AT&T Time Warner merger goes to lawyers for all the wrong reasons

When the deal for AT&T buying Time Warner was announced a year ago we wrote that the three regulators which stand in the way of the deal are the Justice Department (DoJ), The US Federal Trade Commission (ITC) and the FCC.

The FCC has a duty of care to not let its assets – such as wireless spectrum – be used to the disadvantage of the consumer. It can block things which are seen as “not in the public’s interest,” which use such assets and it decided to give the deal a pass, leaving it to the other two.

But the DoJ and the ITC can only act if the AT&T deal breaks specific clauses in either the Sherman AntiTrust Act or the Clayton Act, which really define what anti-trust is for the whole world or in the Hart-Scott-Rodino Act, which deals with the issue of how mergers can create new monopolies. It is fairly clear that the measure for horizontal mergers are far easier to police than vertical mergers, and we cannot see that there is a basis here for blocking the merger without breaking new legal ground. Time Warner has too small a US market share in content for its change of hands to distort that market and the merger is vertical. To block it would be unprecedented.

This is why AT&T’s legal counsel David R. McAtee II, said this week, “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.”

He went on to predict that the US District Court will reject the Government’s claims and permit this merger under longstanding legal precedent. We hate to agree with any lawyer, but he seems to be spot on.

Once the FCC said that it would not even evaluate the deal, then it had always seemed to us that the only thing that could prevent the acquisition was an intrusive President who chose to influence matters directly, in a manner that may well be deemed to be “illegal,” if proved.

The truth is that for DoJ leaders, the President suggests someone, the rest of the US government approves them, and thereafter they are in charge of their own agenda. The President cannot directly tell the DoJ what to do, and if he tries, the head of the DoJ, the Attorney General, can ignore him.

But something is going on here. The Hart-Scott-Rodino Act was supposed to prevent mergers that created monopolies, not simply say that something was not in the public interest or that it promotes “fake news.” Okay, if price rises are virtually guaranteed, that’s as much evidence of monopoly as any market share number. At Faultline we don’t want this merger to go ahead. It puts too many cards in the hand of too few people. But we cannot see a justifiable reason under the existing laws of the land to prevent it.

Since AT&T has acquired DirecTV it’s main move has been to bring down the prices of content by offering a skinny bundle in DirecTV Now. All the evidence points to this being as much a defensive action, as one that will provide a monopoly.

We believe that AT&T, with Time Warner in its hands, will eventually come up substantial changes in its operational approach. It has DirecTV Now, and it could go on to produce a Netflix rival, exclusive to its network brand. Now this doesn’t prevent someone like Disney from doing the same with some of the same content, but AT&T has both the network to deliver it to handsets, another to deliver it to TVs, and the CRM knowledge of who likes what. It would definitely have an edge over Netflix and other SVoDs.

But unless someone can define, to the court’s satisfaction, that OTT is a single country marketplace, which exists across network owners, OTT content providers and pay TV operators, then this is not a single market. It would also have to show that when tied to a particular network, this would lead to a rise in content and pay TV prices. Now if we look out 15 or 20 years, that is likely, but right now AT&T wants to cut the prices of a service to its phones, to strengthen its phone market share. This amounts to tying one product to another – a fundamental of Anti-trust which needs to be prevented. All that is needed to prevent that is a set of consents that AT&T will operate Time Warner at arms’ length, on consistent pricing.

So has the Justice Department tried to get such a deal and been turned down? If it has, then that is sure to come out in the court case to prevent the merger, and the DoJ will clearly win and the merger will need to either agree such terms, or but called off. But we think this is highly unlikely. What seems more likely to have happened here is that the personal preferences of the current President have been taken into account. This amounts to incompetence and toadying by the Attorney General, and it will be undone in the courts.  The rumor that selling off CNN was one of the terms being discussed, is virtually a smoking gun. CNN has been accused by Donald Trump of proliferating “Fake news.”

AT&T has every right to ask why it cannot do precisely what Comcast has been allowed to do, buy out a content business in NBC-Universal, to go with its network. What some commentators would argue is that Comcast signed up to terms which said it would not get privileged pricing for NBC-U content; it would not slow online video traffic on its network, and yet a few years after that deal, many have said that Comcast actually broke those terms. Nowhere does the law allow the penalizing of AT&T because of Comcast’s behavior. They are separate and competitive entities.

A similar approach was used in Europe when the Liberty Global Ziggo deal was allowed – it had to remove any clauses for the next 8 years in content contracts that prevent a TV channel from both selling to Ziggo AND going on its own OTT, or through OTT partners. And it must provide adequate interconnection capacity. It also had to sell off its second movie channel, because it owned all of them in the Netherlands.

We would characterize what AT&T is doing as trying to escape the bit-pipe trap. As the value of mobile connections go down, it shifts its value proposition to content. Until it has a monopoly such a move is fine.

When economists define monopolies they start at any entity controlling over a third of a given market. Time Warner does not achieve this in content. DirecTV does not achieve this in pay TV, but AT&T may just about do this in cellular service revenues, although it is probably just under. And it is not buying another cellular operation.

Here at Faultline Online Reporter we have been saying for years and years, and at length in 2013 in our report The Faultline Revisited, that content businesses would be in the firing line of Mobile Network Operators.

This is clear because our entire concept of a Faultline is one of disruption in the media chain. Not only do markets change hands overnight around a technical innovation like shifting content from analog to digital or to IP, but also everyone big wants the business of everyone else who is big, leading to a conflagration of communications operators, media players and pay TV operations.

In June 2014 Faultline carried an opinion piece entitled “Video to become key differentiator for cellcos, in 15 to 20-year fight” and it took two years for a leading MNO to have the bravery to act on this need. We felt that once AT&T began the process, others, all over the world will follow, and floodgates would open. And they will, but only after AT&T gains approval. The only certain thing now is that unless AT&T and the DoJ reach terms, the deal is significantly delayed and will need to go through a courtroom, possibly more than once and very possibly, it will not happen.

The Justice Department triggered the war of words on this subject when earlier this week it said the merger would harm competition, and result in higher bills and less innovation for millions of American consumers. And then promptly filed a civil antitrust legal action to block the merger.

But the reasons given were the same that were given against the Comcast NBC-U merger, i.e. that the combined company would use its control over content to hinder rivals by forcing them to pay hundreds of millions of dollars more per year for the right to distribute its TV networks.  Actually that is happening everywhere in pay TV in the US, and the worst offenders are the national broadcast networks NBC, CBS, Fox and Disney’s ABC. Time Warner is not a national broadcaster, but has powerful cable channels which are monetized in a similar way.

The JoD also said that the combined company would use its increased power to slow the industry’s transition to new and exciting video distribution models – when all the evidence suggests that it is only doing it because this industry transition is inevitable.

DirecTV itself was cited as saying that vertically integrated programmers “can threaten to withhold programming from rival distributors. But the same is true for Comcast NBC-U and the terms of that deal could be made to apply.

What’s hilarious here is that AT&T applauded the arrival of a Republican President as it was meant to stop this type of deal blocking action. And it was while Barack Obama, a democratic president was in power, that the Comcast NBC-U deal was allowed.