The Justice Department’s lawsuit seeking to block the AT&T–Time Warner merger, filed this week, has suddenly scrambled political battle lines and set up a historic legal fight in a quickly unfolding showdown. If approved, the merger would create a new entertainment powerhouse, as AT&T uses its distribution channels for Time Warner-owned content like CNN and HBO. If denied, it could set a new precedent for how similar mergers are approached.
Both parties have arguments that lean on years of precedent
Both parties have arguments that lean on years of precedent and context — and recent comments from President Trump may also be a factor. Here’s what you need to know to understand the legal dispute.
The Justice Department’s argument
The Justice Department’s argument, which it lays out in the complaint filed this week, is fairly straightforward: if AT&T is allowed to go forward with the transaction, it will be able to unilaterally price out competitors who might otherwise offer content owned by Time Warner. Anti-competitive deals like that are unlawful, it argues.
AT&T, the Department continues, could increase the price for, say, cable channels, harming every distributor who isn’t AT&T but who wants those channels. Right now, if a price is too high, a distributor of those cable channels can walk away from the transaction. But if the merger were approved, AT&T would be at a distinct advantage: it might be the only distributor offering a package with those channels.
The Justice Department encapsulates the idea early on in its complaint:
If allowed to proceed, this merger will harm consumers by substantially lessening competition among traditional video distributors and slowing emerging online competition. After the merger, the merged company would have the power to make its video distributor rivals less competitive by raising their costs, resulting in even higher monthly bills for American families. The merger also would enable the merged firm to hinder the growth of online distributors that it views as a threat to the traditional pay-TV model.
Some observers have sided with the Department on that thesis. “That the Justice Department should seek divestitures would — absent the Trump effect — seem logical, commendable and a continuation of recent merger practice,” author and Columbia professor Tim Wu wrote in a New York Times op-ed earlier this month.
In a statement, AT&T leaned on antitrust history to suggest that the Justice Department was taking action that was unprecedented in the modern era. Calling the lawsuit “inexplicable,” the company pointed out that the Justice Department has not taken similar “vertical” mergers to court, where the companies don’t directly compete, for decades. In the meantime, the Department approved “hundreds” of such deals, AT&T said.
AT&T has called the lawsuit “inexplicable”
The company also made the claim that the deal would ultimately increase competition, as the landscape is already competitive. AT&T points to both giant corporations like Comcast, as well as streaming services like Netflix, as evidence that consumers won’t be harmed by the merger. “Against this backdrop, there is no realistic possibility that AT&T’s acquisition of Time Warner’s modest portion of a rapidly-expanding content universe could possibly slow innovation or lead to higher consumer prices,” the company said in a statement.
Hanging over the entire lawsuit is President Trump, who has expressed disdain for Time Warner-owned CNN, and has said in the past the he believes the merger should be blocked. As a candidate, Trump said the merger was “a deal we will not approve in my administration, because it’s too much concentration of power in the hands of too few.” Reports said the Justice Department demanded Time Warner divest itself of some properties, possibly including CNN, before it would approve the deal. AT&T has said it wouldn’t make a deal on those terms, and Trump has denied making the decision to intervene.
The situation immediately raised questions about whether the Justice Department’s lawsuit was politically motivated — a way for the Trump administration to damage CNN. Although it’s unclear how well that argument would play out in court, the motivations behind the lawsuit will likely continue to be scrutinized.
While it’s true that the government rarely fights such vertical mergers in court, regulators have not sidestepped involvement in such deals entirely. AT&T notes that its deal is similar to the 2011 merger between Comcast and NBC Universal. The Justice Department ultimately approved that deal, and AT&T argues that its merger proposal is much less controversial.
The Obama administration was fond of “behavioral” antitrust remedies
Still, the Comcast deal didn’t come without strings: regulators imposed several conditions meant to stop the company from using its new power to quash upstarts like Netflix. (Those conditions will finally expire next year.) Harold Feld, senior vice president at nonprofit Public Knowledge, which opposes the deal, notes that divestiture is one possible substitute for “behavioral” antitrust remedies, which the Obama administration was fond of. The current head of the antitrust division has said he doesn’t agree with that approach.
However it turns out, the case will likely become a milestone in antitrust law. A win for AT&T would contribute to a consolidated industry, and likely make related cases harder to win in the future. Similarly, successfully blocking the merger could set the tone for the Trump administration’s future antitrust efforts. “This is certainly a signal that the DOJ is going to be a lot less willing to negotiate and is going to insist instead on divestitures,” Feld says.