AT&T Has Strong Defense Against Justice Dept., Market Analysts Say

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By Eleanor Tyler

AT&T Inc. says the harm foreseen by the Justice Department to its proposed $85.4 billion merger with Time Warner Inc. amounts to pennies, literally.

AT&T says a 45-cent increase in customers’ monthly bills is insignificant, even if the government can prove it. Economists and market analysts say that makes a strong case.

The DOJ and AT&T are slated to go to trial March 19 in a high-profile antitrust case in which the DOJ says the merger would give AT&T-owned DirecTV control over Time Warner’s must-have content such as HBO’s “Game of Thrones.” DirecTV could then charge more for that programming to competitor pay-TV companies, such as Dish Network Corp., who would then pass the costs along to consumers.

But prices to consumers are already going up, Paul Verna, principal video analyst at eMarketer Inc., told Bloomberg Law. “For the government to spin its wheels on stopping this deal for a quarter or two a month makes no sense from a market standpoint,” he said.

AT&T and the DOJ have presented their legal arguments to Judge Richard Leon ahead of the trial in the U.S. District Court for the District of Columbia. The DOJ’s trial brief is redacted, so many of the finer market points behind its case aren’t available until they’re aired in court. But the public parts of both parties’ briefs frame the battle as a question of whether the harms the government has identified are “substantial.” That’s the legal standard that allows the government to block a deal under antitrust law.

The DOJ estimates the deal will increase costs to non-DirecTV customers by $30.1 million to $22.6 million per month in total. AT&T’s math puts that figure at 45 cents per month per customers of rival providers. Any increase to non-DirecTV customers will be offset by the benefit to its own customers, which will see decreases, AT&T said.

Hal Singer, a principal at Economists Incorporated and adjunct professor at George Washington University and Georgetown University, said the DOJ likely overestimated the impact. The DOJ’s expert economist ignored a “baseball-style arbitration offer” by Time Warner to submit disputes over programming prices to binding arbitration and guarantee rivals continued access to it.

That shrinks AT&T’s bargaining power, and the likely increase in rivals’ costs is probably less than 27 cents, he told Bloomberg Law. “If Dish’s marginal costs went up 27 cents a month per customer, that can’t really substantially lessen competition,” he said.

Market Questions

The DOJ and AT&T also paint radically different pictures of the markets at issue. The DOJ says the merger could harm 1,174 “local footprint overlap zones” for multichannel video distribution, also known as traditional pay-TV.

AT&T says the competition isn’t in the pay-TV market. Content delivery “is transitioning from the television era to an intensely competitive internet video era.” The merger will help it compete more effectively with a new set of rivals, such as Amazon.com, Google Inc., and Netflix Inc., its court brief says.

AT&T’s market assessment is “right on the money,” Verna said. “The market is moving away from a pay-TV economy as the government describes it.” Future markets will be “where people subscribe to the content on platforms that travel with you and are accessible on all devices.”

The DOJ agreed in court filings that it will have to prove an “appreciable danger” of substantial anticompetitive effects from the deal. If the DOJ meets that standard, AT&T can then counter that the merger creates “efficiencies” — i.e., lower prices overall — that outweigh the demonstrated harm.

Carnegie Mellon University information technology professor Michael Smith said AT&T has a good argument that the real competitive danger might be in blocking the merger, and 45 cents a month is a small price to pay to maintain competition.

“Power is shifting away from the people who own the content to those who own the customer — that is, Amazon, Google, and Netflix,” he told Bloomberg Law. ”Because they own the customers, and our data, they have a lot of power. They are pretty quickly going to start wielding that power against the content creators.”

If the DOJ prevails, it could save customers 45 cents on their cable bill today and block similar mergers such as Walt Disney Co.'s bid for 21st Century Fox.

But then “we cement the future of the entertainment industry in the hands of Amazon, Google, Netflix,” Smith said. “Could that be worse for consumers in the long run?”

Winning an efficiencies argument would be new in court, Cleveland State University antitrust law professor Christopher Sagers told Bloomberg Law. “It has never happened in a litigated merger challenge,” he said. “That doesn’t mean it couldn’t happen here, but the rules under which efficiencies can even be considered are strict and narrow.”

The case is U.S. v. AT&T , D.D.C., No. 17-cv-02511, filed 11/20/17 .

To contact the reporter on this story: Eleanor Tyler in Washington at etyler@bloomberglaw.com

To contact the editor responsible for this story: Fawn Johnson at fjohnson@bloomberglaw.com

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