Why a DOJ vs. AT&T-Time Warner Case Could Be a Close Call -- Update

By Brent KendallFeaturesDow Jones Newswires

If the Justice Department sues to block AT&T Inc.'s planned acquisition of Time Warner Inc., the challenge will likely raise novel legal issues, making one of the most ambitious antitrust cases in decades hard to handicap.

In the typical merger case, the government challenges a proposed combination of two companies that directly compete. But the proposed AT&T-Time Warner deal is a so-called vertical merger of complementary businesses: AT&T's cable, wireless and satellite distribution with Time Warner's popular content, including its offerings on HBO and Turner networks like CNN, TBS and TNT.

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The government at times has raised concerns about vertical deals, but it hasn't litigated one in decades, meaning a lawsuit against AT&T would require a judge to confront legal issues that courts haven't faced in recent memory.

"In terms of importance to antitrust, there hasn't been a vertical merger case in more than 30 years," said Steven Salop, a professor of economics and law at Georgetown University.

Justice Department officials have told AT&T they are concerned the telecom giant would have anticompetitive leverage if it controls so much popular video content as well as distribution, including through satellite arm DirecTV. The Justice Department has been laying the groundwork for a legal challenge if no settlement could be reached.

The department recently contacted some state attorneys general about joining a government antitrust case, the latest sign that a lawsuit could be close, according to people familiar with the matter. The states' responses couldn't immediately be learned.

Legal observers said there are several arguments the government could pursue in a lawsuit -- and several defenses AT&T could make. "It's not crazy to be against it or in favor of it," said Stanford University economics professor Roger Noll. "It's a fairly close call."

AT&T argues the department's concerns are misguided, especially in an age where consumers have a growing array of programming and are cutting the cord from pay-TV services. AT&T says the deal would help make film and TV more affordable for consumers, and that the Justice Department has no valid basis for challenging this vertical transaction, especially when it has allowed so many others, including Comcast Corp.'s 2011 takeover of NBCUniversal.

Under one theory, the Justice Department could argue that a postmerger AT&T would have the power to push for larger carriage fees for Time Warner channels, a move that could hinder rival cable and satellite companies as well as the development of online pay-TV distribution.

Mr. Noll said the department's best argument on that issue could be related to sports programming, which is in high demand even in an era when fewer channels could be considered "must-have" offerings.

Time Warner's Turner division, for example, holds rights along with CBS Sports to broadcast the NCAA men's college basketball tournament. TBS televises some Major League Baseball playoff games, while TNT is a leading broadcaster of National Basketball Association games.

If you're a competing pay-TV distributor, and AT&T played hardball on carriage fees, "sports is the biggest single thing you can't work around, " Mr. Noll said.

Relatedly, the department could argue the merger would allow AT&T to prioritize its content at the expense of rivals and consumers, perhaps by putting competing channels on more expensive tiers of service.

There are counterarguments, however, that any such tactics by AT&T would be self-defeating.

Disfavoring rival channels on DirecTV's lineup, for example, could prompt customers to switch to a different provider. And if other pay-TV providers dropped Time Warner channels in the face of higher fees, fewer people would be watching those channels, which could hurt advertising rates and revenue.

"The substantive arguments are going to be tough for the government," said Herbert Hovenkamp, a leading antitrust expert who teaches at the University of Pennsylvania law school.

If a Justice Department case against AT&T-Time Warner shows only that it would be possible for AT&T to favor its content or discriminate against others, "my instinct tells me that's not going to be enough," Mr. Hovenkamp said.

The Justice Department would have a better chance in court if it uncovered any internal AT&T communications suggesting anticompetitive intent, Mr. Hovenkamp said.

Two other big issues could hang over any court case.

One is Comcast, which became a powerhouse of content and distribution with NBC. The Wall Street Journal has reported that some Justice Department officials believe the government didn't do enough to stop or restrain that deal. Now, the department could seek to argue that Comcast and AT&T would be twin powers that would dominate future programming and distribution markets and squeeze other video content owners and pay-TV distributors.

The other issue is Donald Trump's unusual pledge during last year's presidential campaign that his administration would block the AT&T deal. The Justice Department has said the White House isn't influencing the investigation, but AT&T could attempt to raise questions about the government's motives.

Stanford's Mr. Noll said the president has put his Justice Department in a difficult situation. "What it does is cast a cloud on what's going on at DOJ," he said.

--Drew FitzGerald contributed to this article.

Write to Brent Kendall at brent.kendall@wsj.com

(END) Dow Jones Newswires

November 15, 2017 14:49 ET (19:49 GMT)