After one more delay (as a snowstorm pushed back opening arguments), Thursday’s unofficial kickoff to the United States v. AT&T in federal court in Washington means the heavy cloud of uncertainty shrouding the media business gets closer to dissipating.
The legal fight over the AT&T-Time Warner merger hasn’t brought deal flow to a halt, as many initially predicted, but it has ushered in a period of profound disorientation for everyone from creative talent to the executive suite. A big part of the issue has been the seemingly endless length of the march toward the biggest antitrust case since the U.S. v. Microsoft a generation ago. It has been 17 months since AT&T first announced it planned to buy Time Warner for $85 billion in one of the largest corporate mergers in history. The U.S. Department of Justice, which seemed poised to approve the deal, abruptly reversed course last November, suing AT&T in an attempt to block the deal.
Initially, political allegiances were thought to have driven the DOJ decision. President Donald Trump, after all, has openly sparred with CNN and the narrative quickly took shape that Trump was punishing the cable news network’s owners by creating a bureaucratic bottleneck. Pressed to comment at various points, from his candidacy to aboard Air Force One, he has managed only sideswipes at the deal as being “not good for the country” because of its size. Soon, though, the focus has moved past the unproven theory of Trump meddling. AT&T chief Randall Stephenson, while saying he found the coincidence curious, has insisted no one from the government ever asked that AT&T leave CNN behind in the deal. U.S. District Judge Richard Leon, who is overseeing the case, further sidelined the matter when he ruled that AT&T could not access emails and other evidence that might have established an improper level of co-ordination between the White House and DOJ officials.
Along with some mind-numbing stretches exploring the fine points of structural remedy and other antitrust philosophies, there will likely be flashes of genuine drama over the next six to eight weeks. High-ranking executives from a range of media and tech companies will be called to testify about the potential impact of the merger. Pre-trial filings suggest that the combined witness list will include companies like YouTube, Comcast and Cox Communications. Stephenson and Time Warner chief Jeff Bewkes are expected to attend the opening arguments Thursday, as the government lays out its contention that the merger would harm customers and rivals.
AT&T’s counter is partly that it has already vowed to submit to arbitration, rather than blacking out any channels or forcing customers to switch to DirecTV. It also says that in a world where tech giants like Google and Amazon are delivering an array of programming direct to consumers, the government’s notion of harm is out of touch. Lead attorney Daniel Petrocelli has called the government’s case “fake antitrust” and says there is “no credible evidence” it would cause any harm. In fact, by bundling together Time Warner’s HBO with skinny-bundle service DirecTV Now at a discount, the company is actually saving money, while HBO can still continue to make whatever other carriage deals it wants with other operators.
Casting a long shadow over the trial will be the government’s 2010 approval of Comcast’s acquisition of NBCUniversal, which came with a host of conditions attached. Judge Leon ruled on that landmark combination as well, just as he will decide the fate of AT&T and Time Warner.
Many analysts and observers see AT&T prevailing, though perhaps with conditions. The fact that months rolled by between the suit filing and the start of trial without a settlement likely increased the government’s chances. “Our math suggests that NBCU’s affiliate fees (the best example of content/distribution leverage) have grown at a slower rate than the cable net universe since its deal with Comcast,” UBS analyst John Hodulik wrote in a recent report. “Claims in the DoJ brief that AT&T could work with Comcast to keep content off of vMVPDs and use HBO against competitors do not reflect the realities of the OTT world, in our view.”
Michael Smith, a media professor at Carnegie-Mellon, told Deadline the case will spotlight the existential race that is being run across media, technology and entertainment to evolve quickly enough to avoid a newspaper- or radio-style meltdown. “The whole case turns on this idea of, what is the relevant market?” he said. “We used to define the market by households served by MVPDs. But we know now that it’s wide open. … Content isn’t scarce anymore.”
And what would happen if the DOJ were to win? What would the potential impact be on other pending deals, most notably Disney’s planned acquisition of most of 21st Century Fox?
Hard to say for sure — the head-scratcher about all of this is that it’s occurring as an effort of a Republican White House which has been explicitly pro-business and anti-regulation. But if the court were to find that there is harm in a combination of AT&T’s distribution might and Time Warner’s deep well of content, the same could well be said in many other cases. The idea of Disney owning both ESPN and a portfolio of regional sports networks inherited from Fox, for example, suddenly looks a lot shakier in that light.
Fortunately for Time Warner, it has continued to put up strong numbers and its stock price has held steady through all of the turmoil. “The need for scale in direct-to-consumer [DTC] would make TWX assets attractive if deal is blocked,” Hodulik wrote. “With traditional TV subscriber declines accelerating and viewership migrating to online providers (viewership within the 18-24 demographic has declined 50% since 2010, down 14% in 2017 alone), OTT is clearly the future of video distribution.”