Cutting Out the Regulatory Middle-Man: AT&T Responds to DOJ’s Complaint

On November 21, 2017, the U.S. Department of Justice (“DOJ”) filed a lawsuit to block AT&T Inc.’s acquisition of Time Warner Inc. The vertical merger, which combines AT&T’s video distribution platform with Time Warner’s programming, could be the first such deal litigated in almost 40 years.

According to the DOJ, the proposed acquisition will result in higher prices for programming, thus harming consumers. The DOJ’s complaint alleges that the merged firm will have the increased ability and incentive to credibly threaten to withhold or raise the price of crucial programming content – such as Time Warner’s HBO, TNT, TBS, and CNN – from AT&T’s multi-channel video programmer distributor (“MVPD”) rivals. At present, Time Warner negotiates with an MVPD to reach a price that depends on each party’s willingness to walk away. But the transaction would change the bargaining leverage such that AT&T/Time Warner would have less to lose from walking away. Or so the DOJ alleges. According to this reasoning, post-merger, if the merged firm and an MVPD are unable to reach an agreement, some customers would switch from their current MVPD to AT&T/DirecTV in order to obtain the sought-after Time Warner content. In addition, the DOJ alleges that AT&T/DirecTV has approximately 25 million subscribers and that there are 18 Designated Marketing Areas (“DMAs”) – out of 210, nationwide – where AT&T/DirecTV has approximately 40% share of the local MVPD market.

However, AT&T’s response indicates that the DOJ’s complaint is a misguided effort to block a pro-competitive deal that poses no real threat to consumers. The DOJ’s theory betrays a lack of understanding of the current and rapidly evolving market for content and distribution. The merged firm will still have a strong financial incentive to license Time Warner’s programming to as many outlets as possible. Because local cable monopolies dominate local markets through the bundling of broadband and MVPD services, AT&T does not have a clear economic incentive to cut off rival video distributors. After all, such a strategy is risky because AT&T might lose more than it gains with only the possibility that a small number of subscribers would switch to AT&T/DirecTV. In fact, consumers are increasingly willing to cut the cord entirely as they look to virtual MVPDs like Sling TV as well as subscription video on demand services (“SVODs”) such as Amazon Prime (80 million U.S. subscribers) and Netflix (109 million subscribers worldwide), demonstrating that the video distribution and content markets have become ever more dynamic – and competitive. And the lines between MVPDs, virtual MVPDs and SVODs are blurring as Amazon Prime recently carried the Titans/Steelers game live. AT&T called out the DOJ for not providing any market analysis or empirical evidence to support its theory that consumers would be harmed.

Beyond that AT&T claims that the DOJ’s case is arbitrary and accuses them of selective antitrust enforcement. Neither argument holds water nor matters very much because at the end of the day, Judge Leon is going to make a decision based on the economic realities of the video distribution and content markets. Nevertheless, AT&T also responded that Comcast/NBCU raised the same vertical issues and in that case, the DOJ resolved the concerns with behavioral remedies.

While AT&T does not concede that the transaction results in competitive harm, it offers the same behavioral fix used and approved by Judge Leon in Comcast/NBCU. Contingent on deal completion, Time Warner formally and irrevocably offered its distributors licensing terms for 7 years after the merger that entitle them arbitration if there are any disputes over arbitration and forbids Time Warner from “going dark” on any current distributor. The merging parties have done this on their own and the beauty of it is that it does not require any oversight by the Court or the DOJ.

Given that the DOJ has been unwilling to negotiate a comprehensive set of behavioral conditions that would insure that AT&T’s video rivals are able to obtain the Time Warner programming that they desire, AT&T is taking matters into its own hands. In other words, AT&T is cutting out the regulatory middle-man.

Such a strategy allows AT&T to greatly increase its chances that the DOJ will simply drop its case. It is a win-win for everyone involved, the merging parties, the DOJ, and AT&T’s video rivals. The DOJ can save face as it will have done its job of preserving competitive pricing and availability of content while avoiding the risks of trial and without becoming a day-to-day regulator of the merged firm’s conduct. That said, the DOJ rarely accepts a fix without a signed consent decree and presumably this offer was not good enough to avoid the complaint.

Alternatively, if the case goes on to trial, the irrevocable offer to video distributors for Time Warner programming provides Judge Leon, as the fact finder, with some evidence to counter the DOJ’s allegations that AT&T would withhold or raise the price of content to its video distributor rivals. Given the ever evolving video and programming markets, a band-aid may be all that is necessary.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com