WASHINGTON--A federal judge on Tuesday gave the green light to proposed AT&T-Time Warner merger in a case that could change not only the media landscape but the future of business consolidation across the board.
The decision by U.S. District Judge Richard Leon allows the deal—which was proposed in October 2016 and is now valued at $80 billion—to proceed and gives impetus to Comcast to move forward in its attempted disrupted takeover of 21 Century Fox, which is also being courted by Disney in an all-stock deal worth $52.4 billion.
Judge Leon excoriated the U.S. Dept. of Justice, which had stepped in to oppose the merger last year on the grounds that it represented a "vertical merger" between the two companies that would threaten competition. The DOJ claimed that the merged company—which would combine such popular Time Warner properties as CNN and TBS with the nation’s largest pay-TV distributor—would gain an unfair advantage in negotiations with multichannel video program distributors and the fast growing market for “virtual” streaming services such as AT&T’s DirecTV Now, DISH’s Sling TV and Google’s YouTube TV.
''SMALL WONDER'
AT&T argued that the merger would increase innovation and competition at a time when the combination of video and the internet has revolutionized the television industry in ways unseen since its origin. Judge Leon noted that the case illustrated a commonly held notion both in and outside the Beltway—that federal regulators are woefully behind the curve when it comes to keeping up with the impact that technical innovations have on the American consumer market.
“If there ever were an antitrust case where the parties had a dramatically different assessment of the current state of the relevant market and a fundamentally different vision of its future development, this is the one,” Judge Leon wrote. “Small wonder it had to go to trial!”
Judge Leon said that the DOJ had failed to prove its case that the merger would increase Turner’s bargaining leverage in affiliate negotiations, arguing that a merged company would not increase the likelihood of “blackouts” and that the DOJ’s argument that Time Warner content is considered “must have” to pay-TV operators.
[Read: DOJ Suing To Block AT&T-Time Warner Deal]
“The evidence showed that distributors have successfully operated, and continue to operate, without the Turner networks or similar programming,” Judge Leon said. “The evidence indicated that the term 'must have' is a marketing phrase used by virtually every programmer to suggest its programming is popular with viewers.”
Despite what many considered a lack of precedence in the ruling, Judge Leon did cite three previous cases where distributors aligned with programmers and the result was not what regulators feared: News Corp’s partial acquisition of DirecTV in 2003, which it spun off in 2008; the 2009 split of Time Warner’s programming business with Time Warner Cable, and Comcast’s acquisition of NBC Universal. “Those instances of prior vertical integration did not affect affiliate fee negotiation or content prices," Judge Leon wrote.
THE REACTIONS
AT&T said it was “pleased that, after conducting a full and fair trial on the merits, the court has categorically rejected the government’s lawsuit to block our merger with Time Warner. We thank the Court for its thorough and timely examination of the evidence, and we compliment our colleagues at the Department of Justice on their dedicated representation of the government.”
The merger, which faced a deadline of June 21 before it would result in a $500 million breakup fee is set to go ahead unless DOJ appeals, which it has not decided on yet. Nevertheless, consumer and cable lobbyists noted their opposition to the decision.
Common Cause called it a “horse-and-buggy decision blind to today’s communications marketplace. The court’s decision blessing of the AT&T/Time Warner merger creates a communications behemoth that that will raise prices for consumers, curb innovation, and reduce the amount of independent and diverse programmers in the video marketplace.
The American Cable Association, an organization of small- to mid-sized cable operators warned of the negative consequences of the decision. “When a single firm owns both video distribution and programming assets, a major competitive harm that arises is that the vertically integrated firm will have both the incentive and ability to disadvantage rival distributors by raising the prices it charges these rivals for programming,” it said. “This harms consumers because a share of these price increases are passed through to them.”
Gary Arlen, president, of Bethesda, Md.-based Arlen Communications research firm and contributor to TV Technology echoed Judge Leon’s contention that federal regulations are not keeping up with technical innovation, adding that it’s time to overhaul Congress’ Communications Act that was passed more than two decades ago
“The 1996 update barely mentions the Internet, yet developments during the past two decades have changed the ways that broadcasters, cable and ‘telephone’ companies operate,” Arlen said.” They all deliver the same Internet Protocol technologies via both wired and wireless platforms. AT&T/Time Warner functions in conduit and content realms [formerly two separate categories in communications policy], just as broadcast networks and their O&O stations do since the demise of fin/syn rules. In other words, the multiple lines of business covered by the Act are increasingly indistinguishable and should be regulated along similar lines: the ‘level playing field’ and possibly with the ‘light touch,’ to parrot the politicians' lingo.
“Realistically, any such omnibus overhaul is unlikely in the foreseeable future, given the financial and lobbying clout of the various sectors who want to play by their own rules,” Arlen continued. “Yet a major reexamination of the law - no matter how long it takes - would be preferable to all the constant, minor [and as in the case of net neutrality, major] adjustments that we now see.”
Observers think this decision will encourage more consolidation (and disruption) in the media market, between vertical markets. "The floodgates will open," Bank of America Merrill Lynch Analyst Jessica Reif told the Wall Street Journal.
