If the government goes to court to block the merger of AT&T and Time Warner, as seems increasingly likely, it may well be the antitrust case of the decade, even without the claims of presidential meddling that have already engulfed the deal in partisan controversy.
A lawsuit by the Justice Department, along with its earlier, widely reported demands that AT&T sell either DirecTV or Turner Broadcasting to gain approval for the deal, would mark a radical departure from decades of antitrust enforcement policy, both in defining what is an unlawful anticompetitive merger and in fashioning a remedy to cure the problems.
That’s because the combination of AT&T and Time Warner is what’s known as a “vertical” merger, meaning that the two companies don’t compete to any significant degree in their primary lines of business, which are telecommunications (AT&T) and entertainment (Time Warner). There would be the same number of competitors in both fields after the merger as there were before it.
This week, two Barclays analysts, Kannan Venkateshwar and Amir Rozwadowski, called the government’s threat to block the deal “unprecedented” and said they were “perplexed” given the Justice Department’s longstanding leniency toward vertical mergers.
Larry Downes, an antitrust expert and a fellow at the Georgetown McDonough School of Business, told me flatly this week: “If the government goes to court, it will lose. There’s no case law to support them.”
Court challenges to vertical mergers on antitrust grounds have been extremely rare in recent decades. (Mr. Downes said the most recent example he could find dated to 1964.) But in the past few years, as the internet has disrupted traditional media companies and prompted some high-profile mergers, there has been a growing sense “that antitrust enforcement has been too lenient,” said Maurice Stucke, an antitrust professor at the University of Tennessee College of Law and a co-author of the article “Antitrust and the Marketplace of Ideas.”
Referring to Louis D. Brandeis, the former Supreme Court justice, he said, “There’s a populist, Brandeisian movement that’s rising.”
President Trump tapped into that sentiment during the campaign when he described the proposed AT&T-Time Warner combination as “a deal we will not approve in my administration because it’s too much concentration of power in the hands of too few.”
That’s a view shared by many progressive media critics, including an influential group of young antitrust professors who have been calling for stricter review of vertical mergers, especially in media and entertainment. Prominent Democrats also criticized the proposed deal.
But since the election, Mr. Trump has continued to insert himself into what is supposed to be an independent review. On Wednesday, even as the Justice Department was said to be putting the finishing touches on its complaint, he renewed his attacks on CNN, the Time Warner-owned cable news network and his No. 1 media nemesis.
The Justice Department hasn’t explicitly demanded that AT&T divest CNN, but it’s a key part of Turner Broadcasting. Should CNN be sold, it could easily fall into the hands of far more Trump-friendly owners than AT&T or Time Warner, such as conservative-leaning Sinclair Broadcasting, which has been on the acquisitions trail, or Rupert Murdoch’s 21st Century Fox. Fox bid for all of Time Warner’s assets in 2014 but said at the time that it would divest CNN to avoid antitrust concerns. (Fox might find Trump-appointed antitrust regulators to be friendlier this time.)
Even when the government challenges vertical mergers, they are usually resolved by consent decree or other arrangements, in which the merged companies agree not to engage in anticompetitive behavior and to abide by conditions imposed by the government.
That was the approach when Comcast acquired NBC Universal in 2011, a deal that raised many of these same issues. Comcast agreed to more than 150 conditions, many aimed at preventing Comcast from favoring NBC Universal content at the expense of competitors.
While there continue to be critics of the Comcast-NBC merger, it’s hard to argue that competition in news and entertainment has diminished as a result, given the rise of Netflix and Amazon and the explosion in entertainment options that followed the merger.
But there’s also a growing sense that such agreements are easily circumvented and that the government doesn’t have the resources to oversee hundreds of such limitations. The alternative is to demand divestitures, as the government has done during negotiations with AT&T. Such “structural” remedies, as they’re known, “are much easier than behavioral remedies to craft and enforce,” Professor Stucke said.
The administration’s new head of the antitrust division, Makan Delrahim, a former deputy attorney general in the division and a member of Mr. Trump’s transition team, expressed a strong preference for divestitures over behavioral remedies in a speech Thursday at the American Bar Association’s annual antitrust forum.
“Our goal in remedying unlawful transactions should be to let the competitive process play out,” he said. “Unfortunately, behavioral remedies often fail to do that. Instead of protecting the competition that might be lost in an unlawful merger, a behavioral remedy supplants competition with regulation.”
Divestitures have long been the preferred remedy for horizontal mergers, where there’s an overlap between the two companies. Airlines, for example, may have to sell routes or airport gates where the two airlines compete; cable operators may have to sell operations in cities where both companies operate.
The Justice Department’s merger guidelines don’t rule out divestitures in vertical merger cases, but suggest that “tailored conduct remedies” can protect consumers “while still allowing the efficiencies that may come from the merger to be realized.”
A study by the Federal Trade Commission found that concerns about every vertical merger examined by the commission from 2006 to 2012 were resolved through “conduct remedies” rather than divestitures, and that all these remedies had been successful at protecting competition.
That hasn’t mollified a new generation of antitrust activists. Tim Wu, an antitrust professor at Columbia University and one of the leading proponents of a more intense scrutiny of media mergers, told me that the deal should be blocked on grounds that a combined megacompany could exert “broad anticompetitive effects.”
Say, for example, that a combined AT&T-Time Warner aggressively raised prices for popular offerings like HBO and CNN. Rival distributors, such as cable companies, would have to pay much higher prices, passing the increases on to consumers, or drop the channels, forcing consumers who want them to turn to other distributors, such as AT&T, reinforcing its already commanding position in satellite, wireless and broadband distribution.
This threat of higher prices and restricted consumer choice appears to be the theory the Justice Department is pursuing, according to people briefed on the negotiations.
Market-oriented economists and antitrust experts largely dismiss such an outcome, deriding it as “hipster antitrust,” as Mr. Downes put it in a Harvard Business Review article this week. They argue that Time Warner is already charging a profit-maximizing price for its content, which is exactly what AT&T (or any rational owner) would continue to do. Concerns that AT&T would favor Time Warner content to the disadvantage of rivals could be easily addressed through behavioral remedies, Mr. Downes said.
Further clouding any action is Mr. Trump’s outspoken animosity toward CNN. Antitrust enforcement decisions are supposed to be based solely on the facts and law, not on politics, and no one I spoke to could recall a president who so publicly inserted himself into an antitrust enforcement investigation. (While Richard Nixon notoriously meddled in antitrust enforcement in the 1970s, he kept his machinations secret, at least until they were exposed by Oval Office tape recordings.)
Mr. Delrahim has pledged an independent review uninfluenced by politics. Professor Stucke noted that the investigation began during the Obama administration, and that “it’s unlikely senior leadership would go out on a limb to challenge the merger unless the staff had recommended it.”
“They’re career professionals,” he said. “I’d start with the presumption the staff was diligent and followed the evidence.”
An AT&T spokesman declined to comment, as did the Department of Justice.
Asked this week whether there had been communications about the case with the White House, Attorney General Jeff Sessions declined to answer, fueling speculation that there may have been some.
Should the case be filed and go to trial, that’s one mystery that will soon be resolved: Some of AT&T’s first subpoenas will no doubt go to the White House.