It could end up as the biggest antitrust showdown since the Justice Department tried to break up Microsoft at the height of the Windows era.
Following word on Monday that the federal government had sued to block the $109 billion combination of telecom titan AT&T and entertainment giant Time Warner, the companies said they’d fight what they called a “radical and inexplicable departure from decades of antitrust precedent.”
Usually such angry corporate fusillades consist of more loud attacks than rational arguments, but in this case AT&T and Time Warner may have a strong case. And it no doubt helps the companies that President Trump has made a series of public attacks against the merger, and Time Warner’s CNN unit, that raise the specter of political interference.
AT&T CEO Randall Stephenson made clear it was an issue he planned to raise. “There’s been a lot of reporting and speculation about whether this all about CNN and frankly I don’t know,” Stephenson said on a call with reporters on Monday. “But nobody should be surprised that the question keeps coming up because we witnessed such an abrupt change in the application of antitrust law here.”
Typically, the Justice Department attacks mergers that seek to combine competing companies in the same business, like when regulators shut down AT&T’s effort to buy T-Mobile (TMUS) in 2011 or the merger of Staples (SPLS) and Office Depot (ODP) last year. Analysis of those situations seem relatively straight forward: fewer competitors often means higher prices and less consumer choice.
For combinations of companies in related fields, like Comcast’s purchase of NBC Universal, the analysis is more complex and the response from regulators is usually not outright opposition but the crafting of conditions to prevent any funny business in the future. Among other restrictions, for example, Comcast is barred from offering programming only to cable and satellite providers and not Internet-based TV services like Sling TV. That’s because regulators were concerned that the combined companies would use their sway over entertainment content to thwart threats to Comcast’s massive cable service.
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And the concerns about AT&T and Time Warner, at least in theory, are very similar. “AT&T/DirecTV would hinder its rivals by forcing them to pay hundreds of millions of dollars more per year for Time Warner’s networks, and it would use its increased power to slow the industry’s transition to new and exciting video distribution models that provide greater choice for consumers,” the Justice Department said in its lawsuit filed on Monday night. “The proposed merger would result in fewer innovative offerings and higher bills for American families.”
AT&T said the Justice Department hadn’t sued to block such a so-called vertical merger since President Jimmy Carter’s administration. But what’s changed is the antitrust leadership in the Justice Department, not to mention a few tweets from President Trump saying that he would never allow the AT&T Time Warner merger to be approved.
Some former antitrust regulators agreed with AT&T. “The case relies on antiquated antitrust law from a period of time (over 40 years ago) when we received television programming through rabbit ears,” David Balto, an attorney who helped review mergers at the FTC under President Clinton, noted. “Like those rabbit ears the law DOJ relies on belongs in a museum not in a court and the case is likely to receive rabbit ears reception by a skeptical court.”
Makan Delrahim, the new head of the antitrust division and, ironically, a lawyer who worked for Comcast (CMCSA) on the NBCUniversal deal, is said to be opposed to imposing behavioral conditions. Instead, he is reportedly in favor of a cleaner but more drastic remedy that forces the merging companies to jettison some business units.
So instead of negotiating rules to prevent a newly merged company from hurting consumers, Delrahim favors changing the structure of the company from the start to eliminate or reduce the incentives for bad behavior. That would explain why the department apparently rejected proposed conditions AT&T wanted and instead told the companies to either sell AT&T’s huge DirecTV satellite service or much or all of the TV programming units of Time Warner.
Doing so would destroy AT&T CEO Randall Stephenson’s whole rationale for the deal and paying $85 billion plus taking on another $24 billion of net debt to take control of Time Warner’s rich stable of entertainment that includes HBO, Turner Broadcasting, CNN, and the Warner Brothers movie studio. With revenue from telecommunications and traditional pay TV services sliding, the addition of Time Warner (TWX) would give AT&T (T) a new revenue stream and the ability to evolve more quickly into an online service.
On a call with reporters on Monday, Stephenson pointed to efforts by Netflix (NFLX), Amazon (AMZN), and Google (GOOGL), and other tech companies to start making original entertainment and distribute it to tens of millions of customers.
“Massive, large scale Internet companies with market caps in the hundreds of billions of dollars are creating tons of original content and they’re distributing it directly to the consumer,” he said. “This is disrupting both industries, the media as well as communications industry.