In AT&T Merger Appeal, U.S. Has a Message: We Told You So

(Bloomberg) -- U.S. antitrust enforcers will take another shot this week at convincing a court that AT&T Inc.’s acquisition of Time Warner Inc. is bad for consumers. This time they’re bringing real-world examples.

Six months after AT&T completed the $85 billion deal, many of the ills the government warned about when it sued to stop the takeover have come to pass: higher prices, a programming blackout and reduced choice for consumers. By some accounts, the largest U.S. pay-TV provider has played the role of big-media villain just the way critics scripted it.

In AT&T Merger Appeal, U.S. Has a Message: We Told You So

“Everything we’ve seen in the marketplace reflects the kind of anti-competitive leveraging the merger challenge was all about,” said Gene Kimmelman, the president of the advocacy group Public Knowledge, which opposed the merger. “These are real dangers causing real price increases and harm to consumers.”

The Justice Department’s antitrust division will argue to the U.S. Court of Appeals in Washington Thursday that a lower court was wrong to allow AT&T to buy Time Warner. U.S. District Judge Richard Leon rejected the government’s case that the deal would give AT&T bargaining leverage over cable and satellite services that buy Time Warner programming, leading to higher prices for pay-TV viewers.

Long-shot Bid

The appeal is seen as a long-shot bid by the Justice Department to undo a stinging rebuke from the lower court over a deal that some antitrust lawyers say shouldn’t have been challenged in the first place. A victory could send the merger back to Leon for reconsideration and potentially derail AT&T’s vision of using Time Warner to become a media powerhouse.

The appeals court could order Leon to conduct a full antitrust analysis by weighing whether consumer benefits outweigh any harms from the tie-up. If Leon finds they do, the deal could still proceed. If not, he could reverse his earlier ruling and unwind the deal.

Antitrust officials at the Justice Department see AT&T’s moves after the merger as evidence that their opposition to the deal was justified and that the judge should have blocked the tie-up, according to two people familiar with their thinking.


AT&T Disagrees

AT&T rejects that view. Keith Cocozza, a spokesman for WarnerMedia, AT&T’s Hollywood unit, said the company plans to offer consumers new services in the future, not less. A recent price hike for DirecTV Now, AT&T’s online-TV service, was in line with competitors’ moves and the company continues to negotiate with Dish Network Corp. over differences that led to a blackout of HBO and Cinemax.

AT&T also noted that it launched, as promised, a sports-free $15 a month streaming package made possible by its acquisition of Time Warner.

Central to the government’s case is the risk of programming blackouts, in which Time Warner programming like CNN is pulled from a rival distributor, say Comcast Corp. Before the merger, both parties would lose from a blackout: Time Warner loses revenue and Comcast has a bunch of angry subscribers who can’t watch CNN anymore.

After the merger, however, a blackout isn’t all bad for AT&T, according to the government. That’s because some angry Comcast customers could switch to DirecTV, which AT&T owns.

HBO Dispute

In November, HBO and Cinemax disappeared from Dish’s satellite TV service after the companies failed to reach a new contract. It was the first time in HBO’s more than 40 years that its programming was blocked by a pay-TV service over a contract dispute.

HBO blames Dish for dropping the premium channels and said AT&T had nothing to do with the failure to reach a deal. The discussions are ongoing, WarnerMedia says. Univision, the Spanish-language network owned by private equity groups, has been blacked out on Dish since the summer in a similar dispute.

To Dish, the blackout is a showcase for how big content owners could bully pay-TV systems. During the trial, Warren Schlichting, head of Dish’s Sling TV streaming service, argued that contract talks for Time Warner content would be more difficult, especially if programming blackouts drove subscribers to AT&T’s DirecTV.

Quick to Criticize

The Justice Department was quick to criticize AT&T over the move. While government lawyers can’t technically introduce new evidence at the appeals court, they will probably bring up AT&T’s conduct since the deal closed as an example of how Leon got it wrong, said Jennifer Rie, a Bloomberg Intelligence analyst in New York. They must show "clear error" by the judge to convince the court to vacate Leon’s decision, Rie said.

The three-judge panel has two Democratic appointees and one Republican, which should help the Justice Department’s chances because Democrats have typically been more pro-enforcement and one of them sided with the government on an appeal seeking to overturn a court ruling that blocked Anthem Inc.’s takeover of rival Cigna Corp.

Rie expects the court to rule by the end of February, when AT&T’s agreement to keep Turner as a separate business unit expires.

Rare Win

There aren’t many examples of the government winning a merger challenge on appeal, but it’s not unheard of. The Federal Trade Commission, which shares antitrust jurisdiction with the Justice Department, lost its bid in 2007 to stop Whole Foods Market Inc. from acquiring rival Wild Oats Markets Inc. After the companies closed the deal, the federal appeals court in Washington reversed the decision and sent the case back to the lower court. Whole Foods later settled, agreeing to divest 32 Wild Oats stores.

AT&T’s conduct since the merger doesn’t show the Justice Department was right, said Dan McInnis, an antitrust lawyer at Thompson Hine in Washington who followed the trial.

The core of the government’s challenge was that AT&T would raise prices for Turner Broadcasting channels like CNN on rival distributors, which hasn’t happened yet, he said. Blame for the HBO blackout may rest with Dish, McInnis said, and prices for DirecTV Now weren’t part of the case.

“It doesn’t go to the heart of the government’s case,” McInnis said about AT&T’s moves. “It’s background noise.”

‘Friends’ Deal

AT&T’s Chief Executive Officer Randall Stephenson said Tuesday he isn’t interested in creating a video “warehouse” like Netflix Inc. Instead, AT&T will focus on HBO as a key component of its video strategy, investing to develop more programs and making HBO the core of a coming streaming service it plans to launch at the end of 2019. On Monday, AT&T renewed a licensing deal with Netflix to stream the popular sitcom “Friends” for that service.

The U.S. alleges other harms since the deal besides the HBO blackout. During the trial, AT&T dismissed the government’s warning that the deal would lead to higher prices. In fact, the company said, consumers would see lower prices from the deal. Less than a month after Leon’s ruling, AT&T said it was raising prices for its DirecTV Now streaming service by $5 a month.

Then last week, AT&T shut down FilmStruck, a subscription service for classic-film buffs. The online video service, which AT&T says wasn’t profitable, was a sort of internet extension of the Turner Classic Movies network, and the exclusive home of the Criterion Collection. More than 50,000 fans signed petitions trying to save FilmStruck.

During the trial, the merger proponents pointed to FilmStruck as an example of one of Time Warner’s innovative offerings. Time Warner executive Coleman Breland testified it was the first direct-to-consumer product started by the company’s Turner Broadcasting division and was an attempt to reach consumers at a time when they have increasing options for consuming content.

©2018 Bloomberg L.P.