Update: On Monday, November 20th, the DOJ's Antitrust Division increased the stakes in its consideration of the AT&T/Time Warner merger, when it filed a lawsuit opposing the merger in the U.S. District Court for the District of Columbia. DOJ asks that the court permanently enjoin AT&T and Time Warner from carrying out the proposed merger and related transactions. This litigation to stop a vertical merger marks a significant departure from U.S. antitrust policy in recent years, which has generally permitted vertical mergers like that proposed by AT&T and Time Warner. Moreover, it highlights the problems created by AT&T and Time Warner in not having availed themselves of the FCC's public interest review to address publicly over the last year many concerns articulated about the merger. AT&T has immediately responded that it will defend the merger and confidently predicts victory. But the bottom line is that what was once a sure thing – the approval of AT&T's $85.4 Billion entry into the content production business – might not come to pass.
- Unexpectedly, AT&T and Time Warner now face the possibility of structural remedies like divestiture to satisfy antitrust concerns about the proposed purchase.
- The likely outcome at the FCC, where there is likely a majority to approve the deal, would have been behavioral remedies to check potential anti-competitive activities (as in the Comcast/NBC Universal merger), instead of possible divestiture of DirecTV or CNN.
- Avoiding the FCC's more open public interest standard inquiry might now cost AT&T considerably more than the delay that FCC review would have entailed because the proposed merger is in the hands of a regulator who believes only in structural conditions like divestiture.
As the old proverb goes, for want of a nail, the shoe was lost; for want of a shoe, the horse was lost; and on until the battle was lost. In AT&T's case, for want of the FCC, the battle to acquire Time Warner might now be lost.
Suddenly, AT&T's $85.4 billion deal to purchase Time Warner Communications and its marquee programming channels and studio, which seemed like a sure thing only a few weeks ago, has run into significant regulatory difficulties. As reported during the week of November 6th, the U.S. Department of Justice has raised the prospect that AT&T will have to divest either the Turner Broadcasting unit, which includes CNN and other popular channels, or its DirecTV business.1
This was not the way it was supposed to be, according to the AT&T/Time Warner script.
When the merger was announced in late October 2016, AT&T confidently predicted that the deal would get the regulatory "green light." Time Warner had various radio licenses, which would normally require that the Federal Communications Division ("FCC") grant applications for a transfer of control to AT&T;2 the FCC requires a finding that the transaction would serve "the public interest, convenience and necessity."3 Approval prior to merger would also be needed from the Antitrust Division.4 Nonetheless, the parties portrayed the deal as a classic "vertical" merger that removed no competitors from any market. They denied that the merged company would be too powerful. Furthermore, DOJ and FCC had allowed a similarly large vertical merger to proceed in 2011 when Comcast was permitted to acquire NBC Universal from General Electric.
Prior to the 2016 presidential election, then candidate Donald Trump famously opposed the merger. "As an example of the power structure I'm fighting, AT&T is buying Time Warner, and thus CNN, a deal we will not approve in my administration because it's too much concentration of power in the hands of too few."5 Yet notwithstanding the President's comments it was generally thought that the merger would be approved.
However, shortly after the election, the script for the merger began to change regarding FCC review. Some commentators suggested that the parties could accomplish the merger without getting FCC approval and that AT&T could simply offload Time Warner's one remaining television station license while avoiding the FCC's "public interest" review,6 even though Time Warner and its various subsidiaries like CNN and HBO held FCC licenses. AT&T, chastened by its failure in 2011 before the FCC to acquire T-Mobile in a horizontal merger,7 wanted to avoid FCC review, if at all possible.
By February 2017, Time Warner was reporting to the Securities and Exchange Commission that it did not plan to transfer any of its licenses to AT&T, so that it would not need to seek FCC approval.8 In a letter to U.S. Senator Al Franken and other Senators who had expressed some concerns about the deal, AT&T wrote: "Although our plans are subject to change, we currently anticipate that Time Warner will not need to transfer any of its FCC licenses to AT&T to maintain its business operations. Almost all of Time Warner's existing licenses are used only for internal communications anyway; they do not provide FCC-regulated services to the public."9 Indeed, even FCC Chairman Ajit Pai commented that he did not expect there to be any FCC review of the transaction because there were no licenses being transferred, leaving DOJ as the sole federal agency reviewing the transaction.10
Then President Trump nominated Makan Delrahim to be Assistant Attorney General for Antitrust. With Delrahim, who had commented favorably on the transaction when the deal was announced, overseeing the review, it was thought that the megamerger would sail through the Antitrust Division.
Curiously, few questioned AT&T's suggestion that there was no role for the FCC because the licenses did not themselves provide service to the public. The Communications Act applies to all radio licenses, not just those that are intended to provide direct service to the public.11 In fact, Time Warner's Turner Broadcasting unit itself had been cited and fined by the FCC in 2010 for failure to obtain prior approval for transfer of licenses related to an internal reorganization.12
Any assumption that the merger was on a fast track to approval overlooked several important factors, including the politics of the deal and general concerns about changes and consolidation in the media and Internet markets. For example, all along there has been considerable bipartisan political opposition to AT&T's acquisition of Time Warner. Leading Republican members of Congress (e.g., Senators Chuck Grassley and Mike Lee) have spoken skeptically of the merger. Congressional opposition ranges across the aisle to include left-of-center Democrat members of Congress like Senator Elizabeth Warren. In addition, the same public interest groups that had pushed back against the 2010 acquisition of NBC Universal by Comcast, including Public Knowledge and Free Press, opposed the AT&T deal.
By contrast, the 2010 acquisition of NBC Universal by Comcast Corp. engendered essentially no Republican opposition and very little on the Democrat side of the aisle. As a result, despite a very active airing of the issues, particularly at the FCC, the transaction was approved, albeit with some behavioral conditions imposed by both DOJ and the FCC. These conditions related to incentives that might exist for Comcast to favor NBC Universal programming now to be owned by the merged entity.13 Importantly, when DOJ approved the Comcast/NBC Universal merger in 2011, it imposed no divestiture obligations on Comcast. In contrast to AT&T, the opposition to Comcast was essentially by programmers and public interest providers, as opposed to politicians.
In the AT&T deal, the realization that two companies will control nearly two thirds of high speed broadband capacity, plus programming, has also raised far greater concerns than the Comcast transaction seven years ago. For example, Comcast and AT&T already control 62.3% of the high-speed internet broadband capacity, evidencing their significant market power and potential ability as internet service providers (ISPs) to engage in foreclosure strategies against competitors.14 AT&T's dominance in the wireless market is also considerable. "Competitors" today include not only other providers of traditional television programming, but also Google, Facebook and other internet companies that depend on ISPs like Comcast and AT&T to connect their users.
Public interest groups and content providers have again raised the concern that like Comcast before it, AT&T will now itself be a programmer with an incentive for anti-competitive behavior. Post-merger AT&T, like Comcast, will include networks that could be considered close substitutes for a much larger set of unaffiliated programming than is currently the case. Thus, AT&T would be in the same position to engage in foreclosure strategies that was the basis for the FCC's concluding that Comcast could harm producers of programming,15 particularly those not affiliated with other cable providers and ISPs. In 2011, the solution for Comcast was that both the FCC and DOJ included behavioral conditions to protect against anti-competitive harms.
Today in 2017, concern has been expressed, including by regulators, that these behavioral remedies have not been all that successful in preventing abuses. In addition, some officials at DOJ are apparently "frustrated with what they viewed as a campaign by the companies to create a sense of inevitability around the deal's approval."16 Moreover, DOJ's Delrahim has criticized so-called behavioral remedies to address concerns about a merger, preferring that companies be required to sell off assets instead.17 So, AT&T might have left itself in a position where (a) there has been no transparency in the review process, (b) the agency that would impose behavioral remedies is on the sideline, (c) the political landscape has turned against mergers of this kind and (d) the principal regulator is an opponent of behavioral remedies used in the past to condition mergers. This situation might have been avoided if AT&T had bit the bullet and gone to the FCC so that it along with DOJ would have reviewed this merger.
By avoiding the FCC altogether, AT&T and Time Warner have bypassed the public scrutiny that the FCC's public notice and comment procedures require, but also foregone the "safety valve" that would have been provided by this same public airing of the issues, including the type and scope of behavioral remedies that had been applied to the Comcast merger approval in 2011. Moreover, the FCC's emphasis on public interest issues might have taken pressure off DOJ to look at more drastic alternatives like divestitures of key assets, including CNN or DirecTV.
If the AT&T/Time Warner merger fails, it will not be because of President Trump's public feud with CNN and his Tweets about "fake news." Even AT&T's CEO has acknowledged that would not be the case. It will probably be because AT&T tried to avoid the hothouse of public scrutiny at the FCC, where the FCC would have imposed conditions on future conduct of AT&T, and instead will end up with unacceptable conditions from the DOJ like divestiture. For want of the FCC, the merger might be the battle lost.
1 "Regulators Seek Significant Asset Sales in AT&T Deal for Time Warner," Wall Street Journal, Nov. 8, 2017.
2 47 U.S.C. § 310(d).
4 15 U.S.C. § 18a.
5 "Trump's Victory Could Threaten AT&T's Purchase of Time Warner," Los Angeles Times, Nov. 14, 2016.
6 "FCC Unlikely to Review AT&T-Time Warner Merger," Forbes, Nov. 17, 2016.
7 In re Applications of AT&T, Inc. and Deutsche Telekom AG, DA 11-1955, released Nov. 29, 2011 (Chief, Wireless Telecom. Bur.)
8 "FCC Chairman Says Doesn't Expect Agency to Review AT&T-Time Warner Deal," Wall Street Journal, Feb. 27, 2017 ("Time Warner and AT&T
filed statements with the Securities and Exchange Commission earlier this year saying: "While subject to change, it is currently anticipated that Time Warner will not need to transfer any of its FCC licenses to AT&T in order to continue to conduct its business operations after the closing of the transaction."
9 Letter dated Feb. 17, 2017 from Timothy P. McCone, Executive Vice President – Federal Relations, AT&T, to Sen. Al Franken, et al.
10 "FCC Chairman Says Doesn't Expect Agency to Review AT&T-Time Warner Deal," Wall Street Journal, Feb. 27, 2017.
11 1934, Federal Communications Commission, Nov. 16, 2015, https://www.fcc.gov/reports-research/guides/private-wireless-licensees-obligations-under-section-310d-communications-act-1934
12 In re Turner Broadcasting System (Notice of Apparent Liability for Forfeiture), DA 10-1648, released Sep. 10. 2010 (Chief, Enforcement Bur.)
13 Comcast Corp., General Electric Co., and NBC Universal Inc. For Consent to Assign Licenses and Transfer Control of Licenses, 26 FCC Rcd 4238 (2011).
16 "Snag in Media Merger Stirs Tensions Over Trump-CNN Feud," Wall Street Journal, Nov. 10, 2017.
17 "Regulators Seek Significant Asset Sales in AT&T Deal for Time Warner," Wall Street Journal, Nov. 8, 2017.
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