Trial over Time Warner deal has broad ramifications for
antitrust enforcement across industries
By Brent Kendall and Drew FitzGerald
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (March 16, 2018).
WASHINGTON -- The government accuses the company's chief
executive of behaving like the disingenuous Captain Renault in the
film "Casablanca." The company likens the government's case to a
shaved Persian cat, "pale and thin."
A federal judge in Washington, D.C., next week will hear a case
that may settle one of the biggest antitrust issues of modern
times.
The face-off, between the Justice Department and AT&T Inc.
over the company's $85 billion agreement to buy media giant Time
Warner Inc., has broad ramifications for media, technology and
other industries as well as for the government's powers to deter
large-scale corporate consolidation.
It could determine whether antitrust enforcers will have real
practical authority to challenge so-called vertical mergers
involving two complementary companies that operate at different
levels of the same industry. Typically, the government challenges
unions of direct competitors that sell similar products and
services, or horizontal mergers.
The ruling could affect major pending health-care mergers and
may have ramifications for the tech economy. If the deal is
allowed, AT&T argues, it could act as a bulwark against the
power of digital media giants such as Alphabet Inc.'s Google and
Facebook Inc. Or it could create an entertainment behemoth that
holds consumers hostage, as the government insists.
The outcome could also affect how strongly the Trump
administration, with its rival populist and pro-business factions,
pursues the kind of vigorous antitrust enforcement that was a
hallmark of the Obama administration.
The battle is unusual because AT&T and Time Warner aren't
head-to-head competitors. They want to combine AT&T's
video-distribution network with Time Warner's content -- from HBO's
"Game of Thrones" to the NCAA basketball tournament -- in a move to
integrate different links in the same supply chain.
"This will be the first court decision on a vertical merger in a
very long time," said Wayne State University law professor Stephen
Calkins, "and what the court says will be terribly important."
The case is a pivotal moment in a recurring clash between merger
mania and government enforcement, and the drama has produced two
lead actors: AT&T boss Randall Stephenson and U.S. antitrust
chief Makan Delrahim.
Mr. Stephenson has come to personify the hard-charging executive
whose approach to guiding a corporate titan through a rapidly
changing landscape is to get bigger.
Mr. Delrahim emerged last year as a surprising foil, a
Republican antitrust enforcer who moved swiftly to file suit
against the deal -- the type of merger challenge some liberal
officials longed to bring but never did.
The case comes as viewers are demanding more ways to watch video
programming at lower prices. Millions have abandoned cable and
satellite-TV contracts for other options. Some have turned to
cheaper packages online. Others have dropped traditional
programming entirely, finding their entertainment on Netflix Inc.,
Amazon.com Inc., Hulu and Alphabet Inc.'s YouTube. Younger
customers increasingly watch video on phones, tablets and
laptops.
The upheaval has left the pay-TV industry scrambling. Mr.
Stephenson made a $49 billion play for video distribution by
acquiring DirecTV, the top U.S. pay-TV satellite service, in 2015.
He's now trying to make the company's wireless and video bundles
more attractive to viewers and investors by adding Time Warner
news, sports and entertainment assets to the package.
Given Mr. Delrahim's objections, the deal has been pending for
17 months, creating something of an industry chessboard frozen in
time, with competitors uncertain of their next play. Antitrust
fears in part prompted 21st Century Fox to spurn Comcast Corp.'s
higher offer for most of its entertainment assets, The Wall Street
Journal reported, citing people familiar with the discussions,
choosing a $52.4 billion deal with Walt Disney Co. instead.
(Journal parent company News Corp and 21st Century Fox share common
ownership.) The prospect of a better-funded Time Warner is
prompting other media executives to look for faster ways to
grow.
If AT&T wins, it could embolden rivals such as Comcast and
Verizon Communications Inc. and clear the way for a market
dominated by internet-media hybrids. A loss could leave the media
industry wide open as programmers and distributors search for ways
to adapt to changing consumer tastes.
Question of competition
The case raises this central question: If AT&T buys Time
Warner, would it lead to substantially less competition? Both sides
lay out their arguments in court papers filed in the case.
Mr. Delrahim's team says yes. The deal would mean higher prices
and sluggish innovation, the department says in the filings, and
"American consumers will end up paying hundreds of millions of
dollars more than they do now to watch their favorite programs on
TV."
The department acknowledges AT&T and Time Warner aren't
direct rivals, but argues the deal could broadly harm the public
because the merged firm would have too much power in the pay-TV
ecosystem. It says Time Warner's content, especially the Turner
networks -- including TBS, TNT, CNN, Cartoon Network and truTV --
are competitively significant, with consumers expecting pay-TV
packages will include those channels.
If AT&T owns Time Warner, it could threaten to withhold the
Turner channels from rivals of DirecTV unless they pay higher fees,
a move that would ultimately lead to higher consumer cable bills,
the department alleges. It says AT&T could limit the ability of
rivals to offer promotions on Time Warner's HBO, the most popular
premium television channel, as a way to add subscribers or retain
current customers.
On the innovation front, the department says an independent Time
Warner has been eager to offer its channels as part of online
packages that break from the traditional cable model but wouldn't
be so willing under AT&T. "With the merger, Time Warner would
turn from friend to foe," it says in filings.
AT&T rival Comcast is likely to come up frequently in the
case. An AT&T victory, the Justice Department says, would give
it and Comcast a stranglehold on the industry. But the department
in 2011 allowed Comcast to take control of NBCUniversal, creating
an integrated giant similar to what AT&T now wants to
become.
The Justice Department under Barack Obama allowed the Comcast
deal after imposing restrictions on Comcast's business tactics
after the merger. The department leadership under Mr. Delrahim has
made clear it opposes the approval of mergers based on those types
of "behavioral" conditions.
AT&T and Time Warner say in court filings there is no valid
legal argument for preventing the combination of complementary
companies. They deny anyone's customers would pay more for TV and
dispute the idea that anything they do will stop customers from
cutting the cable cord. "AT&T and Time Warner aren't seeking to
hold back the tide, as the government asserts, but to ride an
irresistible wave," the companies say.
AT&T says it would lose money withholding Time Warner
programming from rival pay-TV distributors. As an assurance, the
company offered rival video distributors the opportunity, for seven
years, to let an arbitrator pick appropriate fees for the Turner
channels if negotiations fail. The Justice Department says the
arbitration offer doesn't remedy the merger's harms to
competition.
Where Mr. Delrahim and the government see a behemoth in the
making, Mr. Stephenson and the companies envision the emergence of
a streamlined rival ready to take on already-powerful competitors.
The deal, they say in court filings, would give Time Warner access
to AT&T's infrastructure for selling directly to consumers and,
equally important, would provide Time Warner personalized data
about AT&T customers' interests and preferences.
By joining forces, the companies have said publicly and in court
documents, they can create a unique platform that allows
advertisers to buy commercials targeted to specific viewers,
creating an alternative to Google and Facebook, which have built
businesses using consumer data to sell targeted ads.
Bad blood
High-stakes litigation always tends to produce bad blood, but
the level of hostility in the AT&T case has been pronounced.
Messrs. Stephenson and Delrahim have taken public shots at one
another, even if rarely referring to each other by name.
Mr. Stephenson on multiple occasions has publicly questioned Mr.
Delrahim's motives and cited a television interview from 2016 in
which Mr. Delrahim, then a private-practice lawyer, suggested the
deal wouldn't face insurmountable antitrust hurdles.
The two also have appeared to express fundamentally different
recollections of their own face-to-face conversations. Mr.
Stephenson has said publicly he never offered to sell CNN, a
constant target of criticism by President Donald Trump, as a carrot
to win Justice Department approval.
Mr. Delrahim, in a sworn legal affidavit obtained by the Journal
under the Freedom of Information Act, said Mr. Stephenson indeed
asked him whether the department would approve the deal if AT&T
sold CNN.
Mr. Delrahim in a November appearance made what was interpreted
as a clear reference to AT&T, saying the public should beware
when an incumbent company promises "to help you against the evils
of dynamic competition from Netflix, Amazon, Google, Facebook."
The Justice Department in a brief last week mocked Mr.
Stephenson's professed surprise at getting sued, noting the CEO
previously said AT&T had been making litigation preparations
from the outset. The government compared him to Captain Renault,
the corrupt Vichy police prefect in the film "Casablanca," quoting
his famous line, "I'm shocked, shocked to find that gambling is
going on in here!"
People close to AT&T's management say the department's
lawsuit surprised Mr. Stephenson, a lifelong Republican often vexed
by Mr. Trump's unpredictable statements.
AT&T, in its own brief, said the department's legal
arguments fell apart in trial preparations, writing: "Now, what
remains of the government's case, 'like a Persian cat with its fur
shaved, is alarmingly pale and thin,' " borrowing a turn of phrase
from a 1992 case.
That choice of words raised eyebrows among some people close to
Mr. Delrahim, who is of Persian descent.
U.S. District Judge Richard Leon will open the proceedings March
19. This isn't a jury trial. The judge alone, who oversaw the
Comcast-NBCU settlement, will decide the merger's fate.
The Justice Department presents its case first, with a roster of
witnesses likely to include officials from rival companies.
AT&T and Time Warner will spend a good portion of their
defense on testimony from their own executives, including Mr.
Stephenson and Time Warner CEO Jeff Bewkes, about what they see as
the deal's benefits.
Each side has hired economic experts who have conducted studies
that offer dueling claims about how the merger will affect prices,
consumers and cost savings. The government is relying upon
University of California, Berkeley, business and economics
professor Carl Shapiro, who served as a top Justice Department
antitrust official in the Obama administration. AT&T has turned
to University of Chicago economics professor Dennis Carlton, who
has provided expert testimony in antitrust cases for more than 30
years.
Judge Leon, a George W. Bush appointee, is expected to rule in
the next few months. The companies extended their merger agreement
from April 22 to June 21 to give him more time.
Mr. Trump's comments hang over the case. After AT&T
announced the deal in October 2016, Candidate Trump unequivocally
said his administration would never allow the deal to be approved.
After the department filed its lawsuit, Mr. Trump said he shouldn't
comment on the litigation, then added: "Personally, I've always
felt that that was a deal that's not good for the country. I think
your pricing is going to go up."
There is no shortage of observers who believe Mr. Trump's
position was motivated not by antitrust principles but by his
distaste for CNN, whose news coverage he has criticized fiercely.
Mr. Stephenson has called the tensions between Mr. Trump and CNN
the "elephant in the room" when it comes to deciphering why the
Justice Department sued.
Mr. Delrahim has publicly said Mr. Trump and the White House
didn't influence his decision to sue AT&T. The telecom giant
laid the groundwork to make Mr. Trump's comments an issue in the
trial, but Judge Leon denied AT&T's request to access certain
internal government communications about the deal. The company
hadn't shown it had been especially singled out for disfavored
treatment, the judge concluded.
Judge Leon's ruling could be a career-defining moment for
Messrs. Delrahim and Stephenson. Both, in a sense, have pushed all
of their poker chips to the middle of the table.
The AT&T head has made clear the Time Warner acquisition is
integral to his vision for the company -- and equally clear he
believes the government is treating AT&T unfairly. The
bespectacled Oklahoman has spent his 35-year career at AT&T and
its predecessor companies. His tenure as CEO includes a 2011 loss
to the Justice Department that scuttled a $39 billion bid for
wireless rival T-Mobile, a failure that cost AT&T more than $4
billion.
Mr. Delrahim previously served in the department's antitrust
division in the George W. Bush administration. With the AT&T
case, he brought one of the most consequential merger lawsuits in a
generation within weeks of taking office last fall, under highly
unusual circumstances because of Mr. Trump's comments about the
deal.
The Justice Department has been riding a decade's momentum in
court, with Obama antitrust enforcers succeeding in blocking
several deals in which major rivals sought to merge.
Mr. Delrahim's opening act could either take that momentum to
historical heights or deliver a painful blow to the department at a
time when a new wave of deal making could be on the horizon.
Write to Brent Kendall at brent.kendall@wsj.com and Drew
FitzGerald at andrew.fitzgerald@wsj.com
(END) Dow Jones Newswires
March 16, 2018 02:48 ET (06:48 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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