AT&T's Power Grab Is Hit by Government From Two Directions
(Bloomberg Gadfly) -- Just as lawyers for AT&T Inc. wrap up what most have considered to be a strong defense of the Time Warner Inc. megamerger, information has trickled out that may test the company’s credibility.
AT&T, the No. 2 wireless carrier in the U.S., and its larger rival Verizon Communications Inc. are reportedly under investigation by U.S. antitrust officials over whether the companies colluded to make it harder for customers to switch carriers. The probe has to do with new electronic SIM, or eSIM, technology that allows consumers to make the switch by changing settings on their phone or tablet, rather than having to physically swap out a SIM card chip or go through their carrier.
The Justice Department is looking into whether there’s been coordination by the two companies and GSMA, an industry standards-setting group, to thwart this technology. Verizon says it’s simply a “difference of opinion” with phone-equipment manufacturers regarding eSIM standards, while AT&T says it has provided the requested information to the government.
The investigation comes as the Justice Department’s antitrust division also attempts to block AT&T’s $109 billion takeover of Time Warner on the grounds that AT&T could then collude with Comcast Corp., the cable giant that owns NBCUniversal, to control the pay-TV market, thus hurting competition and resulting in higher prices for consumers. AT&T and Time Warner executives not only say this is false, they’ve scoffed at the idea and called the case “ridiculous.”
But while there may not be legal precedent or antitrust framework to block this type of vertical merger, the government’s concerns are valid. Should the judge allow the deal to proceed, other companies such as Verizon, Comcast and Charter Communications Inc. could pursue their own transactions to gain more power across the media, pay-TV and wireless industries. On the other hand, proponents of the AT&T-Time Warner merger say these companies need to more scale to compete against the likes of Netflix Inc. as well as Facebook Inc. and Amazon.com Inc., which are encroaching on their turf armed with immensely valuable data about advertising audiences. Some also suspect the Justice Department is doing President Trump’s bidding in targeting the deal, since his nemesis CNN is one of the key Time Warner assets at stake.
AT&T didn’t expect a courtroom battle with regulators when it struck the deal 18 months ago, but it entered this fight quite confident that it would win – and it seems it is so far. Testimony by an economist, whose study was key to the Justice Department’s argument that the deal would lead to higher prices, may have gone too into the weeds and lost the judge. The witness suggested that the judge review “all the equations and appendix” in his study because they would make his point clear, to which the judge responded, "I doubt I’ll do that.”
But it’s not over yet. In fact, this quote given to my Bloomberg News colleagues by Gene Kimmelman, a former U.S. antitrust official and president of the consumer advocacy group Public Knowledge, makes a very good point:
"The government has effectively shown that [AT&T and Time Warner] have both the opportunity to raise prices and the economic incentive. There just has to be enough evidence to suggest the likelihood that something like this will happen and I think they have enough evidence."
That AT&T may possibly be colluding with Verizon to keep customers on their networks and assert their industry dominance isn’t necessarily the evidence the government needs for the M&A case. But it certainly speaks to that likelihood that Kimmelman mentions—that a corporation faced with a shrinking pay-TV business, intense competition in its core wireless operations and pressure to show investors growth would step out of bounds at the expense of consumers.
Tara Lachapelle is a Bloomberg Gadfly columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.
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