Media and Telecom: Vertical Mergers and the Regulatory Road Ahead

BOBBY RENZI—On October 22, 2016, AT&T and Time Warner agreed to a $108.7 billion merger. Over one year later, the U.S. Justice Department filed a civil antitrust lawsuit to block the merger. The case is now in trial before Judge Richard Leon in the U.S. District Court for the District of Columbia.

The outcome of the case will have important implications on deals. If the merger is blocked, there will be a presumptive regulatory battle in future deals. Telecom companies will likely waver at the thought of innovative media mergers after factoring in the likelihood of a costly antitrust lawsuit. But, if the lawsuit is dismissed, it may open a gateway to unprecedented vertical mergers between telecom and media companies, which operate at different wavelengths along the same technology spectrum.

Although this type of merger is rare, it is not the first of its kind. In 2011, Comcast and NBC Universal merged. Despite the parallels to the AT&T and Time Warner merger, the Comcast and NBC Universal deal was not met with an antitrust lawsuit. As a result, AT&T accused the government of selectively enforcing its antitrust laws, but the point was made to no avail. In February, Judge Richard Leon referredto the case as a “rare breed of horse, [but] not exactly a unicorn.”

AT&T has substantially invested in its streaming service, DirecTV Now. Time Warner presented an opportunity for AT&T to boost its original programming by pairing with Time Warner’s three divisions—HBO, Warner Bros., and Turner. Randall Stephenson, AT&T’s CEO, explained that AT&T’s decision to merge represented a “significant shift in strategy”that was needed to compete in the content business with companies like Netflix, YouTube, and Amazon.

AT&T contends that the merger would not harm consumers. Instead, AT&T asserts that the merger would lead to less costs for consumers because of the increased advertising revenue, which would shift costs from consumers to advertisers. AT&T and Time Warner even proposed an arbitration system to quell the fears that AT&T will arbitrarily raise their content prices. A victory for AT&T would cause a tectonic shift in the way telecom and media companies overlap.

The Justice Department’s challengeto the merger was headlined by the following: “Merger Would Harm Competition, Resulting in Higher Bills and Less Innovation for Millions of American Consumers.” The government argues that AT&T will have both the opportunity and the incentive to raise prices for CNN, TNT, and other networks, which are part of Time Warner. Rival TV distributors will have no choice but to accept the higher prices because they need the networks for their lineups. The government asserts that this would lead to “higher monthly television bills and fewer of the new, emerging innovative options that consumers are beginning to enjoy.” In an era of continuing industry concentration, a victory for the government would create a potential legal roadblock to future vertical mergers in the form of judicial precedent.

Soon, a decision will be made that permanently alters the landscape of deals in the telecom and media business. Either party may appeal to the U.S. Court of Appeals for the District of Columbia Circuit. Although, AT&T may be limited by Time Warner, which would reportedly consider withdrawingfrom the deal if a favorable decision is not granted in the district court.

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