Justice Department, AT&T-Time Warner Outline Strategies in Pre-Trial Briefs

ATT Time Warner
Courtesy of AT&T and Time Warner

WASHINGTON — The Department of Justice plans to argue that AT&T’s proposed merger with Time Warner will harm the competition, including that the merged company will have the incentive to coordinate with Comcast to withhold content from nascent online rivals.

That was one of a number of lines of argument featured in a pre-trial brief filed late Friday, and immediately rebutted by AT&T-Time Warner in its own filing.

The Justice Department is seeking to block the transaction, arguing that the combined companies would force rivals to pay more for “must-have” content from the Turner Networks, including TBS, CNN and TNT, and that the result would be higher prices for consumers.

The DOJ also plans to make the argument that AT&T would have a common interest with Comcast in slowing the growth of “virtual MVPDs,” or multichannel online video services like Apple TV, Dish’s Sling and YouTube that offer an alternative to pricey cable and satellite bundles.

In its brief, the DOJ’s Antitrust Division said that “unlike an independent Time Warner, the merged firm would share with Comcast a strong interest in slowing or blocking disruptive new entry by virtual MVPDs. The firms could advance this shared interest by withholding from virtual MVPDs Turner and NBC content—two of the most important network groups for virtual MVPDs — or restricting their use of that content (e.g., by prohibiting inclusion of channels in skinny bundles).”

“Because market conditions are conducive to coordination, and because a coordinated denial of content to virtual MVPDs would face relatively few obstacles, the merger likely would facilitate coordination and lead to higher prices, fewer options, and reduced innovation.”

AT&T-Time Warner, however, said such an argument does not make sense because they “want growth in these services, because more online video viewership increases usage of its wireless broadband network, where AT&T has a decided market advantage over Comcast.”

“AT&T has more than 100 million wireless connections in the U.S.; Comcast has almost no wireless customers (380,000 by its own account),” AT&T-Time Warner said in its brief. “Consumers who watch video on AT&T mobile devices will benefit the merged firm even if they use an over-the-top provider other than DirecTV Now: they will increase their use of AT&T’s broadband network; they will expand the number of devices to which AT&T can send targeted advertising, the most valuable form of advertising in the industry; and they will become less likely to switch (‘churn’) to other wireless providers.”

The trial briefs suggested that the parties will make heavy use of expert witnesses and data, while also calling corporate executives and rivals. The Justice Department signaled that it will challenge comments that AT&T CEO Randall Stephenson made in a deposition, and the government attorneys even mocked one of Stephenson’s remarks after the lawsuit was filed on Nov. 20.

“On the day the United States filed this action, AT&T’s CEO sounding a bit like Captain Renault in the classic Warner Bros. film ‘Casablanca,’ proclaimed that he was surprised — ‘surprised to be here’,” the DOJ said in its brief.

Witness lists are expected to be made public next week.

Much of the focus of the DOJ’s argument has been on the ability of AT&T-Time Warner to withhold or drive up the price of Turner Networks to other distributors, with the cost increases ultimately passed on to consumers.

“For current consumers of traditional pay-TV content, economic modeling shows that the merger will mean paying for the equivalent of 13 months of Turner content per year, while getting only 12. That’s pure overcharge consumers will have to pay without getting anything in return,” the DOJ says in its brief.

AT&T-Time Warner, however, plans to try to poke holes in the government’s economic model and one of its expert witnesses, Carl Shapiro of University of California Berkeley.

“To the contrary, the government now concedes it would not be profitable for the new company to withhold its television networks from pay-TV distributors and that the new company’s prices to its own television customers will go down,” the companies say in their brief. “As a result, the government’s suit to block this merger is not only baseless in fact, but it is affirmatively contrary to consumer welfare, making it difficult for the government even to allege a viable antitrust claim, much less prove one.”

Other arguments outlined in the briefs:

HBO. The DOJ argues that the merged company “will far less inclined to allow rivals to use HBO to win subscribers from DirecTV, as AT&T would have a strong preference that subscribers access HBO content via DirecTV. It likely would act on these changed incentives immediately.”

AT&T-Time Warner, however, says that the “evidence will show that the government has it exactly backwards: it is HBO that needs its distributors to promote its programming—not vice versa—and nothing in this merger will affect those fundamental business imperatives.”

Comcast/NBC Universal. AT&T/Time Warner has argued that it is being singled out even though the Justice Department has in the past given the green light to similar vertical mergers. Their case in point: The Comcast-NBC Universal merger, approved with conditions in 2011.

But the Justice Department said that “defendants in antitrust actions do not get to select the relief to which the United States will agree,” adding that it is a matter of “prosecutorial discretion.” Antitrust chief Makan Delrahim has, in a number of speeches, explained why he favors structural remedies for problematic mergers, in which companies agree to shed assets, versus conditions, in which the government is then tasked to make sure the corporate conduct is followed.

The DOJ dismissed one of AT&T’s offers. After the lawsuit was filed, AT&T said that it would engage in “baseball-style” arbitration in contract disputes with distributors over Time Warner content, for a period of seven years.

The DOJ, however, said that the arbitration offer was “a fundamentally flawed effort to undermine the free-market solution by merely offering to behave in a way that is contrary to the merged company’s natural business incentives and interests. With no oversight.”

AT&T, however, said that the Comcast-NBCU merger contained an arbitration provision and, in the seven years since it was approved, it resulted in “no harm to completion whatsoever. Nothing is materially different here.”

AT&T also argues that it won’t have the incentive to withhold Turner programming, as it would mean “immediate, catastrophic losses in licensing and advertising revenue that can never be recovered. Because those losses will not be any more sustainable after the merger than before, any threat to withhold content will be just as hollow as it was before. And everyone will know it.”

“For this reason and others, Time Warner executives will explain at trial that the merger will not — and realistically could not — affect their negotiations with video distributors, as confirmed by experience with multiple comparable transactions in this industry.”

The Dodgers. The DOJ, in making its case that the industry is vulnerable to coordination between large distributors, points to the experience with the Dodgers. The Justice Department brought a lawsuit against DirecTV in 2016 for sharing competitive information with rivals in Los Angeles in a way that “corrupted” carriage negotiations for the Dodgers Channel.

AT&T said that the case was settled “with no admission of liability or proof of the government’s disputed allegations.”

It added that the DOJ will have to show that coordination between two distribution giants like AT&T and Comcast is “probable,” and that the government’s own expert witness “did not even attempt that showing” in depositions.

AT&T’s statements. The DOJ plans to try to use the past words of AT&T executives and statements made about past mergers against them. Among them is an FCC filing in which AT&T urged the FCC that content companies aligned with cable operators “retain the incentive and ability to withhold unique and popular programming to inhibit competition.”

The DOJ also said that Stephenson, in his deposition, “diminished the work of AT&T’s large and well-paid strategic planning group, dismissively stating that he alone makes all strategic planning decisions for the company.

“The reason for defendants’ tactic is obvious: defendants’ documents show that AT&T can use Time Warner content to raise rivals’ costs and to impede innovative new competitors from becoming viable substitutes for the pay-TV business, just as the government alleges.”

In a footnote in its filing, AT&T notes the existence of documents in “describing the existing MVPD business as a ‘cash cow’ or using similar colorful phrases.”

“Those documents reflect the reality that the traditional MVPD business is a mature, low-growth one,” AT&T said in its brief. “AT&T CEO Randall Stephenson, who establishes the company’s strategy, has long made clear that AT&T seeks to embrace the movement of video to broadband and mobile.”