at other cable companies.
“AT&T would not want Time Warner content distributed in ways that increase competitive pressure on DirecTV,” the government wrote in its closing brief to the court.
Attorneys for AT&T and Time Warner lashed out at the government’s antitrust claims, calling them “preposterous.” Thanks to new targeted advertising revenue, AT&T argued, the deal would lead to price decreases for TV viewers, not increases. And to highlight its good faith in content negotiations, AT&T pointed to 1,000 letters it sent to rival TV services last year committing to an arbitration process after the merger, in the event those competitors felt they were being overcharged for Time Warner content. Opponents of the deal said the arbitration offer was insufficient, though in his questioning in court, Leon expressed significant interest in it.
AT&T’s legal team sought to dismantle the Justice Department’s economic analysis of the deal, poking holes in research done by the agency’s star witness, a University of California economist named Carl Shapiro. Shapiro’s analysis failed to consider enough real-world examples of programming disputes, AT&T argued, instead drawing on surveys and long-term projections to arrive at the conclusion that consumers will be harmed by the merger.
Hanging over the trial was also the political shadow of President Trump, who has publicly and repeatedly criticized the merger as concentrating too much power “in the hands of too few.” Arguing that it was being unfairly singled out for punishment, AT&T briefly demanded that the Justice Department hand over White House communications logs that could prove whether Trump inappropriately directed the agency to block AT&T’s merger. But Leon denied that request, focusing narrowly instead on the core antitrust arguments in the case.
The high-profile case is widely viewed as a bellwether for other mergers waiting in the wings. Should AT&T be allowed to buy Time Warner, analysts say an arms race will follow in which companies of all stripes will seek to consolidate with other businesses. An acquisition involving 21st Century Fox is already in the works, with Comcast and Disney poised for a bidding war over Fox’s lucrative film and TV studios, cable networks and other assets. Meanwhile, T-Mobile and Sprint have announced a merger of their own.
Wall Street will be looking for clues in the AT&T decision as to whether the government is likely to challenge those deals.
“At the simplest level, the market will draw a conclusion as to whether this administration is laissez faire or interventionist when it comes to big deals,” he said.
By Brian Fung/WAPO
Posted by The NON-Conformist