The trial over the Justice Division’s lawsuit to dam AT&T’s buy of Time Warner, which is able to attain its conclusion when a choose declares his ruling Tuesday afternoon, is not only in regards to the mixture of two huge corporations. It’s about tectonic shifts within the media and expertise industries. It is about how and the place we devour content material and it is in regards to the knowledge that corporations like Netflix, Fb and Amazon acquire on viewing habits and shopper habits that offers them a leg up over corporations like Time Warner and AT&T.
The trial can be a landmark for all the trade, as corporations like Disney, Fox and Comcast wait to see how the choose guidelines earlier than shifting forward with their very own mega offers. If AT&T and Time Warner win, it’s going to probably be full steam forward. But when the ruling falls within the Justice Division’s favor, a brand new period of presidency scrutiny over a lot of these mergers may freeze additional consolidation within the trade.
The lawsuit landed like a bomb when it was filed on Nov. 20, 2017, greater than a 12 months after the 2 corporations introduced the deal.
Authorities fits of this sort are uncommon, particularly in so-called “vertical” mergers — that’s, the mix of two corporations that don’t immediately compete with each other. Time Warner is a content material producer whereas AT&T is a content material distributor through its DirecTV satellite tv for pc companies and cell phone enterprise. It is like a pipe producer shopping for the corporate that creates the fabric that flows via the pipes. The final time the federal government sued to cease a “vertical” merger was within the 1970s.
The ultimate determination rests solely on Choose Richard Leon. Leon’s ruling will rely upon whether or not he finds that the acquisition would violate antitrust legal guidelines, which prohibit mergers or acquisitions that inside “affordable chance” are more likely to reduce competitors.
Leon has repeatedly famous the magnitude of the case and its significance “to the way forward for the trade,” and mentioned that he expects his written opinion to be tons of of pages lengthy.
Leon just isn’t restricted to ruling “sure” or “no.” He may primarily pressure a 3rd choice, by which he tells AT&T and Time Warner he’d permit the deal to proceed, however provided that the businesses make sure modifications to the transaction.
That would contain so-called “behavioral cures,” like requiring AT&T and Time Warner comply with sure situations that can assist decide how they negotiate contracts with distributors.
Leon may additionally impose “structural cures,” like declaring that with a view to full the deal, AT&T couldn’t be a majority proprietor of Turner, the Time Warner subsidiary that owns CNN. The Justice Division has prompt that Leon pressure the businesses to divest part of the newly merged entity — both AT&T’s DirecTV satellite tv for pc subsidiary or the Turner networks — to ameliorate the antitrust issues. However the Justice Division supplied this feature to AT&T and Time Warner earlier than the lawsuit was filed and the businesses rejected the thought, saying it will defeat the aim of the acquisition.
Both facet can attraction the choice, which might then deliver the case to the D.C. Circuit Court docket of Appeals. If Leon doesn’t rule within the Justice Division’s favor, it will probably ask that both Leon or the appeals court docket subject a keep, forcing AT&T and Time Warner to attend additional earlier than finishing the deal — and since June 21 is the deadline for the deal to shut, if a keep is issued, the deal as it’s presently structured may then crumble.
The Authorities’s Case
The Justice Division argued that if it had been to personal Time Warner, AT&T would cut back competitors in 3 ways: Elevating the prices of Time Warner’s content material to AT&T’s rivals, limiting rivals’ use of Time Warner’s HBO community as a promotional device, and impeding innovation unilaterally or via coordination with Comcast-NBCUniversal.
The DOJ’s attorneys spent a lot of the six-week trial centered on the primary allegation. They argued that buyers demand that their cable or satellite tv for pc suppliers carry Time Warner’s Turner networks, together with CNN, TNT and TBS, due to the content material they present, like reside sports activities and information. Proudly owning these networks would give AT&T a bonus in negotiations with rival suppliers, the federal government argued. AT&T may demand that these rivals begin paying extra to hold the channels, and in the event that they refuse to take action, AT&T would threaten to stroll away as a result of then customers would change to AT&T’s personal DirecTV. That may result in increased costs general, which might harm the aggressive market and customers, the federal government’s attorneys alleged.
“If AT&T acquired Time Warner, Turner’s leverage would improve as a result of it will have the nation’s largest [multichannel video programming distributor] with it within the trenches,” the Justice Division’s staff wrote in its post-trial transient, utilizing the trade time period for a cable firm. “The choice to an settlement in each negotiation with a rival [distributor] could be higher for the merged agency as a result of and not using a deal, DirecTV would steal helpful video subscribers away from that rival.”
The DOJ additionally argued that AT&T would need to restrict its rivals’ use of HBO as a promotional device, like providing it totally free to potential prospects — if rivals like Cox and Constitution cannot use status reveals like “Sport of Thrones” to entice prospects to enroll, the federal government argued, DirecTV can, giving it a bonus.
The federal government additionally alleges that AT&T would coordinate with the one different vertically built-in media and distribution firm, Comcast-NBCUniversal, both explicitly or via public posturing, to impede the innovation of recent on-line streaming companies by withholding or limiting the usage of their content material.
The Justice Division referred to as dozens of witnesses — everybody from key staff of rival distributors to AT&T and Time Warner executives — to bolster its case. Crucial witness, although, was economics professor Carl Shapiro from the College of California at Berkeley, who used an financial mannequin to foretell that prospects would expertise a value improve of between $235 million and $561 million general — that’s, lower than a greenback per buyer per 30 days.
AT&T and Time Warner’s Protection
AT&T and Time Warner say the deal is all about competing with “FAANG,” an acronym for Fb, Apple, Amazon, Netflix and Google.
“The vertical integration of AT&T and Time Warner will allow the mixed firm to answer the challenges posed by the present transformation of the video market and, in so doing, deliver higher merchandise and higher worth to customers,” AT&T and Time Warner attorneys wrote of their post-trial transient.
The FAANG corporations, AT&T and Time Warner attorneys notice, are actually deep into the content material recreation. And never solely are they creating progressive and standard applications (assume “Stranger Issues” and “The Marvelous Mrs. Maisel”), they’re additionally gathering reams of knowledge on their prospects, permitting them to grasp shopper preferences. Time Warner has mentioned it is hobbled by not having data on its viewers. Not like Netflix, Time Warner would not know who precisely is watching what, when and for the way lengthy, or what they watch after their favourite reveals finish. With AT&T, Time Warner says it might have entry to that data and can be capable of higher serve prospects by creating the content material they need. The businesses additionally declare that this helpful shopper knowledge may even assist them promote focused advertisements, which may decrease shopper’s cable payments as a result of the corporate would wish to cost much less as a result of they’re making extra money from advertisements.
Legal professionals for AT&T and Time Warner frolicked in court docket on a counterintuitive tactic, making an attempt to argue that Time Warner’s content material is not really as standard as the federal government says, in an effort to downplay how a lot distributors really depend on Time Warner content material.
The protection additionally spent a substantial period of time in the course of the trial making an attempt to forged doubt on Professor Shapiro’s research, on all the pieces from the info and mannequin he used to the precise outcomes he discovered. Even when the info and mannequin had been appropriate, AT&T and Time Warner’s attorneys mentioned, the outcome was statistically insignificant and claimed Shapiro couldn’t show it will really occur.
Most significantly, the concept the newly merged firm would ever comply with via on the risk to withhold its content material is “absurd,” the attorneys for AT&T and Time Warner wrote of their post-trial transient, as a result of the corporate wouldn’t be capable of “financially tolerate the lack of programming offers and so can not wield a critical risk of strolling away from the desk.” Dropping programming offers with a distributor, even for one month, would value the corporate tons of of hundreds of thousands of dollars in misplaced subscriber charges and advertiser offers, they mentioned.
CNNMoney (New York) First revealed June 11, 2018: 9:50 PM ET