What Consumers Need To Know: the AT&T Time Warner Merger

The Department of Justice (DOJ) lawsuit to prevent the merger of AT&T and Time Warner under federal antitrust law (case 1:17-cv-02511) has begun. D.C. Federal District Court Judge Richard Leon ordered a trial date of March 19, 2018, splitting the difference between the Justice Department’s requested date of May 7 and the merging parties’ request of February 20. Despite a planned merger date of April 22, the trial has extended into May. Because Judge Leon noted the April 22 deadline was unlikely to be met, Judge Leon suggested that the two companies should invoke their merger agreement’s 60-90 day extension clause. While Judge Leon has indicated that a ruling will not come in time to meet the original contractual deadline, by suggesting the extension, the judge appears to indicate that he will have a decision in the case by May or possibly June.[1]

The aggressive schedule also indicates that the litigation is unlikely to be a long, drawn-out, major antitrust case. It possibly indicates that Judge Leon expects a case centered on legal theories, and witnesses who are economic experts, rather than a case that is a voluminous factual record. However, the government may call several competitors of the merging companies to testify in the case.[2] The DOJ plan to call major telecoms as witnesses including Disney, Dish, and Cox. This puts additional pressure on competing companies to be help the government’s case, in order to minimize the potential of legal action as DOJ reviews future mergers.[3]

There is little recent precedent for challenging vertical mergers, in which the merging companies operate at different points in the industry supply chain, such as in the case of AT&T and Time Warner. The Celler-Kefauver Act of 1950 made antitrust challenges to vertical mergers legal. However, 1979’s Fruehauf Corp v. Federal Trade Commission was the last court case challenging a vertical merger, in which the government lost on appeal to the Second Federal Circuit Court.[4] In that case the Federal Trade Commission (FTC) invoked its own antitrust authority in an attempt to require Fruehauf Corp., a trailer truck company, to divest assets after its acquisition of Kelsey-Hayes Co.[5]

The AT&T/Time Warner merger case represents a significant departure from established DOJ antitrust policy, including under the previous administration. In the past, vertical mergers have been approved, although sometimes with significant conditions to prevent anti-competitive use of the market power acquired through the merger.6

DOJ’s 23-page complaint sets out broad ways in which the proposed merger may reduce competition and harm consumers by conferring market power on the merged corporation to raise prices. The case rests primarily on the effects of DirecTV, also a leading defendant in the case despite being a subsidiary of AT&T.7 Justice contends that the merger’s antitrust issues come not through control of a greater share of a specific market such as TV channels, but through control of content for such channels or other conduits to the public that is conferred by the merger. Before filing suit, the DOJ approached the companies with options to settle the lawsuit in advance by divesting some of Time Warner’s cable television assets. According to the DOJ, those divestments would eliminate the claimed anti-competitive effects of DirecTV’s inclusion in the AT&T-Time Warner merger.8 The settlement offers are not public, and while talks have recently collapsed, a settlement could come before or after the trial starts.9

CNN is one of the rumored divestment requirements and has garnered widespread publicity due to President Donald Trump’s vocal animus against the cable news broadcaster. Without a directive from the President, proving that the DOJ’s requirement to sell CNN is politically motivated would be difficult to prove.

The decision to file an anti-trust lawsuit represents a shift in the DOJ’s rhetoric from two years ago. In October 2016, Makan Delrahim, recently installed as chief of the Antitrust Division, had said, “I don’t see this [the AT&T-Time Warner merger] as a major antitrust problem. This is more of what we call a vertical merger — a content with distribution — rather than two competitors merging…I think it’ll get a lot of attention, but I don’t see this as a major antitrust problem.10

Coming before the actual merger terms were finalized, Delrahim’s reversal is not as significant as it first seems. While this action represents a break from decades of Department of Justice practice, there has been recent discussion both academic and in business publications of the possible need for new standards for vertical mergers.11 DOJ has presented thorough arguments as to why the AT&T merger may have anticompetitive effects, both as to the size of the merger creating excessive market power and to specific ways in which this market power could be used to harm competitors.

Once this case is decided, either party can appeal to the D.C. Circuit Court, and the losing party is likely to have ample opportunities to press for a second opinion. Should AT&T and Time Warner lose, the companies must consider whether the merger would still be considered viable after the considerable delay that a successful appeal would entail. Any appeal would likely take several additional months to litigate. A delay of that nature could sink the merger, regardless of the appeal result.12 For the Department of Justice, pursuing an appeal would need to be justified, either because DOJ thinks the merger is extaordinarily harmful or in order to establish a new precedent for vertical mergers. DOJ would also need to consider whether pursuing an appeal has the appearance of an attempt to stop the merger through administrative delay.

DOJ’s attempt to block the AT&T and Time Warner merger, despite the plausible arguments, depends on rewriting both the DOJ’s vertical merger policies of the last 37 years and refuting the preponderance of recognized economic arguments against the government’s case. Antitrust administrative law is an area where the boundaries between legal arguments and economic arguments are very diffuse. In the case against AT&T and Time Warner, there is no clear area of competition in which this merger increases the market share of the new entity. DirecTV, currently an AT&T subsidiary, does not directly compete with cable networks like CNN. Instead, DirecTV competes with Comcast, Verizon, Cox and other carriers for CNN and other cable networks. Even in its discussion of DirecTV, the DOJ complaint did not claim that DirecTV was direct, horizontal competition for CNN.

Instead, the DOJ’s case relies on the belief that that the vertical combination of AT&T’s TV networks and Time Warner’s content producers gives the merger company a competitive advantage for its entertainment distribution network. In order to prove undue competitive advantage, the government will also need to prove that such an advantage is harmful to competition. Vertical mergers may help the merging companies to compete, but such strengthening of their position may increase, rather than diminish, competition and may even extend competition to new areas.

Furthermore, the government will also need to prove the merger diminishes consumer welfare. Time Warner accounts for a large portion of entertainment content aired in the United States, but not a dominant share. Other powerful producers of content, such as Disney (which is in the process of acquiring Fox) could strike back at the merged company through litigation if it made a habit of anti-competitive behavior. TV broadcasters and other distributors could also join with other producer companies to counter such action. There is a wide and growing set of content providers around America. While a merged AT&T and Time Warner merged company could withhold some popular shows, the overwhelming entertainment content produced by rival broadcasters would significantly decrease any competitive advantage. Withholding any content would also come with costs in lost subscriber revenue and in unfavorable publicity. Such conduct would also inevitably lead to specific enforcement action against the merged company, if anti-competitive actions became extensive and pervasive. Accordingly, the likelihood of withholding of major content is low and if it happens and injures consumers, the cure is readily available in the form of enforcement.13

The telecommunications and entertainment distribution markets are changing rapidly. With the development of new modes of communication and distribution of content through the Internet that compete with broadcast and cable TV, with DirecTV, and with all other existing modes, such as Netflix, mergers like AT&T-Time Warner may be market necessities to order to compete with powerful new entities like Amazon and Google that are seeking new worlds to conquer. In a communication universe of the large and powerful, the merger of AT&T and Time Warner would be likely have little effect. Ultimately the size of the merged AT&T and Time Warner company would to promote greater competition and increase consumer welfare rather than pose a threat to competition.

Despite new interest in vertical mergers by the DOJ, the government’s established view and practice is to allow them with some conditions where deemed necessary. Economic arguments are critical in merger law and these do not, on balance support prevention of vertical mergers. In the AT&T-Time Warner case, despite the size of the merged company, it would not dominate any of its areas of business. The changing nature of the communications area and the proliferation of new and potential competitors further weaken the DOJ’s argument that this merger will be anti-competitive or harmful to consumers.

[1] McLaughlin, D., & Harris, A. M. (2017, December 07). AT&T Commits to Time Warner Deal Even as Judge Delays Deadline. Retrieved May 7, 2018, from https://www.bloomberg.com/news/articles/2017-12-07/at-t-judge-says-he-will-hold-march-19-trial-on-time-warner-deal

[2] Gasparino, C., & Schwartz, B. (2017, December 15). AT&T-Time Warner: DOJ plans to call media rivals to testify against $85B deal. Retrieved May 7, 2018, from http://www.foxbusiness.com/markets/2017/12/15/at-t-time-warner-doj-plans-to-call-media-rivals-to-testify-against-85b-deal.html

[3] Ibid.

[4] Fruehauf Corp v. Federal Trade Commission (United States Court of Appeals, Second Circuit June 28, 1979). Retrieved from https://openjurist.org/603/f2d/345/fruehauf-corporation-v-federal-trade-commission

[5] Note that this case was an FTC decision appealed to the Circuit Court, as is the procedure in such challenges of regulatory agency decisions. The AT&T case is procedurally different; it is a lawsuit filed by Department of Justice in Federal District Court, with no prior administrative decision.

6 Jeffrey, J. (2017, November 21). AT&T-Time Warner suit highlights Uncle Sam’s merger clout. Here are some of his greatest hits. Retrieved May 7, 2018, from https://www.bizjournals.com/bizjournals/news/2017/11/21/at-t-time-warner-suit-highlights-uncle-sams.html

7 United States of America v. AT&T Inc., DirecTV Group Holdings, LLC, & Time Warner, Inc. (United States District Court for the District of Columbia, November 20, 2017). Retrieved from https://www.justice.gov/opa/press-release/file/1012896/download

8 Stelter, B., & Wattles, J. (2017, November 9). Who is Makan Delrahim, the Trump antitrust chief? Retrieved May 7, 2018, from http://money.cnn.com/2017/11/09/media/antitrust-trump-makan-delrahim/index.html?iid=EL

9 Manchester, J. (2017, December 16). AT&T, Justice Department settlement talks fail. Retrieved May 7, 2018, from http://thehill.com/homenews/365228-att-justice-department-settlement-talks-fail

10Stelter, B., & Wattles, J.

11 Goldman, D. (2017, November 10). AT&T’s battle with Trump administration could enter rare territory. Retrieved May 7, 2018, from http://money.cnn.com/2017/11/10/media/att-trump-antitrust-case/index.html

12 Goldman, D.

13 Manne, G. A. (2017, November 21). There’s No Antitrust Case Against AT&T. Retrieved May 7, 2018, from https://www.wsj.com/articles/theres-no-antitrust-case-against-at-t-1511306560

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