What AT&T Might Do to Convince Regulators to Bless the Time Warner Deal

Like when Comcast purchased NBCUniversal, the telecom's CEO Randall Stephenson anticipates his company will need to make concessions, but has the Comcast-NBCU deal poisoned the waters?
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AT&T chairman and CEO Randall Stephenson

The proposed marriage between AT&T and Time Warner is not the end of negotiations; in many ways, Saturday's anouncement is only the beginning. 

As regulators soon turn their eyes towards examining the implications of one of the nation's top telecommunications companies acquiring a content giant whose properties include HBO, Warner Bros., the Turner networks and CNN, attention will soon turn to the conditions that AT&T is willing to accept so that its $85.4 billion deal passes muster with those in the government.

AT&T CEO Randall Stephenson acknowledges what's ahead.

"What this is, is a vertical merger in its purest sense," Stephenson said over the weekend in a conference call with reporters. "Time Warner is a supplier to AT&T and we are combining with a supplier. It is a classic vertical merger. And I think you are hard-pressed to find many instances in the United States where the only remedy for the government if they had concerns was to block them. They are typically always dealt with by remedies — concessions, if you will — and conditions imposed on a combination. That’s what we anticipate happening here."

The acquisition, coming after AT&T's purchase of DirecTV last year and with its potential to broadly impact the entertainment and media industry in the future, has already become a political football for those on the right and left, with Donald Trump and Bernie Sanders both now urging regulators to reject the deal. Even those in the middle of the political spectrum, like Democratic vice presidential nominee Tim Kaine, are voicing their own skepticism. The U.S. Senate's antitrust subcommittee has announced it will be holding hearings in November, and when that happens, it's not just the current deal on the table that will be subject to a snap judgment. Lawmakers also will likely look back at the most analogous merger — Comcast's five-year-old acquisition of NBCUniversal — for lessons on whether vertical integration has benefited or harmed consumers.

At the time, Comcast's purchase of NBCU set off a furious debate among insiders in the nation's capital. It now provides a roadmap of what's to be expected for AT&T in terms of minimum conditions. In order to win government approval, Comcast made promises not to discriminate against channels competing with its own content, accepted prohibitions on excluding its own services from mobile internet data caps and also pledged to bolster independent minority-owned channels. In the years since, each of these topics — discrimination, zero-rating of streamed content and diversity — has triggered complaints that Comcast hasn't lived up to its bargain.

Partly for the suspicion that Comcast may have poisoned the well, there are doubts — including from Time Warner investors — about the merger surviving regulatory hurdles. Wells Fargo analyst Marci Ryvicker, for example, believes "D.C. has had many regrets over Comcast/NBCUniversal" and "concessions [are] likely to be worse than both Comcast-NBCUniversal and Charter-Time Warner Cable.”

If so, what kind of shape will the new company be in?

"Many of the potential benefits to AT&T's wireless, pay TV and broadband distribution assets from owning Turner Networks, HBO and Warner Bros. will likely be reduced or eliminated by long-standing program access rules, the recent net neutrality classification, and Comcast-NBC like conditions," writes Morgan Stanley analyst Benjamin Swinburne. 

By selling or spinning off assets like Time Warner's one Atlanta-based TV station, AT&T could seek to bypass regulatory review at the FCC. The media agency's recent attempts to write new rules on net neutrality, access to programming and privacy would be a strong reason why AT&T would prefer to not negotiate its conditions with the government agency currently headed by Tom Wheeler.

That would put much of the onus on the Justice Department to ensure that the merger won't harm competition. The downside for AT&T here is that the Justice Department has often shown more of a willingness to force divestitures as the price for big mergers. Would AT&T be willing to sell off something like Time Warner's 10 percent stake in Hulu? Drexel Hamilton analyst Tony Wible sees this as a possibility, noting that AT&T and Hulu "are both nearing the launch of promising virtual multichannel video programming distributor services."

Right now, those driving the merger are touting competition from the tech vanguard as part of the consumer-friendly merits of the deal. (It's a well-trodden public relations strategy previously exploited by Comcast in its acquisition of NBCU, AT&T in its deal to acquire DirecTV and Charter in its purchase of Time Warner Cable.)

"If you look at the last year, more than half of the growth in advertising in the United States went to two companies — Google and Facebook," Time Warner CEO Jeff Bewkes said Monday morning on CNBC. "And we need to increase competition for advertising across television, internet companies. That's an important thing."

Expect more posturing in the months ahead. The tie-up between AT&T and Time Warner quickly came together this past week with assistance from attorneys at Sullivan & Cromwell and Cravath Swaine & Moore, but that just sets the stage for more dealmaking.

“When you look at modern history in media and the internet, the U.S. government has always approved vertical mergers like this," says AT&T general counsel David McAtee. "They do so for good reason. They put downward pressure on consumer prices, they increase competition and consumer choice, and in our case, they spur the sort of innovation and investment. So we enter this process confident. We don’t prejudge the outcome. We stand ready to talk to the regulators and to address any concerns they have."

Georg Szalai contributed to this report.

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