By: Monica Carranza
On October 22, 2016, AT&T, Inc. (“AT&T”) announced its decision to merge with Time Warner Cable (“Time Warner”) for an enormous purchase price of $85.4 billion.[1] The two companies cited a “rapidly changing media landscape” for the decision to merge, stating that in order to survive competition with media titans, such as Netflix and Amazon, the merger was a necessity.[2] Through the merger, AT&T would acquire Time Warner’s subsidiaries, such as HBO, Warner Bros Studio, CNN, TBS, and other networks.[3] In November 2017, the Department of Justice (“DOJ”) sued AT&T, Time Warner, and DirecTV Group Holdings, LLC (“DirecTV”), arguing that the merger was harmful to competition and would eventually raise prices for consumers.[4]
The DOJ’s argument envisions the merger as endowing AT&T and Time Warner with increased bargaining power against pay-TV distributors by allowing AT&T to charge companies, like Comcast and Dish, more money for Time Warner services.[5] In the event that these companies refuse to do business with AT&T under such circumstances, AT&T could simply decide to offer networks like CNN and TBS on its own DirecTV, forcing customers to switch.[6] In August 2018, the Federal Communications Commission (“FCC”) submitted an amicus brief which pointed out that the judge’s legal reasoning was flawed, and that a comprehensive review of the filings had not been done, meaning that anticompetitive issues could indeed arise as the DOJ predicts.[7]
The U.S. District Court Judge, Richard Leon, presided over the case and rejected the DOJ’s argument by countering that the merger could actually offer cheaper options to customers, and would let producers learn more about what customers liked, enabling them to target ads better, instead of raising subscription prices for consumers.[8] AT&T completed its acquisition of Time Warner on June 14, 2018.[9] The action signaled to other giants of the media industry that they should follow suit and complete similar deals.[10] Ironically, the DOJ recently approved a similar merger in which Disney acquired 21st Century Fox (“Fox”) with the simple caveat that Disney divest Fox’s sports networks, since an antitrust conflict could arise from Disney’s simultaneous ownership of ESPN.[11] The DOJ reasons that the Disney-Fox merger was a horizontal merger between direct competitors, as opposed to a vertical merger, which takes place when companies acquire complementary businesses, as in the case with AT&T and Time Warner.[12]
As it currently stands, media companies could have much to gain if they are seeking to merge with each other—either horizontally or vertically.[13] Judge Leon’s decision has now set a favorable precedent for vertical mergers.[14] If the DOJ is successful, AT&T and Time Warner will be forced to part ways soon after their union.[15] In its appeal, the DOJ argued that “Judge Leon ignored ‘mainstream economics’ in his decision and refused to see the deal as having ‘an appreciable danger’ of raising prices on consumers in the future.”[16]
While only time will tell whether a demerger is in the newly minted “Warner Media, Inc.’s” future, there are some indications that AT&T is doing the opposite of what it said it would do in court.[17] For instance, AT&T recently raised the prices of DirecTV by five dollars-per-month, despite having argued in court that the merger would in fact lower prices for consumers.[18] HBO was also removed from one of AT&T’s unlimited data plans, administrative fees were raised, and the company announced the launch of a new streaming service at a $15 monthly rate, which is currently a free add-on feature for customers with unlimited plans.[19] Market forces were cited as driving factors in these new service features, but the fact that these changes come so close on the heels of the recent completion of the merger will certainly raise eyebrows in the wake of the DOJ’s appeal.[20]
[1] AT&T to Acquire Time Warner, AT&T (Oct. 22, 2016), https://about.att.com/story/att_to_acquire_time_warner.html.
[2] Rachel Sandler & Skye Gould, Here’s Everything AT&T Will Own After it Buys Time Warner, Bus. Insider (June 14, 2018, 1:41 PM) https://www.businessinsider.com/att-time-warner-acquisition-what-it-will-own-2018-6.
[3] Id.
[4] Complaint at 3, AT&T Inc., 310 F. Supp. 3d 161 (D.D.C 2018) (No. 17-02511); Hadas Gold & Brian Stelter, Judge Approves $85 Billion AT&T-Time Warner Deal, CNN Media (June 13, 2018, 8:11 AM) https://money.cnn.com/2018/06/12/media/att-time-warner-ruling/index.html.
[5] Id.
[6] Id.
[7] Victoria Graham, AT&T Filings Support Justice Dept. on Time Warner Deal, FCC Says, Bloomberg (Aug. 14, 2018) https://www.bna.com/att-filings-support-n73014481737/ (noting that both the DOJ and the FCC cited Judge Leon’s dismissive treatment of a similar merger which used AT&T’s argument calling the argument “less credible,” and of “limited evidentiary value.”)
[8] United States v. AT&T Inc., 310 F. Supp. 3d 161, 173 (D.D.C. 2018); Adi Robertson & Makena Kelly, Why Yesterday’s AT&T and Time Warner Merger Appeal Matters—and Why it’s a Long Shot, The Verge (July 13, 2018, 11:01 AM) https://www.theverge.com/2018/7/13/17566326/justice-department-att-time-warner-merger-ruling-appeal-explainer.
[9] Edmund Lee & Cecilia Kang, AT&T Closes Acquisition of Time Warner, The N.Y. Times (June 14, 2018) https://www.nytimes.com/2018/06/14/business/media/att-time-warner-injunction.html.
[10] Cecilia Kang & Edmund Lee, AT&T-Time Warner Deal Approval Gets Justice Department Challenge, The N.Y. Times (July 12, 2018) https://www.nytimes.com/2018/07/12/business/justice-department-plans-appeal-of-att-time-warner-merger-approval.html; see also Robertson, supra note 8 (explaining that “Judge Leon’s decision encouraged other companies to make merger bids,” and Comcast quickly made a counter-offer against Disney’s plans to merge with 21st Century Fox after the ruling; but the appeal may make Comcast reconsider since it would reverse Judge Leon’s decision, if successful.)
[11] Complaint at 2, AT&T Inc., 310 F. Supp. 3d 161(D.D.C 2018) (No. 17-02511) (arguing that vertical mergers implicate antitrust issues because they violate Section 7 of the Clayton Act, 15 U.S.C. §18, which requires the DOJ to prohibit mergers and acquisitions that might substantially lessen competition or create a monopoly; whereas the Disney-Fox merger can avoid becoming vertical by divesting Fox’s sports networks); Andrew Liptak, Disney Wins Antitrust Approval to Acquire 21st Century Fox, The Verge (June 27, 2018, 12:48 PM) https://www.theverge.com/2018/6/27/17509984/disney-21st-century-fox-acquisition-antitrust.
[12] Robertson, supra note 8.
[13] Id.
[14] See Jon Brodkin, AT&T Promised Lower Prices After Time Warner Merger—It’s Raising Them Instead, Ars Technica (July 2, 2018, 4:22 PM) https://arstechnica.com/information-technology/2018/07/att-promised-lower-prices-after-time-warner-merger-its-raising-them-instead/ (explaining that companies are ready to seize the opportunity for new mergers that this precedent sets, but that the DOJ appeal could reverse the decision, despite that the FCC’s amicus brief simply points out the judge’s error instead of arguing in the DOJ’s favor.)
[15] Id.
[16] Alex Sherman, The Government Just Gave its Explanation for Appealing the $85 billion AT&T-Time Warner Merger, CNBC (Aug. 6, 2018, 4:38 PM) https://www.cnbc.com/2018/08/06/why-the-government-is-appealing-atts-85-billion-acquisition-.html.
[17] Adi Robertson & Makena Kelly, Why Yesterday’s AT&T and Time Warner Merger Appeal Matters—and Why it’s a Long Shot, The Verge (July 13, 2018, 11:01 AM) https://www.theverge.com/2018/7/13/17566326/justice-department-att-time-warner-merger-ruling-appeal-explainer.
[18] Brodkin, supra note 14.
[19] Id.
[20] Sherman, supra note 16; see also Brian Naylor, Presidential Campaigns Blast AT&T-Time Warner Merger, NPR, (Oct. 24, 2016 11:25 AM) https://www.npr.org/2016/10/24/499152454/presidential-campaigns-blast-at-t-time-warner-merger (highlighting that the initial announcement of the merger sparked criticism from politicians who were concerned that the deal created a power imbalance in favor of Warner Media, Inc. by allowing higher prices and fewer choices for consumers). But see Jake Walter-Warner & William F. Cavanaugh, Jr., The Last Time DOJ Sued to Block a Vertical Merger was Over Forty Years Ago… And It Lost, Patterson Belknap, (Jan. 8, 2018) https://www.pbwt.com/antitrust-update-blog/the-last-time-doj-sued-to-block-a-vertical-merger-was-over-forty-years-ago-and-it-lost (recalling United States v. Hammermill Paper Co. in which the DOJ challenged a vertical merger 40 years ago but lost.)
