The Justice Department’s case against AT&T Inc.’sT -0.37% planned
acquisition of Time
Warner Inc. TWX -0.90% has
shown signs of strain after a grueling trial, highlighting the difficulty of
challenging a merger involving companies that aren’t direct competitors.
A key government witness drew skepticism from the judge, and five weeks
of testimony turned up few major revelations from senior executives. Closing
arguments, set for Monday, give the Justice Department a final chance to frame
its arguments and AT&T an opportunity to cement its gains. It also provides
a venue for U.S. District Judge Richard Leon, who is deciding the case, to
further signal his thinking, although he isn’t expected to rule for several
weeks.
The trial marked one of the biggest antitrust cases in decades and the
stakes are high. Should the Justice Department lose, it could embolden
companies, including in the media industry, to pursue more transformative
deals. A government loss also could prompt it to shy away from future lawsuits
against vertical mergers, which combine companies that operate at different
rungs of the same industry ladder.
Meanwhile, a win for the Justice Department would give antitrust
enforcers additional momentum and new court precedent for pushing back against
mergers at a time of continuing industry concentration. It could also become a
defining legacy for antitrust chief Makan Delrahim, who made the decision to sue AT&T within weeks of taking office.
The Justice Department filed suit to block the $85 billion deal last November. The merger would
vertically integrate AT&T’s extensive pay-television business, including
its DirecTV satellite service, with Time Warner’s movie and television
programming, which includes HBO and the Turner networks. That, the government argued, would give AT&T both the incentive
and ability to charge higher prices for Turner networks such as TNT, TBS and
CNN, because, it contended, rival pay-TV distributors must have them for their
lineups.
Judge Leon, however, has focused less on theoretical incentives than on
what will actually happen if the merger is approved. AT&T and Turner
executives testified that they couldn’t credibly threaten to withhold Turner
programming from rivals because the networks’ profitability depends on wide
distribution.
The Justice Department’s chief economic expert, University of
California, Berkeley, professor Carl Shapiro, disagreed, saying AT&T would
have newfound leverage because its DirecTV arm would pick up new subscribers if
Turner was blacked out on rival services.
“So that’s an assumption you’re making?” Judge Leon asked the economist.
“Yes, it is,” Mr. Shapiro responded.
“But you don’t have an independent basis of evidence for that?” said
Judge Leon.
“That is fair,” Mr. Shapiro said, adding that it would be perilous to
assume that merging companies won’t use their combined assets to maximize
profits.
AT&T and Time Warner pointed favorably to the 2011 vertical mergerof Comcast Corp. and
NBCUniversal, saying there is no indication that Comcast has tried to leverage
its control of NBC to force other pay-TV distributors to pay more for the
content.
The government called two Comcast witnesses, but that proved to be a
strategic conundrum. The department used the testimony to present Comcast data
showing the importance of the Turner networks to customers, the higher prices
Comcast paid for Turner in recent negotiations, and the potential subscriber
losses to Comcast if there was a blackout.
But the Comcast officials also testified they hadn’t used their NBC
purchase as leverage in contract negotiations, and they disputed one of the
Justice Department’s central allegations—that Comcast and a postmerger AT&T
would dominate the industry, stifling innovation and competition.
One challenge for the Justice Department’s case emerged only after it
filed the lawsuit, when AT&T promised to arbitrate any Turner fee disputes
with rivals in case of an impasse. The company made the offer a week after the
case was filed.
Judge Leon has expressed interest in whether the arbitration offer,
good for seven years, would address concerns about anticompetitive Turner fees.
When some AT&T rivals such as Charter CommunicationsInc. suggested the arbitration
offer wasn’t good enough, the judge floated the possibility that it could be
strengthened.
The judge’s interest could cut both ways. It suggests he might not be
eager to block the deal, but could also mean he believes the merger raises
competition concerns that need to be fixed.
The arbitration promise isn’t the only way AT&T has shifted the
ground since November. When Chief Executive Randall Stephenson testified on
April 19, he said the government was off-base in arguing AT&T wanted to
protect its traditional pay-TV business and prevent cheaper, online
innovations. As evidence, he unveiled a new product on the witness stand: a
“skinny bundle” of channels that AT&T would make available for nationwide
streaming at $15 a month.
“These are the kind of things we’re motivated to do as a distributor,”
Mr. Stephenson said.
Still, the trial wasn’t all adversity for the Justice Department.
One new market development could help the government. After the lawsuit
was filed, AT&T noted that Google’s YouTube TV service launched its
streaming video package without Turner—a sign, AT&T said, that Turner
programming wasn’t a “must have.” But since then, YouTube has added top Turner
channels to its lineup, and a Turner executive on the witness stand conceded,
“They were anxious to have us.”
Elsewhere, AT&T rivals such as Charter, Cox Communications Inc.and Dish Network Corp. were
unequivocal in testifying to serious concerns about the deal.
The department likewise elicited testimony that raised questions about
the fairness of arbitration, and whether AT&T and Time Warner can meet one
of their central goals for the deal: the creation of a new marketing platform
that will allow the sale of targeted ads to customers based on their viewing
preferences and other personalized data.
After the Justice Department had a solid morning in court recently, Don
Kempf, a member of the antitrust division’s front office, ambled into the court
cafeteria with a smile on his face and urged his colleagues to press on.
“Home runs from here on out,” he urged a table of government lawyers who
were having lunch. “No more bunt singles.”
It is possible neither side will give up the fight if they lose. Both
the Justice Department and AT&T have had appellate lawyers in the courtroom
keeping a close eye on the proceedings. But time pressures also loom: AT&T
and Time Warner’s merger agreement expires June 21, and any appellate case could stretch months
longer.
Click here for the original article form The Wall Street
Journal.