The success or failure of the U.S. Department of Justice's lawsuit to block AT&T Inc.'s pending acquisition of Time Warner Inc. may depend on whether the government can show the combined company produces "must-watch content," something which some industry observers argue will be hard to prove in today's fragmented entertainment landscape.
AT&T is looking to combine its nationwide wireless network and nationwide DIRECTV satellite television operations with the cable networks of Time Warner in a transaction valued at $106.40 billion, including debt. But in a lawsuit filed in the U.S. District Court for the District of Columbia, the Justice Department argues the combination would give the resulting entity too much power in the pay TV and online video marketplace, a claim AT&T and others dispute.
Essentially, the Justice Department believes the marriage of "must-watch content," including Turner's live sports content on TNT (US) and TBS (US), with nationwide distribution platforms creates too much incentive for the combined company to "weaken its video distributor competitors by charging them higher prices for Turner's networks, resulting in a substantial lessening of competition."
AT&T executives called these hypothetical harms "pure fiction," with AT&T CEO Randall Stephenson saying during a recent conference call, "Our objective with Time Warner is to take that content and broaden distribution, not to refine and limit distribution." He also noted AT&T is limited in the prices it can charge for Turner networks by competition from online services.
Stephenson is not the only one to argue the Justice Department's lawsuit does not consider the competitive pressures of the evolving media marketplace.
"The complaint completely ignores just how troubled the legacy media sector is today," BTIG LLC analyst Richard Greenfield said in a Nov. 21 blog post. He pointed to "collapsing" TV viewership ratings, adding, "Cord-cutting/shaving/nevering is accelerating, ad dollars are shifting more rapidly toward mobile and the hope was that M&A could provide a solution to the industry's growing headwinds."
Greenfield also questions the Justice Department's characterization of Turner's networks as "must-have" or "must-watch" content. "Investors perceive Turner as the weakest part of Time Warner with a gloomy outlook for all basic cable networks," the analyst said.
Hal Singer, a senior fellow at the George Washington University Regulatory Studies Center and a principal at the Economists Inc. consulting firm, also questioned Turner's must-have status, noting history had proved this false. Specifically, he pointed to the 2014-end carriage dispute between Time Warner and DISH Network Corp.
"DISH went two months without CNN and Cartoon Network, and you look at DISH's subscriber defections and you try to see if there was anything special or horrible," Singer said in an interview. He noted that while the 63,000 net subscriber loss DISH reported for the fourth quarter of 2014 was "bad," it was not ultimately disastrous. In fact, during a November 2014 earnings call in the midst of the dispute, DISH CEO Charlie Ergen said of the Turner blackout, "It's not had a major impact on our business yet."
"So the DOJ can't use that episode, though AT&T will," Singer said, noting the Justice Department instead cites an internal study from DIRECTV involving a "different substantial programmer." That study, prepared in December 2014, estimated "subscriber losses from a blackout of a particular programmer's channels would cost it $10.5 billion over 6 years."
Singer noted most of other "substantial" programmers in the market — such as Comcast Corp./NBCUniversal Media LLC, CBS Corp., 21st Century Fox Inc. and Walt Disney Co. — own broadcast networks, making comparisons difficult. "They [the DOJ] are left to cite these studies that appear not to relate to Turner content. So I think they're in trouble in that regard," Singer said.
Singer also questioned the Justice Department's argument regarding DIRECTV's market power. Specifically, the DOJ lawsuit notes AT&T has "nationwide presence and has a large market share in many regions across the country," controlling "more than 40 percent of [pay TV] subscribers in at least 18 local Designated Market Areas," or local TV markets. Nielsen counts a total of 210 DMAs.
"When you are dealing with national content and your adversaries are national distributors like DISH, I don't know why it matters that DIRECTV's and AT&T's share in a handful of markets is above 40%," Singer said.
Craig Moffett, an analyst at MoffettNathanson, agrees the DOJ lawsuit will face a number of challenges, noting that Congress at one time explicitly banned exclusive contracts for satellite-delivered cable and broadcast programming between cable operators and affiliated networks. But Congress and the Federal Communications Commission allowed those regulations, known as the Program Access Rules, to sunset in 2012. At the time, then FCC Commissioner Ajit Pai, who now serves as chairman of the commission, explained that because of the expansion and new competition in the pay TV market, programmers earn their revenues from licensing content to a variety of distributors.
"This reduces their incentives to forgo licensing fees for programming in the hope of inducing rivals' customers to switch providers. In short, there just won't be a business case for many cable-affiliated programmers to withhold content," Pai said.
Moffett believes AT&T could point to that decision from Congress and the commission, and "argue that it was, in fact, the intent of Congress to eventually allow for vertical integration, not as a threat to competition but instead as the manifestation of an entirely new type of competition."
Steven Levitsky, a lawyer at the antitrust law firm Bona Law PC who has more than three decades of experience as an antitrust and compliance lawyer at major international law firms, agreed the Justice Department has a lot of work ahead of it but noted it is still early days for the lawsuit. He said the Justice Department is undoubtedly already gathering economic models to prove the competitive harms posed by the AT&T/Time Warner deal.
"The government is going to say this is the inevitable consequence, and here's an economist's formulas showing this is going to occur and it will be anti-competitive," Levitsky said, adding AT&T will have its own economists disputing the Justice Department's claims.
"That's the nature of these antitrust cases. In almost every case, you have two economists who are swearing exactly the opposite," he said.

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