8:01am PT by Eriq Gardner
Dish-HBO Standoff Shows How Trump's Justice Dept. Choked in the AT&T Merger Fight
For the first time in its history, HBO has gone dark on a distribution service. Thanks to an impasse in negotiations between AT&T's WarnerMedia and Dish Network, the Game of Thrones pay network is currently off Dish's satellite and streaming services. Reacting to the news, the U.S. Justice Department decided to pat itself on the back, telling one journalist, "This behavior unfortunately is consistent with what the Department of Justice predicted would result from the merger" between AT&T and Time Warner.
Au contraire. What the blackout really highlights is how the Justice Department made a significant retreat in its case against the merger.
When the Justice Department filed its lawsuit nearly a year ago to block the merger, there was every reason to expect that the government would make a bigger fuss about HBO, perhaps the most valuable network in the television industry. The complaint explicitly nodded to Game of Thrones and discussed how Time Warner's "control of an input that their competitors need" would mean the potential withholding of content to benefit AT&T's subsidiary DirecTV. When we previewed the antitrust trial of the century in early March, we imagined the doomsday scenario: "It's 2019, and winter has come. Tens of millions of Game of Thrones fans tune in to HBO to find out whether the Starks, Lannisters or Targaryens will take the Iron Throne. But in a shocker, 85 percent of those expecting to watch the conclusion of TV's biggest series suddenly can't. The final episodes are available only on DirecTV or HBO's streaming service — with an AT&T broadband subscription."
But a funny thing happened just afterwards on the road to trial: The Justice Department pulled back on the argument of market foreclosure, which is antitrust speak for when a downstream buyer is denied access to an upstream supplier.
The government was not making the case that AT&T/TW would deny a distributor like Dish access to HBO's content. Instead, as can be seen on pages 37-45 of the government's trial brief, what the Justice Department was really contending was that distributors would be denied use of HBO in promotional campaigns. As the brief put it, "HBO could limit approvals for the use of HBO in marketing and promotions by DirecTV's rivals in a number of ways, including forms of subtle and targeted obstruction. Also, it could raise the costs of HBO offers and campaigns for rivals by refusing to waive fees during trial periods or by reducing its funding for cooperative advertising campaigns or insisting that such funds be used only for upgrade campaigns unlikely to affect DirecTV's market share." (italics ours)
At trial, the defendants responded that this theory made no sense given that HBO's business model depends on winning subscribers.
When it came to Turner networks like TNT, TBS, and CNN, the Justice Department came much closer to making a foreclosure argument, but here too, the government stopped short. Instead of contending that these networks would forever be withheld, the government put forth a somewhat convoluted argument based on bargaining theory and economic models that AT&T would be more inclined to tolerate blackouts in order to win price increases in licensing negotiations. (That theory gave the defendants the opportunity to present arbitration as the cure-all.)
Obviously, that theory didn't convince the trial judge, and now the government is telling an appellate court that U.S. District Court Judge Richard Leon has ignored economic logic. While there are plenty of observers who believe the Justice Department could have made a stronger case from the get-go with alternative theories about the competitive harms arising from the merger, that opportunity has now passed. And Trump's Justice Department has left many confused. Just yesterday, the FTC convened a panel on mergers with lawyers for big companies practically begging for new vertical merger guidelines.
In response to a Justice Dept. spokesperson's self-congratulatory note of predicting the HBO-Dish impasse, WarnerMedia put out statement accusing the government of not only collaborating closely with Dish in the lawsuit to block the merger, but also continuing the "collaboration" in Dish's "tactical decision to drop HBO."
Of course, litigating in the press has become the norm when it comes to carriage negotiations and perhaps there's some perceived advantage to pointing to continued interference from the Trump Administration, but the truth is that Dish hardly needs much push when it comes to escalating a fight. The satcaster has a notorious history of brinksmanship upon the expiration of licensing deals. See the fight between Dish and ESPN five years ago. Or more recently, check out the $100 million litigation between Dish and HBO's sister company over the CNN contract. That case is ongoing and could have gotten more play at the AT&T trial, but it was only mentioned briefly.