UPDATE: The Department of Justice on Monday pulled the trigger on the proposed AT&T/Time Warner merger, filing a lawsuit in D.C. federal court to block the $85-billion deal.
Just a week ago, we explained why this transaction poses an outrageous threat to the public interest—a fact that tended to be obscured by President Trump's campaign against CNN, which is owned by Time Warner. Reportedly, the administration was pressuring AT&T to agree to divest CNN after the merger as a condition for approving the deal. AT&T CEO Randall Stephenson responded by denying his company had any inclination or intention to sell CNN as part of the deal.
In a hastily-called press conference Monday afternoon, Stephenson and other AT&T executives strongly defended the deal and questioned the Trump White House's motives for moving against it. They tried to contrast their deal with the 2011 merger of the cable company Comcast with NBCUniversal, which was attacked at the time for its potential to stifle competition in distributing online entertainment and information content, including streaming video and other services. As we noted, those fears were borne out.
AT&T's executive said Monday that Time Warner is a smaller content enterprise than NBCUniversal was, and that competition at all levels of distribution and content creation has intensified since 2011. That's a questionable assertion.
That wasn't the only questionable assertion. Daniel Petrocelli, an outside attorney for AT&T working on the merger, said, that "the TV bill will not go up" as a result of the deal. Reporters in a New York conference room with the AT&T team and tuning in via a webcast and conference call didn't get a chance to get Petrocelli to explain his claim, but obviously there's no way he could possibly guarantee it.
Our Nov. 13 column explaining the drawbacks of the AT&T/Time Warner merger appears in its entirety below:
Given the hand-wringing over the Trump administration's reported demand that AT&T divest CNN as a condition of approving its $85-billion acquisition of Time Warner, CNN's parent, you'd think that Trump was interfering in a merger that could only do good things for the public interest.
But that's wrong. It has been crystal clear since the deal was announced about a year ago that the government should block the proposed merger. Forcing AT&T to sell CNN would be a positive step in averting all the ills that will emanate from the merger, but only a modest step. The companies shouldn't be allowed to combine at all.
Trump's rhetoric about the deal, which dates back to his presidential campaign, has muddled the issues — and may even have increased the chances that the deal will go through with all its negative aspects intact. His administration's alleged demand, delivered via Justice Department antitrust chief Makan Delrahim, that AT&T sell off the Turner Broadcasting portion of Time Warner, and specifically CNN, has been taken as an artifact of Trump's war with CNN over its reporting on his administration.
True, Trump whines about any news organization that reports on him negatively, but he seems to reserve the greatest venom for CNN — who can forget the video he posted on Twitter in July of him supposedly beating up on a figure with a CNN logo for its head at a wrestling event?
"The Trump effect is overshadowing the underlying issues with this deal," says John Bergmayer, senior counsel to the consumer advocacy group Public Knowledge. "We welcome people looking into the issues of political influence over antitrust decision-making, but this is still a deal that should be analyzed on its own merits."
Public Knowledge even joined with a clutch of tea party and other conservative groups to urge Atty. Gen. Jeff Sessions to block the deal unless its harmful aspects can be prevented, an unlikely prospect. "Allowing these firms to join forces," the groups asserted in an Oct. 26 letter to Sessions, "would intolerably limit consumers' control over what they watch and where they get their information."
Let's look at the underlying issues, and then at how Trump has complicated matters.
AT&T is the nation's largest provider of pay-TV (following its 2015 acquisition of DirecTV), as well as its second-largest wireless company and third-largest broadband internet provider. Time Warner is one of the nation's largest content companies, the owner of CNN, HBO, Warner Bros. and the cable channels TNT, TBS, Cartoon Network and Turner Classic Movies, among numerous other entertainment and news offerings.
In antitrust jargon, the deal would be a "vertical" merger, bringing together business at different levels of a given industry, rather than a "horizontal" merger, which applies to deals that bring together two largely identical businesses — two cable firms merging, for example.
Normally, vertical mergers are treated as less anti-competitive than their horizontal cousins, since they don't eliminate a competitor from the marketplace. But mergers of distributors of information and entertainment content with creators of that content raise special concerns. The danger is that AT&T, which owns the internet pipeline into an ever-increasing share of American homes, could use that power to steer its internet customers to its own content and degrade or block competing material.
Kept separate, content distribution companies such as AT&T and DirectTV have an incentive to offer their subscribers the best possible TV package. Content companies just want to create material that will attract the largest number of viewers. Put them together and their business incentives change drastically.
The new AT&T "might not want to give too good a deal to Dish Network (a satellite competitor of DirecTV), because it wants people to become DirecTV customers," Bergmayer argues. "There's not even a question about whether AT&T's TV packages are going to carry Time Warner programming, because of course they are. But that may be at the expense of viewers or competing programmers that might have something better, but aren't even going to be considered."
Up to now, Federal Communications Commission rules promoting network neutrality tended to act against such behavior by mandating that internet service providers give all content equal access to the customer. But under Trump's newly appointed FCC chairman, Ajit Pai, the commission is moving toward scrapping network neutrality principles.
Under Pai, the FCC ceded jurisdiction over the AT&T deal to the Department of Justice — even though the FCC maintained oversight over the merger of Comcast and NBCUniversal in 2011, a smaller deal but one with the same vertical structure.
The prospect is that, if only AT&T complies with the Justice Department's lone politically motivated demand over CNN, the merger will be approved. "Every citizen ought to be interested in finding out if there's been political pressure applied," says former FCC Commissioner Michael Copps, now a senior advisor to Common Cause. "But that shouldn't sidetrack us from the fact that this deal is bad for consumers, bad for competition, bad for innovation, bad for the country in general. It's far too much power for any one company to wield in a democratic society. It ought to be unacceptable on its face."
The usual solution for potential conflicts in vertical mergers has been to impose behavioral conditions. That was the approach that enabled the FCC to wave through the Comcast-NBCUniversal merger. The FCC ordered the merged company not to use its nearly nationwide distribution footprint to squeeze out cable channels or video services that competed with NBC's channels or Comcast's video streaming service.
That didn't work. Content providers have lodged frequent complaints about unfair treatment. Bloomberg, for example, complained that Comcast sequestered its news channel in a hard-to-find ghetto on its cable programming grid, reducing its viewership. Bloomberg won its case before the FCC, but only after two years of litigation.
The Santa Monica-based Tennis Channel also fought a long battle to avoid being isolated in what one might consider the nosebleed section of Comcast's channel lineup, ostensibly to protect Comcast's own sports channels, the Golf Channel and Versus (now the NBC Sports Network), from competition. The FCC's enforcement staff agreed with the Tennis Channel, but it lost its battle in the courts.
One could argue that the FCC finally found a way to punish Comcast for its misbehavior when it effectively killed the company's proposed merger with Time Warner Cable last year. (Time Warner Cable isn't affiliated any longer with AT&T's quarry, Time Warner.) But that happened only after years of complaints about Comcast's behavior. Nor is the same approach likely to work with AT&T.
On the surface, Trump's objection to the AT&T-Time Warner merger might appear to have the same roots as consumer advocates' concerns. But the context of his position statements generally has been undifferentiated anti-media diatribes. A few weeks before the 2016 election, for example, he lumped the AT&T deal together with the ownership of the Washington Post by Amazon founder Jeff Bezos and the ownership of NBC by Comcast. "They're trying desperately to suppress my vote and the voice of the American people," he said. (An NBC production, "Access Hollywood," generated the notorious tape that featured Trump bragging about sexually assaulting women.)
Trump's established animosity toward CNN could give AT&T grounds to fight administration efforts to block its merger in court, as reflecting political influence. Ironically, AT&T was rumored months ago to be shopping CNN to other buyers in a post-merger slimming. The latest reports forced AT&T Chief Executive Randall Stephenson to disavow any such efforts.
"It's important to set the record straight," Stephenson said in a written statement issued in response to reports of the Department of Justice's position on CNN. "Throughout this process, I have never offered to sell CNN and have no intention of doing so." Stephenson's statement may be taken as a signal that AT&T won't capitulate to political pressure, but its refusal to sell CNN could end up being the wrong thing done for the right reason. AT&T shouldn't own CNN — and it shouldn't own any of Time Warner's other content either.