History often repeats itself. Is AT&T’s latest dilemma a result of its own miscalculation or is it because of Donald Trump?
In late 1980, the U.S. Department of Justice (DOJ) offered to settle a major antitrust case against AT&T if it agreed to spin off Western Electric, the equipment division of AT&T. But AT&T assumed that the recently elected President Ronald Reagan would eventually drop the suit and rejected the offer. AT&T bet wrong, and Reagan’s DOJ insisted on the break-up of the company.
DOJ’s present suit to stop AT&T’s buyout of Time Warner bears a similar hint of miscalculation. The merger was proposed when Hillary Clinton looked like a safe bet for president, but with the decision left up to Trump’s DOJ antitrust chief, Makan Delrahim, its prospects for completion were then in doubt. AT&T hoped that a conservative would still approve the merger, and stuck by its plans. But it was wrong, as it was with Reagan: The DOJ sued this week to block the merger.
While some attribute the current DOJ action to Trump’s low opinion of CNN, I beg to differ. If the merger succeeds, AT&T will likely restrict access to CNN to only its own distribution network. It could instead decide to license CNN’s content at a higher price to rival cable networks. Either way, CNN’s influence would significantly diminish after the merger. If Trump wants CNN’s influence to wane, he should allow the merger to go through rather than stop it.
So, if it is not Trump standing in the way, why has the DOJ sued to stop a merger of two companies that do not directly compete? There are plenty of reasons; if the merger goes through, the valuable Time Warner properties HBO, Cinemax, and CNN will belong to a major content distributor (AT&T) whose subsidiary DirecTV reaches the entire country.
As a result, AT&T will likely either provide those properties exclusively and deny access to rival distributors, or offer them at high cost. That prospect would help AT&T to garner customers from rival cable networks, or upstarts that distribute multi-channel video through the Internet, such as Sling TV.
It is also critical to consider that these costs will be passed on to consumers. If the merger moves forward, HBO and Cinemax are likely to become unavailable to AT&T’s streaming service rivals, such as Netflix and Amazon Prime. Thus the merger would result in stifling innovative competition in video distribution.
Finally, the Federal Communications Commission’s (FCC) proposed abolition of network neutrality rules provides stronger incentives to AT&T to use the acquired contents exclusively. Of course, for DOJ to win at trial, it needs to quantify the anti-competitive effects and show that they “substantially lessen competition,” the standard of the Clayton Act.
AT&T argues that it will make content available to all in a level playing field and will commit to that behavior. However, AT&T has strong profit incentives to act otherwise. And if AT&T’s objective is a level playing field and the widest possible distribution of Time Warner content, why overspend to buy Time Warner at all?
Experience has shown that negotiations do not end when a suit is filed; I expect them to continue before and during the trial. AT&T faces the added danger that the trial (and subsequent appeals, including all the way to the Supreme Court) will take much longer than the late April deadline for the finalization of the acquisition. That would test the patience of the financial markets. All told, AT&T is doubly motivated for a compromise solution before the end of the trial.
AT&T’s miscalculation could kill the deal even if, at the very end, the Supreme Court vindicates the company. In the meantime, investors, consumers, and competitors will grow impatient for a resolution. After this week’s events, we should start considering who might be Time Warner’s next suitor.
Nicholas Economides is a professor of economics at the NYU Stern School of Business.