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The Weirdness of U.S. vs. AT&T

An important debate over media mergers, or just another attack on CNN?

The first thing to recognize about the antitrust trial over AT&T’s $85 billion plan to buy Time Warner — which begins this week at the U.S. District Court in D.C. – is how fundamentally weird the whole thing is.

Few really understand why the Justice Department decided to challenge the deal that would turn Time Warner’s Warner Brothers studio, HBO, and cable networks led by CNN, TBS, TNT, and Cartoon Network over to the nation’s No. 1 TV distributor (AT&T owns DirecTV) and No. 2 wireless carrier.

The antitrust lawyers portray the companies as key members of a television oligopoly who — in conjunction with others including Disney, Comcast, Fox, CBS and Viacom — could raise consumer prices and limit competition.

Those are compelling arguments, but startling to hear from the Trump administration — especially since they contradict the views that animate the president’s appointees at the Federal Communications Commission. Regulators there want to relax ownership limits, making it easier for companies to merge, on the grounds that traditional media companies face meaningful competition from Silicon Valley Goliaths including Google, Apple, Amazon, and Facebook, as well as Netflix.

To appreciate the vast difference in the DOJ and FCC views consider this: Consumer activists including Public Knowledge and the Consumer Federation of America — who frequently attack the FCC — are rooting for the Team Trump in the AT&T case.

No wonder AT&T and other industry watchers suspect the Justice Department asked Judge Richard Leon to block the deal not over antitrust concerns, but simply to rattle the owner of CNN, which the president frequently attacks as “fake news.”

The trial “is being pursued under a cloud, with a perception — at least by some — that DOJ brought this case at the behest of President Trump in order to punish CNN for what he viewed as unfavorable coverage of his administration,” a group of former government attorneys including former U.S. Attorney Preet Bharara, former White House Counsel John Dean, and former Acting Assistant Attorney General of the Civil Division Joyce Branda wrote in an amicus brief this month. If true, they add, then “it raises serious constitutional concerns.”

Judge Leon ruled last month that AT&T failed to demonstrate that it’s being singled out, all but foreclosing that line of attack in court.

Still, CNN’s centrality to the case might be put to the test if, as expected, the trial runs up to Memorial Day — or beyond. That could leave AT&T unable to close the deal with Time Warner by their contractual deadline of June 21. The entertainment company could agree to an extension, or jettison the plan to see if others might now offer higher bids.

The Justice Department also is taking a big risk. It hasn’t sued to block a vertical merger — one that involves companies that complement, and don’t compete with, each other — since 1977. The government lost that case, involving Hammermill Paper Co.

With so much on the line, it’s easy to imagine AT&T and the Justice Department agreeing to make the court case go away before June 21 — conditioned on a promise by AT&T to sell CNN, and perhaps some other assets.

That would reinforce the view that the Justice Department had engaged in selective enforcement.

Just as bad, it would deprive the public of an opportunity to hear an important debate about whether a new wave of media mergers would make news and entertainment more plentiful and inexpensive, or more scarce and costly.

The Justice Department observed in its pre-trial brief this month that consumers would suffer from an AT&T-Time Warner union because the “vast majority of American households” still subscribe to traditional pay TV services, where the Time Warner properties loom so large. Even more important, the filing adds, “they will continue to do so well into the future.”

AT&T’s brief counters that the Justice Department is looking backward, and misses how much Netflix and other Silicon Valley powers have changed TV. Tech companies’ “disruptive impact” on media “could hardly be more dramatic,” AT&T says.

The tech companies, it adds, are part of a “new video revolution” that has “irreversibly reshaped the landscape for the creation and delivery of television content, pushing all players in the market to respond in numerous ways that benefit consumers.”

Well, perhaps. Nearly 93 million households subscribed to traditional cable and satellite TV services at the end of 2017, Wall Street firm MoffettNathanson Research figures. That’s down 5.3% over the last two years. But the total is only down 1.3% if you include new, lower cost, internet-based TV services, DirecTV Now and Sling TV, created by DirecTV and its satellite rival, Dish Network.

To be sure, the competition from tech companies will intensify. Last year Netflix spent $6.3 billion on programming, with Amazon at $4.5 billion and Hulu at $2.5 billion. Netflix says it plans to go over $8 billion this year, with Apple jumping in with $1 billion. Those are serious numbers.

But there’s a big difference between spending money, and creating enough hits to sustain a business for many years. Netflix is borrowing billions to fund its spending spree, and paying relatively high interest rates on its junk rated bonds.

The “new video revolution” that AT&T sees also might help traditional TV companies. The growing array of $10 a month internet-based subscription video services, including Netflix, buy many of their most popular shows from the major studios. They also sell most of their subscriptions to well-to-do people who want to add options to the traditional pay TV bundle — not to cost-conscious cord cutters.

The media business is changing, but not in ways that anyone can easily predict. For whatever reason, the Justice Department has opened an important debate over how big and complicated we should allow companies that shape news and culture to become. Those arguments now deserve to be aired, not buried under more weirdness.

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David Lieberman

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