The Justice Department’s Fanciful Case Against AT&T-Time Warner

There is rarely anything to celebrate when two companies in the same industry decide to merge. Mergers–whether horizontal or vertical–tend to entrench incumbents and raise barriers to entry for disruptive newcomers, which robs consumers of choices.

Within the industry itself, mergers channel capital toward scale, at the expense of innovation, which can lead to stagnation and ennui.

And, while the shareholders of the companies involved may see a short-term windfall, in the long run the buyer generally just ends up inheriting whatever problems drove the seller to sell in the first place, without actually solving them.

So, there is more than ample cause to be skeptical of AT&T’s proposed $109 billion acquisition of Time Warner.

That said, however, the theory of the government’s case for blocking the merger, which went to trial this week, seems cockeyed.

In its complaint and opening statement, the Justice Department argued that by acquiring Time Warner’s valuable programming assets, including HBO, CNN, and the Turner networks, AT&T would have both motive and means to extort higher prices from competing pay-TV distributors by threatening to withhold “must have” programming, thereby ultimately driving up prices for consumers.

The government cites a model developed by University of California economist Carl Shapiro to estimate consumers in aggregate will pay $400 million more per year, or $6.00 per subscriber per year, as a result of the merger.

“The merger will take a tool needed to compete and turn it into a weapon,” attorney for the Justice Department Craig Conrath told the court.

But surely, AT&T’s ultimately goal is to drive the cost of programming down, not up. Even after the acquisition, should it go through, AT&T’s primary business will still be connectivity and delivery, not programming. And as with all TV distributors, the biggest challenge to its margins will still be the ever-rising cost of content. By bringing HBO and the rest of Time Warner’s TV content in house, AT&T would be able to keep a lid on at least a portion of its content budget.

That wouldn’t necessarily preclude it from trying to charge higher prices to other distributor. But incentive to do so would be tempered by a countervailing incentive to restrain the overall rise in content costs. A higher price in the marketplace for HBO is likely to be mirrored by higher prices for other programming which AT&T would still need to license.

So far, AT&T hasn’t really raised that argument, which is surprising since it was central to its case for acquiring DirecTV in 2015. AT&T needed a larger base of subscribers, the company argued at the time, to gain sufficient leverage with media companies to drive down programming costs so it could create skinny bundles and build the wireless video delivery business it envisions.

Bringing Time Warner’s content under its own roof could easily be portrayed as part of AT&T’s overall, long-term strategy to constrain programming costs.

There is even a real-world analog it could point to, in Comcast’s acquisition of NBCUniversal, which the government approved.

“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 [over-the-top services] and use HBO against competitors do not reflect the realities of the OTT world, in our view.”

Instead, lawyers for AT&T have chosen to challenge the government’s case on its own terms, disputing the government’s economic theories and pointing to the flourishing of competition Time Warner faces from the likes of Amazon, Google, and Facebook.

That may make sense from a tactical legal point of view (IANAL). But it makes it more likely that the case will ultimately be decided or settled on grounds that are largely at odds with what’s actually happening in the marketplace.

The un-reality of Partygate

The White House party crashers is not a subject that would usually occupy The Media Wonk. But here in Washington, with so many people running about, flapping their arms like frightened hens over the horror of it all, it’s a very difficult story to ignore. After the crashers themselves and White House social secretary Desiree Rogers declined to appear before Congress to explain themselves (the latter on separation of powers grounds) some on the Hill are talking subpoenas, three Secret Service agents have but put on leave and could lose their jobs, the crashers are lawyering up and the cable news networks have created logos and assigned theme music to the story, a sure sign we’re about to go wall-to-wall on this.

salahi-obamaFeh. I’m with White House press secretary Robert Gibbs, who had to remind overheated reporters at the daily brief Thursday that this isn’t exactly Watergate. It’s a security screw-up in which no one got hurt and the president was in no proximate danger. Worth an internal reveiw by the Secret Service and White House to be sure. But Congressional hearings? Please.

That said, if Congress is determined to start firing out subpeonas, here’s my suggestion: Bravo. The network has been asked little and said less about the incident, even though it was following Michaele Salahi around with a camera all day leading up to the state dinner as part of the preliminary screening for Real Housewives of DC. They followed when she crashed the Washington Redskins Cheerleaders reunion party, where she pretended to be a former member of the squad and made a nuisance of herself.  I’m sure more such stunts will surface in coming days (they always do, like sex tapes.) So why isn’t anyone asking Bravo about its role in encouraging, or perhaps even participating in,  what was, at a minimum, silly and annoying behavior and at worst, possible criminal activity?

Now would be the perfect time for a little reality show reality check. Bravo is owned by NBC Universal, which just announced its pending merger with cable giant Comcast, creating an new media behemoth with myriad conflicts of interest, potential antitrust problems and potential to have a significant and baleful impact on media diversity. Regulators at the FCC, FTC and DOJ are just beginning to pick through the details of the deal. I say, put Bravo under the hot lights and let’s see what the hell it thought it was doing encouraging a freak show act like the Salahis to crash a state dinner.