News & Analysis

AT&T/Time Warner Merger on Hold as Antitrust Case Develops

rtx68x3p-779f0e775adba0ef2ddf68615c356d2320140735-s800-c85The Justice Department recently filed anti-trust concerns against the approved merger of AT&T Inc. and Time Warner Inc. Photo: Brendan McDermid/Reuters

Media companies are merging at the fastest pace since the dotcom bubble as the industry faces a major shake-up from technology startups. The recent merger of AT&T Inc. and Time Warner Inc. has made consumers and politicians alike question whether or not the practice of merging international media giants is beneficial for the free market.

AT&T and Time Warner, Fox and Disney, Viacom and CBS: it seems as though every major media company has merged or looking at the possibility of merging to protect its future. These companies are not just unsure but afraid of what the future holds for them. Tech giants like Google, Amazon, and Netflix have dramatically disrupted the pay-TV industry by offering subscription-based, at times even free, streaming services. Traditional media companies, i.e. Fox, CBS, Time Warner, have struggled in recent years as their two primary revenue sources, subscriptions and advertisements, dwindle away. Amazon and Netflix especially are attracting traditional TV customers by offering them programming directly, and doing so by spending billions on content creation. Google and even Facebook are attracting new customers through cheaper, more effective targeted advertisements thus bypassing the need for on-air commercials. Media companies feel that the only way to protect their decline is to get bigger–to “go big or go home”.

The $85.4 billion acquisition of Time Warner by AT&T is very lucrative for both sides. AT&T now owns programming, something it has long sought to do. They are now able to keep HBO, a premium channel of the Time Warner brand, out of the hands of their cable competitors. As for Time Warner, they received tens of billions of dollars. CEO Jeff Bewkes has long been positioning the company for an acquisition of this type. Time Warner is a collection of businesses that make TV shows, movies, and websites, owning high-profile shows like “Game of Thrones” and “The Big Bang Theory.” AT&T has massive growth potential as a result of this deal.

The merger was not approved with ease. The Trump administration’s Justice Department filed a motion to block it due to antitrust and competitive imbalance concerns. They argued that the merger hurts consumers by exposing them to higher fees and reduced competition. The Justice Department argued that AT&T would have, “both the incentive and the ability to raise its rivals’ costs and stifle growth of innovative, next generation entrants that offer attractive alternatives to AT&T/DirecTV’s legacy pay-TV model–all to the detriment of American consumers.” In a study used by the Justice Department in their argument, Jeffrey Eisenach and Timothy Watts found that the merged company would have the ability to force premium channels (i.e., Starz and Showtime) to foreclose and drive up their operating –if they are able to stay in business. Another key point of the Justice Department’s argument was the vertical integration in the video programming industry. As outlined in the same study referenced above, the supply chain for the production and distribution of video programs consists of three layers: film studios produce the content, television networks combine the content, and distributors deliver the content. The merger combines the largest movie studio (Warner Brothers), the largest premium channel (HBO), and the largest video distributor (AT&T) in a vertically integrated firm.  

im-6326U.S. District Judge Richard Leon speaking at Suffolk University. Photo: L. Barry Hetherington/WSJ

U.S. District Judge Richard Leon ruled on June 12th, 2018 that the merger could proceed and encouraged the Justice Department not to seek an emergency stay of his ruling. Judge Leon disagreed with the idea that AT&T would prevent its rivals from competing after it acquires Time Warner. He also rejected the arguments that AT&T can restrict rival’s access to Time Warner’s HBO and that the post-merger company could hinder rival startups from offering video content on the internet. AT&T general counsel David McAtee said in a statement, “We look forward to closing the merger on or before June 20th so we can begin to give customers video entertainment that is more affordable, mobile, and innovative.” The ruling broke a streak of Justice Department victories on antitrust cases, including the blocking of health insurance mergers such as Anthem Inc.-Cigna Corp. and Aetna Inc.-Humana Inc.

On August 6th, new developments relating to the merger arose, as the Justice Department filed a 73-page brief with D.C. Appeals Court. They state that Judge Leon “erroneously ignored fundamental principles of economics and common sense” and that “it disregarded the foundational principle that a corporation with multiple divisions operates them to maximize the corporation’s overall profits.” David McAtee, AT&T’s General Counsel, dismissed the filing saying, “appeals aren’t do-overs.” AT&T’s response brief is due on September 20th.


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