In AT&T-Time Warner, the Government Went After the Wrong Merger
(Bloomberg Opinion) -- So it turns out that Makan Delrahim had it exactly right back in the fall of 2016 when he told BNN Bloomberg in Canada that he didn't see any "major antitrust problem" with the proposed AT&T-Time Warner merger.
Of course, Delrahim was then still a Pepperdine University law professor, and Donald Trump was still just a candidate for president. But a month later, Trump won the election, and two months after being sworn in, he nominated Delrahim to be the head of the Justice Department's antitrust department. And just like that, Delrahim was singing a very different tune.
During his campaign, Trump had vowed not to approve the merger, because it "put too much concentration of power in too few hands." Many people (myself included) thought that his real reason for opposing the deal was that he wanted to hurt CNN, the cable news network owned by Time Warner Inc. that had become a Trump whipping boy. But never mind. Once Delrahim was sworn in as the new antitrust chief in September 2017, he began to see all the horrible things that might happen if AT&T Inc. were allowed to buy Time Warner.
The merged companies would have too much pricing power over competitors, the Justice Department said when it filed a lawsuit to block the deal last November. It would mean "higher monthly television bills." AT&T might even deprive cable competitors of prime Time Warner content, like HBO, to force consumers to subscribe to its DirecTV unit to see "Game of Thrones." And so on.
Late Tuesday afternoon, U.S. District Judge Richard Leon resoundingly rejected the Justice Department's arguments. According to Bloomberg, he described part of the government's case as "gossamer thin," and said that the government's expert witnesses didn't back some of the government's key theories. In a further slap at the Justice Department, he declined to put a single condition on the merger. When the government quickly asked for a stay to prevent the merger from closing while it appealed, he said no. AT&T lead lawyer, Daniel Petrocelli, told a crowd of reporters outside the courtroom that the merger will likely be consummated by June 20.
Leon's ruling is hardly a surprise. The government theory that the deal would allow AT&T to use Time Warner's content as weapon with which to bludgeon competitors was extraordinarily weak, and bore little resemblance to how the media industry actually works. And the precedents went in the other direction.
AT&T-Time Warner, you see, is what's called a vertical merger, meaning that the two companies don't have units that compete with each other. And as Rich Greenfield, the BTIG media analyst, put it shortly after the Justice Department filed suit, "the DOJ has not litigated a vertical merger in over 40 years." Current antitrust theory says that vertical mergers should be allowed unless you can show they will prevent the entrance of new competitors -- which the AT&T deal did not do.
We'll never know whether Delrahim was acting independently (as he insists) or was carrying out Trump's orders (which many people believe). When AT&T's lawyers tried to bring Trump into the lawsuit, Judge Leon turned them down. Whatever the truth, the lawsuit has made the antitrust division, which is supposed to be fiercely independent, look like a Trump patsy.
More important, the government's insistence on bringing such a weak lawsuit does not bode well for the immediate future of antitrust. There are going to be plenty of mergers over the next few years that will have far more serious consequences than the AT&T-Time Warner deal. Having been slapped down in this lawsuit, the Justice Department is unlikely to be willing to go after those worthier targets, even when they raise important issues of innovation and consumer choice.
This is especially true of the tech industry, where dominant players like Amazon, Facebook and Google have a history of buying companies that might be competitors one day, and of making business moves that, at least on their face, appear to be anti-competitive.
I've previously argued that we need an evolving theory of antitrust that can deal with the dominance of the big tech companies. But this requires the government to be able and willing to bring aggressive suits, and to make innovative arguments. If that doesn't happen, Big Tech is going to become so powerful it will snuff out any company that even thinks about trying to compete. That's not good for the tech industry, and more important, it's not good for the country.
I had hoped that Delrahim, as a longtime antitrust expert, would be the person to lead such a charge. But that hope is now lost. In the short term, the government's willingness to bring this dumb case means that AT&T and Time Warner's merger was delayed a bit, but the combined company can soon start competing with the likes of Netflix and Amazon. (Good luck, fellas!) In the long term, it means that antitrust enforcement has been significantly weakened. That's the true tragedy of the government's suit.
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