Justice Dept. Proposes Turner or DirecTV Divestment If AT&T-Time Warner Merger Not Blocked

In a post-trial brief, the government says the merged company would have too much power in negotiations with cable and satellite rivals. The analogy made is to the Cold War.
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It took a few days, but the U.S. Justice Department has finally made public its big brief following the trial over the merger between AT&T and Time Warner. In the redacted version, the government argues that allowing one of the nation's biggest distributors to join forces with one of the nation's biggest content producers would rise to Cold War-type harm as AT&T/Time Warner exploits its newfound power in carriage negotiations with cable and satellite companies.

"All negotiations have elements of kabuki theater, with both sides posturing as they fight for terms," write government lawyers. "The real-world implications of not reaching a deal, however, determine each side’s leverage and, ultimately, the bargain they strike. Even catastrophic alternatives define high-stakes negotiations: in the Cold War, the most destructive weapons were never used, yet the arsenals and defenses available to each side undeniably influenced every negotiation between East and West. Leverage matters in video content negotiations because millions of dollars change hands depending on who blinks first."

The government contends that AT&T's leverage increases because if it isn't able to strike a deal with rivals for Time Warner content (including CNN, TBS, and TNT), it will at least be able to steal video subscribers for DirecTV, another subsidiary.

"Although AT&T executives denied this ability and incentive to raise rivals’ costs when they were on the witness stand, AT&T and DirecTV have advocated this view of the industry since at least 2010, when the FCC has considered instances of vertical integration between an MVPD and a content provider," continues the brief, referencing what was put forward during the FCC's consideration of the Comcast/NBCU merger.

The government goes into the supposed must-have value of Turner content, which includes live sports programming like March Madness, as well as the premium brand of Time Warner's HBO.

"In AT&T’s hands, Time Warner’s economic calculus would change," argues a Justice Department team led by Craig Conrath. "AT&T would not want Time Warner content distributed in ways that increase competitive pressure on DirecTV. For example, when Time Warner acquired a stake in Hulu and Turner agreed to license content to Hulu for its new virtual MVPD service, Mr. Stephenson told Mr. Bewkes that he viewed the decision as 'going around us,' and threatened that it was 'hard to imagine how it won’t impact all of our relationships.' Post-merger, Time Warner would no longer be agnostic toward its rival distributors."

In its own brief, AT&T knocks the notion of harm and any violation of antitrust law.

The government responds that the defendants want to "rewrite" merger law to waive away "minor" price increases. The Justice Department adds that the other side has taken "potshots" at the model presented by its economist and has merely put forward "speculative, unproven and untested" efficiencies in support of a merger. The government also insists that it is not their burden to rebut an efficiencies defense and suggests that "FAANG Strawman" (Facebook, Amazon, Apple, Netflix, and Google) hardly makes for a good defense to an illegal merger.

The brief insists that the remedy is structural.

"While the Court has discretion to fashion relief for a Section 7 violation, the appropriate relief here is structural — either a permanent injunction against the proposed merger, or a targeted divestiture," states the brief.

The government would like U.S. District Court Judge Richard Leon to issue a permanent injunction on the merger, but if that doesn't happen, an alternative is put forward.

"The evidence demonstrated that the bulk (though not all) of the anticompetitive effects flow from the combination of Turner with DirecTV," continues the brief. "Accordingly, if the Court determines that it is only the combination of DirecTV with Turner that tends to cause anticompetitive effects, the Court could tailor a remedy to redress this specific violation of Section 7 that would prevent the combination of those two assets within one corporate entity."

So in the government's view, if the merger goes forward, AT&T could acquire Warner Bros. and HBO/Cinemax, but not CNN, TBS, or TNT. Alternatively, AT&T could acquire all of these networks, but have to divest DirecTV as a condition for acquiring the company.

One thing the government doesn't want is behavioral relief, meaning the sort of regulatory conditions placed on Comcast at the time of the NBCU acquisition. AT&T has proposed it would arbitrate any carriage dispute with a cable or satellite company, but under the Trump Administration, the Justice Department is less interested in policing ongoing commitments.