As the Justice Department prepares for a legal showdown with AT&T over its $85 billion bid for Time Warner, analysts are debating whether the acquisition’s potential harms to consumers and competition could sink the deal in court.
The economic analysis is zeroing in on whether AT&T’s ability to use Time Warner would harm other businesses in the media and telecommunications industries, and make consumers’ lives more difficult.
One central concern at DOJ is that AT&T could seek to deny other providers of TV and Internet, such as Comcast or Verizon, access to Time Warner’s programming, and that it could prevent the rise of new technologies aimed at delivering content to consumers, according to people familiar with the matter who spoke on the condition of anonymity to discuss internal deliberations.
Time Warner owns a substantial library of content, including shows from HBO, news from CNN and films such as “Wonder Woman” and “Harry Potter.” Under AT&T’s control, that content might be blocked off to viewers who are customers, for instance, of Comcast’s cable TV product.
“This deal would give a combined AT&T-Time Warner both the incentive and the ability to favor its own content over that of rivals and restrict access to its content for competing distributors, ultimately resulting in higher prices and fewer choices for consumers in Minnesota and across our nation,” said Sen. Al Franken (D-Minn.) in a statement Friday. Franken joins others who have critiqued the deal, including the Consumer Federation of America, the American Family Association, Americans for Limited Government and the Writers Guild of America-West.
On Friday, AT&T referred to arguments that chief executive Randall Stephenson made before the Senate last year, saying that it would be “irrational business behavior” for AT&T to restrict access to Time Warner’s programming.
“Time Warner’s programming is more valuable when distributed to as many eyes as possible,” Stephenson said at the time. “At the same time, as a distributor of video services, AT&T must offer the programming its customers want, regardless of whether or not AT&T owns that programming.”
AT&T has also said that the deal will help consumers, because the resulting business in targeted advertising that the company plans to build would allow the telecom giant to lower the price of subscription TV and compete against companies such as Google and Facebook.
“One of the key benefits of putting these two companies together is to stand up a new advertising capability,” said Stephenson this week at a conference hosted by the New York Times.
Other programmers have pushed back against the proposed plan as well, arguing that the deal will raise their costs and force consumers to pay more. One company that has publicly made this argument is Starz, which in July published a study saying AT&T could easily discriminate against the premium cable channel.
“Once it buys HBO, it will have an incentive to raise the cost of its rival premium channels,” said Jeff Eisenach, the economist commissioned to write the study. AT&T, he added, could choke off Starz’s access to AT&T subscribers and put the programmer in a difficult position: Reduce costs by scaling back production, making it an inferior product, or raise prices to compensate for the shrinking audience.
The largest firms with formidable content libraries of their own might be able to compete in this environment. But, analysts say, that could simply create incentives for the biggest media companies to tacitly collude. For example, AT&T and another company with control over must-watch content could raise the price of that programming at nearly the same time, which then puts pressure on smaller cable companies who wish to carry it. Those firms must either pay up or risk losing subscribers, said John Bergmayer, an attorney at the consumer group Public Knowledge, which has opposed the deal.
“They [could] come to deals with each other that are then used to the detriment of smaller competitors,” he said, “where it seems like price-fixing but it’s not — there’s never some smoke-filled room.”
This type of behavior is collectively referred to by economists as “foreclosure,” and left unchecked, it could harm competition and consumers. It is the Justice Department’s antitrust division that is responsible for guarding against it.
DOJ typically addresses anticompetitive deals in a number of ways. It can propose remedies that wind up changing the behavior of a combined firm. It can propose divestments or the sale of assets that effectively create new competitors in the marketplace. And it can sue to block an acquisition entirely.
In the case of AT&T, the Justice Department has pushed for the sale of assets such as Turner Broadcasting or DirecTV. But AT&T has argued against divestitures, saying it would undercut the rationale for the tie-up in the first place. (The Justice Department declined to comment.)
“These folks — Amazon, Google, Facebook — have created some amazing franchises. What we’re doing here is something that we hope gives us a shot at competing with them,” said Stephenson.
(Amazon’s chief executive Jeffrey P. Bezos also owns The Washington Post.)
With the two sides at a standoff, analysts say that a lawsuit appears imminent unless the deal changes in ways that can satisfy regulators. But the litigation could be complicated by President Trump’s prior statements criticizing the merger. Analysts say Trump’s remarks could become evidence of an intent to suppress the free speech of a private actor, which could be considered a First Amendment violation. On Friday, Sen. Amy Klobuchar (D-Minn.) repeated calls she made in July for the White House to disclose any communications between Trump, his aides, and DOJ on the deal.
In a statement, Klobuchar “stressed again that political interference in antitrust enforcement is unacceptable, and called on the President and Assistant Attorney General Makan Delrahim to respond to the questions about interactions between the White House and DOJ regarding the proposed AT&T and Time Warner transaction.”
The White House and Justice Department have denied that any inappropriate communications have taken place.
If DOJ succeeds in blocking the deal, it could change the tone for future mergers involving companies that do not directly compete — what experts call vertical mergers.
“CBS, Aetna, Monsanto/Bayer — there’s a number of deals lined up,” said Diana Moss, president of the American Antitrust Institute. “I think at this juncture, a win on the government’s part on extracting a structural remedy would shift the paradigm on vertical deals and really raise the bar on how, whether and if these deals go through.”