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By Liz Crampton
Time Warner Inc. may regret that one of its top executives said the online Sling TV service owned by AT&T Inc. is nothing without Turner, using more colorful language.
The Justice Department cited the statement by Turner’s CEO as evidence of the kind of leverage a combined AT&T-Time Warner might have in a blockbuster lawsuit filed to stop their proposed $85 billion merger.
The DOJ believes that by handing AT&T access to Time Warner’s popular networks, the combined company would force competitors to pay “hundreds of millions” more per year for the right to distribute those networks. The company would also use its increased power to slow the industry’s shift to video distribution models, the government argues, and consumers would be charged more ( U.S. v. AT&T Inc. , D.D.C., 17-cv-02511, 11/20/17 ).
The Justice Department’s bold lawsuit to stop the deal is shaping up to be a war of words. The government plans to use executives’ comments against them to prove the merger will harm competition. In return, the companies have indicated that they will invoke the Trump White House’s meddling in the Justice Department’s regulatory review of the deal.
The case marks an ambitious legal challenge for the government because it involves companies that don’t directly compete. These so-called vertical deals sometimes raise antitrust scrutiny from regulators, but it’s the first time in decades the DOJ has brought a vertical merger challenge to court. To make its case, the government will heavily rely on internal communications and documents from company executives. That strategy was made clear in the government’s complaint, which quotes from public filings and internal documents.
AT&T executives made clear after the lawsuit was filed that the White House’s potential involvement and the president’s animosity toward Time Warner property CNN was fair game. “Frankly I don’t know,” AT&T CEO Randall Stephenson told reporters in a Nov. 20 conference call regarding how CNN may have influenced the review. “But nobody should be surprised that question keeps coming up because we witnessed such an abrupt change in the application of antitrust law.”
Dan Petrocelli, an AT&T attorney, told reporters on the call that evidence of interference by the White House, if is exists, has “a way of coming out.”
Petrocelli said AT&T doesn’t have to prove why DOJ antitrust chief Makan Delrahim decided to pursue the case. “But if evidence does emerge that it was pursued for some improper purpose that’s not obviously going to help the DOJ. So we’re just going to see what develops in the course of the case.”
The harm to competition caused by the merger is “based on a well-accepted understanding within the industry,” DOJ wrote in the complaint. So well-understood, in fact, that DirecTV itself has admitted to it, the government said.
The complaint cites DirecTV as saying "[v]ertical integration of programming and distribution can, if left unchecked, give the integrated entity the incentive and ability to gain an unfair advantage over its rivals. This ultimately results in higher prices and lower quality service for consumers.”
Aside from excessive control of content, the merger will enable the new company to hobble disruptive competition from online video distributors, DOJ argues. After the merger, AT&T would have an improved ability to charge virtual MVPDs higher prices or even exclude them from Time Warner-owned Turner Broadcasting and HBO.
The government said that without the Turner networks, which includes CNN, TBS and CNN, virtual pay-TV providers such as Sling TV — which to date has been the most successful virtual provider competing with traditional ones like Comcast — may not continue to be as competitive.
“Turner knows this,” the complaint states. “Its CEO has stated that it has “leverage” over Dish and its online Sling TV service.
Using DirecTV’s own analysis from another potential blackout, the DOJ alleges that AT&T and Time Warner can win by holding “must have” content hostage in two ways. First, they can drive up prices to rivals. Second, any customers who leave a distributor during a content blackout could bring a “significant number of new customers” to AT&T.
In short, the government argues, AT&T wins if rivals pay demanded sky-high prices for Time Warner content, and wins if they don’t. In fact, DOJ’s complaint quotes DirecTV as saying that control of programming by a distributor creates “the ability to extract higher rates for years going forward based on the threat of such [subscriber] switching.”
To contact the reporter on this story: Liz Crampton in Washington at email@example.com
To contact the editor responsible for this story: Fawn Johnson at firstname.lastname@example.org
The court's docket is at http://src.bna.com/unE
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
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