Goliath v. Goliath: DOJ, AT&T battle over Time Warner deal
By Kirk Victor Originally published on FTC:Watch on December 1, 2017
The Justice Department’s stunning announcement that it would challenge AT&T’s proposed $85.4 billion acquisition of Time Warner has prompted some praise, some second-guessing and, inevitably, some speculation about what is “really” behind the case.
After all, in months of reporting before the agency filed the lawsuit, not one antitrust lawyer or law professor interviewed by FTC:WATCH saw this lawsuit coming.
They had been quick to note that this was a vertical deal, meaning it didn’t involve a tie-up of competitors. So these veteran practitioners and academics predicted the usual route for such transactions: a consent decree with behavioral remedies to ensure that AT&T would not undermine competition by jacking up prices exorbitantly for its “must have” content or refusing to share it with rivals.
There was no reason to expect any big shift with recently confirmed antitrust division chief Makan Delrahim, who seemed to come out of central casting — a classic Republican who would likely be, if anything, somewhat friendlier to corporate wheeling and dealing than his Democratic predecessors in the Obama administration.
Then stories broke of a standoff between AT&T and the division over government demands that it divest Turner Broadcasting System or DirecTV or face a challenge. Inevitably, speculation followed that the challenge was tied to President Donald Trump, who has contempt for CNN, which is part of Turner Broadcasting. Trump has said the deal is not good for the country and, during the 2016 campaign, even vowed to kill it.
Delrahim has said that he’s had no contact with the White House about the deal. Days before the lawsuit, he made a speech decrying behavioral remedies because they made the division a regulator — “a roving ombudsman of the affairs of business” — instead of a law enforcement agency.
When the lawsuit was filed on Nov. 20, AT&T vowed to fight what David R. McAtee II, senior executive vice president and general counsel, described as “a radical and inexplicable departure from decades of antitrust precedent.”
But is it really so inexplicable? We take a look at some early takeaways from the case, with its sky-high stakes for the future of vertical deals.
* Winning the narrative: Let’s face it, AT&T has outflanked the Justice Department in pushing a storyline that has saturated much of the coverage of this case. That oft-repeated narrative is that the DOJ’s case is a sharp departure from antitrust norms, a “starkly different approach” to antitrust than that of the Obama administration, as The New York Times put it. Lurking in the background in these narratives also are hints of presidential involvement in the decision to challenge the deal.
The media’s willingness to buy that line troubles some. “I have puzzled over…the optics of how this story has been spun,” said Diana Moss, president of the American Antitrust Institute. “The companies have been very, very good at spinning a story which I think the media has gobbled up, that this is a sea change, this is a dramatic shift in policy, this is unheard of, this has never been done. That is just patently false.”
Justice Department officials had their best opportunity to respond and to reshape the debate the day the lawsuit was filed by holding a major, on-the-record, press briefing with Delrahim. Instead, they decided to hold a background briefing with DOJ officials. Nobody from the department went on the record. While many DOJ aficionados may argue that the agency’s job is simply to set out its position in its filings and arguments in court, that view seems a bit naïve or quaint these days. By contrast, Bill Baer, who headed the antitrust division during the Obama administration, held on-the-record briefings to put the DOJ’s story out there.
But don’t hold your breath for much more coming from the Justice Department — except in the courtroom.
* Political topsy-turvy: Suddenly politics is turned on its head with liberals cheering this lawsuit and conservatives blasting it. Democrats who have made stepping up antitrust enforcement a key part of their 2018 campaign platform suddenly find themselves embracing the Trump Justice Department.
“It puts Democratic critics of the Trump Justice Department in a tough place,” Seth Bloom, former general counsel to the Senate Judiciary subcommittee on Antitrust, Competition Policy and Consumer Rights, said in an interview.
In light of Trump’s repeated castigation of CNN, senators even had sought and received assurances from Delrahim that he would maintain his independence. So while this challenge pleases Democratic senators like hard-charging Elizabeth Warren of Massachusetts who “want this deal stopped,” it also makes them “afraid the president ordered it stopped,” Bloom added. Ironically, Warren had even asked Delrahim to recuse himself since she worried that he had prejudged the deal. (See related story by Claude R. Marx: Klobuchar, Warren tout antitrust issues as 2020 presidential election looms.) The lesson, Bloom said, is to “be careful what you wish for because if the government loses this case, how are they ever going to bring another vertical merger case?”
Meanwhile, advocates on the political right are in disbelief that the Trump administration brought a case against a vertical merger. “It’s odd to see the Trump DOJ taking a Carter-era, European-style approach to vertical mergers,”TechFreedom, a free market think tank, TechFreedom, a free market think tank, tweeted. Former Federal Trade Commission member Joshua Wright, a Republican, also tweeted that the case is a stretch: “AT&T/Time Warner challenge falsely framed as choice bw behavioral and structural remedies. Obvious 3rd choice is the longstanding default w vertical mergers based on evidence & experience: NO remedy because no harm to competition.”
* Hot documents: If the complaint is any indication, this is probably not a case that will be decided by damning documents. The DOJ has alleged that if this deal is consummated, then AT&T could target Sling, for example, which provides television over the Internet, as well as other upstart competitors, by refusing to sell them Time Warner’s programming or by charging sharply inflated prices for that must-see content. Turner’s CEO allegedly said, according to the complaint, that his company has “leverage” over Dish, “whose online Sling TV service is ‘shit without Turner.’”
But Bloom is unimpressed. “Quotes are important,” he said. “They need more than those quotes. Funny thing about those quotes is they never say where they came from. What is the date? I think the complaint was pretty thin.”
As for that Turner CEO quote, Gene Kimmelman, president of Public Knowledge and former chief counsel in the antitrust division during the Obama administration, notes that AT&T can distance itself by saying “It is not us,” since the words are attributed to a Turner executive and Turner won’t be a part of AT&T until after the deal is allowed.
The complaint also refers to apparent documents that detail AT&T’s preparation for a meeting with Time Warner executives in which AT&T allegedly expressed hope that after the deal it would be well-positioned to act in coordination with the three other major pay-TV players. The merged company and the other firms “would control a large portion of all three levels of the industry: television studio revenue, network revenue and distribution revenue,” AT&T allegedly said. The incentive of the major pay-TV players will be to “encourage stability,” which the complaint charged meant undercutting competition from other distributors.
In its answer brief, filed on Nov. 28, AT&T tried to allay such concerns by agreeing to mandatory arbitration for seven years after the deal closes to resolve disputes over content access. It also would relinquish its ability to withhold content from a distributor.
Whatever one thinks of such conditions, AT&T’s preemptive move to advance them in its answer brief takes some sting out of the force of the government’s documents that purport to show a firm determined to undercut competition.
* High stakes: There’s no question that the stakes in this litigation are sky high. Kimmelman predicted that if the government loses, “you will see a feeding frenzy of vertical deals…. If I am a content company, I have got to get some transmission in my system, so I have a little bit of both.”
In other words, it will be a signal to major companies, even those not especially eager to do deals, that if they don’t act, maybe someone else will.
On the other hand, if Delrahim prevails, it “is going to put a big chill in transactions in the market for a while,” Kimmelman said. Folks will think, first “‘Wow, there’s a bigger problem on verticals than we ever thought.’” Then they might wonder if this move is targeted just at media deals. Or will Delrahim also take aim at high tech transactions? “He could really put a hold on a lot of consolidation if he wins this case,” Kimmelman said.