Uphill Battle Expected for AT&T-Time Warner Foes

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By Alexei Alexis and Liz Crampton

Opponents of AT&T Inc.’s plan to acquire Time Warner Inc. may have to rely on the Department of Justice as their sole federal option for blocking the $85.4 billion deal, as it looks increasingly likely that the Federal Communications Commission won’t review it.

Public Knowledge President Gene Kimmelman, whose group opposes the merger, acknowledged as much Feb. 28 when he told state attorneys general that they needed to give the deal a closer look than they might otherwise would have. “I would urge you to look at it carefully as I’m not sure it will get as much scrutiny at the federal level as it would in the past,” he said at winter meeting of the National Association of Attorneys General in Washington, D.C.

Without FCC review, the arguments against the deal have shifted away from a “public interest” standard to a narrower anti-competitive standard. That improves the chances for AT&T and Time Warner and makes the case more difficult for opponents.

FCC Chairman Ajit Pai has repeatedly said he doesn’t expect the proposed merger to be reviewed by his agency, which looks at media deals based on whether they help or hurt the “public interest.” Most recently, he told the Wall Street Journal on Feb. 27 that he believes the deal “won’t be presented to the commission.” An FCC spokesman confirmed the comments to Bloomberg BNA.

Proving that a merged AT&T-Time-Warner entity may substantially lessen competition in the telecommunications and media industries will be particularly difficult for opponents because the merger doesn’t involve direct competitors, making it a “vertical” rather than “horizontal” transaction.

“You do have these relatively bad precedents for supposed vertical mergers,” Matt Wood, policy director at Free Press, a public interest group opposed to the deal, told Bloomberg BNA.

A typical Republican administration would be expected to approve a vertical deal like AT&T-Time Warner, but it’s unclear what will happen under President Donald Trump, who vowed before the election to block the deal, Wood said. The outcome will largely depend on who’s appointed to head the Justice Department’s Antitrust Division, he said.

Other Media Mergers

The Obama administration allowed a similar vertical deal between Comcast Corp. and NBC Universal to go through in 2011, with conditions designed to maintain competition in online video. Like AT&T-Time Warner, the merger raised questions about big media companies that combined Internet and cable systems with content providers. The Comcast-NBC Universal deal also went through an FCC review because it involved a transfer of broadcast licenses.

John Gasparini, a policy fellow at Public Knowledge, said the DOJ can challenge vertical mergers. But he acknowledged that it’s hard to find any examples in recent decades.

Gasparini also said the public interest standard that is in the FCC’s purview tends to result in a more rigorous review. “Needing to demonstrate that a merger is in fact beneficial is harder than proving that it simply isn’t harmful,” he said.

Without an FCC review, AT&T-Time Warner opponents are basically left with one viable federal option – arguing that the deal could substantially lessen competition on a horizontal basis. That could be a long shot, as it would require the DOJ to look into what AT&T will do with its new subsidiary.

“We certainly see horizontal impacts from this merger, meaning that, if AT&T is allowed to buy a lot of content, then it could use that content as both a sword and a shield against other pay TV and broadband distributors, like Comcast or Verizon, or the smaller guys especially,” Wood said.

What Happens Next Time?

Kimmelman appears to be taking the long view, arguing that federal enforcers should be prepared to deal with more vertically integrated media companies if they let this one go through.

“You could easily end up, if you don’t have a limiting principle in this transaction, with three, at most four, nationwide vertically integrated media and internet service providers,” he said. “I’m not sure that’s good for long term innovation and competition.”

“If the logic is, ‘Approve this,’ what’s your limiting principle for antitrust enforcement in the next transaction,” he asked. “Can they buy Viacom or CBS?”

‘Speculative Harm.’

Larry Downes, project director at the Georgetown Center for Business and Public Policy, said the argument that Time Warner content might be used as a “weapon” against competitors is “the kind of speculative harm that counts for little in vertical merger reviews.”

“There are no strong legal or economic arguments against the deal, which are the only ones that matter,” he told Bloomberg BNA.

Time Warner has agreed to sell its only TV station, WPCH in Atlanta, in an effort to clear the way for the merger. The trigger for FCC for review is whether the deal involves the transfer of broadcast, satellite or other licenses.

Wood said it’s no surprise that the FCC is not expected to review the deal, given that Pai – a strong business advocate – is now at the agency’s helm.

“We feel like the FCC does have a role here,” he said. “In a different setting, with a different person running it, dumping licenses just to evade FCC review would be frowned upon.”

Franken ‘Disappointed.’

Sen. Al Franken (D-Minn.) said the companies’ effort to “skirt” FCC review is disappointing and perhaps a signal of their own doubt about the benefits of the deal.

“But it’s not over yet, and the Department of Justice has a very important review ahead of them,” he said in an e-mailed statement.

To contact the reporters on this story: Alexei Alexis in Washington at aalexis@bna.com and Liz Crampton at lcrampton@bna.com

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

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