Why the Government is Right to Block the AT&T-Time Warner Merger

Why the Government is Right to Block the AT&T-Time Warner Merger

Despite what Randall Stephenson thinks, the Department of Justice’s suit blocking AT&T from acquiring Time Warner’s assets in an $85 billion merger is a great moment for antitrust in America. It’s late, but it’s welcome.

WIRED Opinion

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Susan Crawford is a professor at Harvard Law School and the author of The Responsive City and Captive Audience.

Stephenson, the AT&T CEO, has no one but himself to blame. He and his minions effectively tanked their own plans to merge their company—the largest major pay-TV provider in the country and the second-largest wireless carrier—with Time Warner’s must-have cable channels and sports rights. AT&T, a company that thinks of government as, at best, a peer, approached the negotiations with an imperious attitude that misread the history of similar deals, and, most egregiously, misread the person who would be making the ultimate call, the skilled new leader of DOJ’s Antitrust Division, Makan Delrahim.

Example: Here’s Stephenson reacting to the news earlier this month that Justice Department staff members had said that the merger could go through only if the Time Warner Turner Broadcasting unit, which includes CNN, was structurally removed from the deal: “I have never offered to sell CNN and have no intention of doing so.” He sounded offended. He said it is “illogical for me to think that this deal doesn’t get approved.”

Those were extraordinary things to say. AT&T doesn’t own Time Warner, even though Stephenson confidently told the SEC in a public filing that he expected the deal to close by the end of next month. AT&T had more than measured the drapes; Time Warner employees had already moved on. But AT&T needed government approval.

Self-inflicted Wounds

AT&T hurt itself by failing to respect DOJ staff that learned key lessons from the giant merger of Comcast with NBCU in 2011: So-called “vertical” mergers between big content and transmission companies can have pernicious consequences for consumers, even if the merger does not remove a competitor from the field. The staff has gotten the message that, in this heavily concentrated, stagnant, and essentially noncompetitive marketplace, trying to smooth over illegal mergers with conditions and ongoing oversight doesn’t work. That’s why, informed by years of staff experience and frustration with Comcast/NBCU, DOJ’s antitrust head Delrahim has sued to block AT&T from completing its deal.

DOJ has a very strong case. AT&T not only failed to address the department’s concerns, but also unintentionally provided ammo in the form of the company’s strategic statements over the years.

The DOJ uses quotes from AT&T’s and DirecTV’s own internal documents to show that the merged company intended to use Turner’s top-rated, widely distributed content as a sledgehammer both (a) to raise prices for any other competing video distributor, so as (ultimately) to drive those distributors’ customers into AT&T’s arms, and (b) to slow competition from online video.

The plainly drafted complaint filed Monday bears the names of dozens of DOJ staff attorneys. They know what they’re talking about.

Time Warner’s content includes three of the five top basic-cable channels as well as a top news network. HBO is a monster; Turner Sports is a juggernaut, with rights to NBA, Major League Baseball, and March Madness (NCAA Division I men’s basketball) games, as well as the PGA Championship. HBO is the world’s leading pay TV brand. CNN is by any measure a top news channel; it’s on track to have its biggest year since 2003. Turner’s top cable networks reach 91 million of the nearly 100 million US households that subscribe to pay TV.

The DOJ classifies sports and news, in particular, as “must-have” content. They’re the two things that audiences still have to see in real time.

Remember that AT&T is the largest pay-TV provider in the country, with about 25 million customers, most of them coming from its acquisition of DirecTV in 2015. It’s also planning to bring more pay TV to its gigantic wireless customer base. It is completely rational for AT&T to use every sledgehammer in its possession to keep competitors from emerging or thriving. And the DOJ, just rationally, sees that AT&T would thus be raising the prices that consumers pay.

Here’s the problem: If you’re a competing pay-TV provider (wireless, wired, or, heaven forbid, satellite) you’ll need rights to March Madness and CNN and HBO in order to survive. You’ll pay what it takes to get this programming, and pass along your increased costs to consumers. People won’t take your package if you don’t have this content.

The DOJ estimates that a merged AT&T/Turner could extract hundreds of millions of dollars in increased fees from other pay-TV providers—because they’d have nowhere else to go for this “must have” programming. And because the whole system is perfectly engineered to raise money from consumers, it is the American public who would end up footing the bill for AT&T’s increased power.

AT&T’s response will be that it has every reason to ensure that Turner content is seen as many places as possible. But DOJ anticipates and dismisses that argument: The newly bulked-up AT&T, it points out, will make more money over time by signing up frustrated pay-TV customers of other providers when those other companies give up on paying AT&T’s ever-increasing prices for programming. The revenue AT&T loses by effectively locking competing providers out of its must-have content will be more than made up for by those new subscriptions—available nationwide through DirecTV.

Take This Bundle, or Else

Even though federal law prohibits locking competing distributors out of pay-TV content, it’s easy to make it so expensive that, as a practical matter, no one can buy it. Content sources play all kinds of “take this bundle or else” and “bulk buying” games—they’ll charge two or three times as much to small distributors than large distributors for the same programming distribution rights, they’ll force buyers to buy a license to a whole lineup of channels in order to get access to the one that viewers really want….on and on.

DOJ has recognized that a bulked-up AT&T with “must have” sports, news, and entertainment as part of its ammunition would have both the incentive and ability to make it very difficult for anyone else to have that content.

And that’s just part of the problem. As so-called over the top, online competition to this must-have content emerges, AT&T-as-data-provider will have a zillion ways to make that content less attractive to consumers. Sure, you can send your content over their network, but yours will be subject to data caps that AT&T content isn’t. You’ll be routed differently, over a portion of the AT&T delivery network that will be both dismal and labeled “public internet.” (And once the FCC’s regulatory authority over high-speed internet access providers is dismantled by the new FCC head, nothing will stop those things from happening.)

Again, a bulked-up, Turner-enriched AT&T will have ample incentive and ability to stifle these new efforts—in order to protect its pay-TV distribution model, or at least slow the gradual move toward online content. Again, AT&T/DirecTV’s own words show they aim to follow this strategy: the company says it intends to “work to make [online video services] less attractive.” The executives have concluded that the “runway” for the decline of traditional pay-TV “may be longer than some think given the economics of the space,” and that it is “upon us to utilize our assets to extend that runway.” The merger would give AT&T increased power to do just that.

And here’s where the DOJ has really learned its lesson: These same concerns were present for the Comcast-NBCU merger in 2011—and indeed, the DOJ and FCC found that that merger was illegal. So why did it go through? The agencies hoped that a series of constraining limits on the new entity’s behavior—set forth in words—would make the merger good enough to pass muster, and on that conditioned basis they approved it. They said that other pay-TV distributors could get arbitration over their fights to get access to Comcast-controlled programming on reasonable terms; they said that Comcast couldn’t discriminate against competing online programming; and they said that Comcast would have to make available low-cost internet access to low-income Americans.

In fact, it was that last condition that really drove the FCC at the time. What a deal! We don’t have to create policy that would ensure that everyone in the country has a decent internet connection, we can just make a merging company do it for us!

Since then, the DOJ has learned a hard lesson: Behavioral conditions just don’t work. It is too easy for good lawyers to drive right through them. All the bulk-buying and buy-our-lineup games have continued, unabated. None of the discrimination against online programming has been constrained—it’s so easy to simply route “online content” over a different, lesser, virtual network and call it a day. And Internet Essentials, the Comcast program for low-income people so celebrated by the FCC at the time, has been a palace of press releases: The actual service is hard to apply for, hard to hang onto, second-rate, and mostly helps Comcast identify customers for its full-price services.

Antitrust Division head Delrahim has signaled very clearly that he himself has internalized those lessons. On Oct. 26, he made an important speech to the nation’s antitrust lawyers. He reminded everyone that antitrust is law enforcement, not a back door to regulation—he’s not someone who would pack a regulatory oversight regime into a merger approval, as the FCC and DOJ did with Comcast. “At times antitrust enforcers have experimented with allowing illegal mergers to proceed subject to certain behavioral commitments,” he said. He was clearly referring to the Comcast/NBCU deal. Those conditions were neither enforceable nor reliable, and so they don’t protect consumers. He’s looking for competitive markets to arise that require less government intervention. And so, he signaled, he expects to “return to the preferred focus on structural relief to remedy mergers that violate the law and harm the American consumer.” By “structural relief,” he means breaking off parts of the deal to remove the resulting entity’s incentives to abuse its power; in the AT&T/Time Warner context, that would likely mean selling or spinning off particular Time Warner content before the deal could be approved.

Here’s the great moment in that speech: Delrahim notes the irony that “traditional regulation has fallen out of favor… [and yet] its essential elements have been incorporated” in merger remedies. That’s right, and it’s evidence of the soft corruption that has afflicted oversight over our enormous, stagnant, monopolistic telecom market in the US for years. Where we’ve needed actual regulation that would unleash competition, we’ve used instead a series of half-baked conditions on mergers to set policy. And the companies have been only too happy to oblige by merging and consolidating up a storm.

In order to have the deal go through, AT&T would have had to accept structural relief. In the AT&T/Time Warner merger context, that would will require lopping off “must-have” programming from the deal. That’s what Randall Stephenson couldn’t imagine.

He thought he had it in the bag. He’s doesn’t. Unless AT&T drops its efforts to buy Time Warner, this will be a major, multiyear piece of litigation. And AT&T will lose.

Source: https://www.wired.com/story/why-the-government-is-right-to-block-the-atandt-time-warner-merger/

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