As the U.S. government gets set to fight AT&T's proposed acquisition of Time Warner in a D.C. federal court, the Department of Justice on Friday submitted a trial brief that sharpens its theories on why the $85 billion merger deserves to be blocked. Justice Department officials say the outcome of the case "will chart the course for the future of video-content delivery in the United States" and are also ridiculing the other side's response.
"First, there is the Star Wars defense: Everything the government is telling the Court is stale and out of context — it is from a long time ago in a galaxy far, far away," the government states in its brief. "Not so. To the contrary, as will be shown at trial, the government is challenging this merger to address the real concerns of real people who populate the real marketplace today. And tomorrow as well, since the acquisition would give AT&T a new tool to slow down the development and growth of disruptive online competitors in the future. The fact that this is an evolving industry does not provide a reason to let the challenged acquisition proceed. Just the opposite: It provides a compelling additional reason why it should be blocked."
The three-week trial begins on March 19 and will represent one of the most important antitrust trials in American history. Although the U.S. government has taken bold actions in the past including forcing Hollywood studios to divest themselves of movie theaters in the 1940s and breaking up local and long-distance phone services in the 1980s, antitrust regulators have traditionally shied away from attempting to stop a vertical merger, that is, one between a distributor and a supplier. In November, after President Donald Trump promised that the AT&T/Time Warner merger would indeed be forbidden by his administration, the Justice Department brought suit with the allegation that the marriage between the entity that owns rights to broadcast NCAA March Madness with the telecom that owns DirecTV would "result in fewer innovative offerings and higher bills for American families."
Claiming that the merging parties would "have the incentive and ability to substantially lessen competition by withholding or raising the price for" content is one thing, but what does the government specifically think will happen should the merger pass the judge's scrutiny? Relying upon experts, the Justice Department submits in its brief and will assert at trial that several things harmful to consumers are more likely to occur than not.
First, the government will attempt to prove that cable and satellite customers can expect their monthly bills to rise. The brief says this adds up to "hundreds of millions of dollars more than they do now to watch their favorite programs on TV."
In its own trial brief, AT&T and Time Warner dispute this prospective price increase. They think that billions of dollars in efficiencies from the merger will translate into a price decrease for customers, and even if the government is right, they say it's miniscule.
"For example, in his initial report, the government’s expert claimed, with startling and implausible precision, that the merger will cause consumer pay-TV prices to rise by a monthly total of 27 cents per subscriber, or less than 0.2% of a consumer’s average monthly bill," states the brief. "Just a few weeks later, after fiddling with some input dials, the expert managed to almost double that insubstantial result to a still-insubstantial 45-cent monthly increase, all of 0.4% per bill, which is where the government currently stakes its case."
The government is also suggesting that the merger would harm competition by constraining AT&T's rivals from effectively using HBO as a competitive tool. Currently, a number of distributors use HBO and its shows like Game of Thrones and Silicon Valley to win subscribers and market share, but the government asserts this will change if AT&T becomes less inclined to allow rivals the right to use HBO in marketing and promotions. AT&T responds this is all "illogical" and that the evidence will show the opposite — that HBO needs these promotions far more than cable and satellite companies do.
Perhaps most controversially, the government contends that with two vertically integrated conglomerates in the media space — AT&T/Time Warner and Comcast/NBCUniversal — there could be "coordination" between the two to disadvantage emerging virtual rivals. Dish Sling and PlayStation Vue are singled out as posing a particular threat to AT&T's DirecTV and U-verse services.
"Unlike an independent Time Warner, the merged firm would share with Comcast a strong interest in slowing or blocking disruptive new entry by Virtual MVPDs," states the government's brief. "The firms could advance this shared interest by withholding from Virtual MVPDs Turner and NBC content — two of the most important network groups for Virtual MVPDs — or restricting their use of that content (e.g., by prohibiting inclusion of channels in skinny bundles). Because market conditions are conducive to coordination, and because a coordinated denial of content to Virtual MVPDs would face relatively few obstacles, the merger likely would facilitate coordination and lead to higher prices, fewer options, and reduced innovation."
This foreclosure claim is a more narrow one than the government originally suggested — AT&T crows that the government now "concedes that the merged entity will not withhold Turner programming from rival MVPDs" (Charter, Dish, Verizon...) — but nevertheless, the notion that content will be withheld from cord-cutters signing up for digital streaming packages is a remarkable and unprecedented one.
As for coordination with Comcast to harm virtual MVPDs, AT&T responds that it would not want to do that.
"Turner receives substantial affiliate fees and advertising revenue from these virtual distributors," says the defendants' brief. "And Turner would have rapidly diminishing relevance and a grim long-term outlook if millennials and other cord-cutters did not see Turner channels in the programming arrays offered by online providers. Indeed, it is far better from Turner’s perspective that consumers choose virtual MVPDs that carry its networks than that they sign up only for non-network-based services like Netflix."
AT&T plans to call its chief executive Randall Stephenson to the witness stand to make a case for the merger.
"For its part, AT&T benefits from virtual MVPDs because they encourage use of AT&T’s nationwide wireless broadband network, which increases revenue for AT&T and discourages consumers from 'churning' away from its own broadband products," continues AT&T's brief, prepared by attorney Daniel Petrocelli. "Indeed, as AT&T CEO Randall Stephenson will explain, AT&T’s core strategy is to embrace the mobile distribution of premium video, exploiting the major competitive advantage its nationwide wireless broadband network provides over Comcast and other cable providers."
In turn, the government's trial team, headed by Craig Conrath, says they will be calling industry witnesses to "explain the importance of Turner content and their vulnerability to price increases by the merged firm."
The trial briefs omit any reference to Trump and speculation he is against the merger because of his distaste of CNN. In late February, U.S. District Court Judge Richard Leon declined the defendants' bid to force more discovery about possible White House interference and stated in a ruling that the evidence wasn't there for "selective enforcement" of the law. Nevertheless, outsiders still are attempting to push the judge into considering Trump's involvement. In an amicus brief filed on Thursday, a group of former Justice Department officials including Preet Bharara and John Dean urged "a full inquiry, if for no other reason than to ensure the public that the department continues to adhere to its obligation of ensuring the fair and impartial administration of justice for all Americans."