Last week, many were caught off guard by reports that AT&T's massive bid for Time Warner had hit a rough patch. In a matter of days, the $85 billion acquisition went from looking like a done deal to something much less certain, with the Justice Department and AT&T seemingly at loggerheads and possibly headed toward a lawsuit. In the middle of it all was a fierce disagreement over the future of CNN, a frequent target of President Trump's criticism and a Time Warner property.
So what happened? Why did the deal hit a snag? Here's a basic explanation to get you up to speed.
What's the big deal about this merger?
AT&T, the telecom giant, wants to buy Time Warner, one of the world's biggest entertainment companies. Time Warner — not to be confused with Time Warner Cable — owns companies such as HBO and Turner Broadcasting, which is the parent of CNN. Time Warner also controls Warner Bros. and everything in it — DC Comics (including Batman, Superman, Wonder Woman and the “Justice League” film), the "Harry Potter" franchise, the “Lord of the Rings” films and a whole lot more.
AT&T said it's doing this because it wants to build an advertising and content behemoth to rival Facebook and Google. AT&T could use Time Warner's huge content library to draw in new customers, gather information about them and create more advertising opportunities that will make more money. With the new holdings, AT&T would gain control over a $29 billion chunk of the entertainment industry and potentially reshape how Americans get their media and information.
What was the uproar last week about?
It turns out that AT&T's deal talks with DOJ weren't going as smoothly as everyone thought. Tensions arose about how and whether AT&T should sell off some of Time Warner's assets as part of the deal — with some saying that DOJ asked AT&T to sell off Turner Broadcasting, CNN's parent, while others said the reverse, that AT&T had suggested it. Regardless of who first broached the issue, what should happen to CNN under AT&T is a key aspect of the spat.
Why is CNN important here? Because Trump has not hidden his criticism of the network or its coverage of his presidency, and one major concern is whether he could use the powers of his office to go after CNN as AT&T tries to close this deal.
Some antitrust experts such as Hal Singer, an economist at George Washington University's Institute of Public Policy, suspect that if DOJ asked for Turner, then it was a “not-so-cleverly disguised” — or plausibly deniable — government demand that AT&T spin off CNN.
Makan Delrahim, who now leads the DOJ's antitrust division, was a strong Trump supporter during the campaign and served nine months as one of his White House lawyers.
But Delrahim has said that the White House never gave him instructions on how to conduct the review of the deal, and on Saturday, Trump said that he did not make DOJ's decision.
So, what concerns does DOJ have about the deal?
One of DOJ's arguments against the deal could be that AT&T may use its control over Time Warner's content against other TV and Internet providers in ways that harm competition and consumers, according to a person briefed on the matter. Other critics, such as Sen. Al Franken (D-Minn.), said more simply that it could basically allow AT&T to behave like a monopolist.
AT&T could theoretically say to other TV or Internet providers — such as Comcast or Verizon, perhaps — that it won't make the "Harry Potter" films available on those platforms, or perhaps only with very steep payments or concessions. If Verizon and Comcast customers can't get that content easily, perhaps it might push them to switch to AT&T, which would allow the telecom giant to amass even more power. (AT&T has said to do that would only hurt itself, because it wouldn't make good business sense to limit the number of people who can see content it owns.)
Another way AT&T might wield its new holdings anticompetitively, analysts say, is by raising costs on companies that desperately want to connect with AT&T's customer base. Because AT&T is the gatekeeper that controls information flow to its customers, it could refuse to grant other firms access to that audience, unless perhaps those firms agree to make concessions.
Economists call both of these types of behavior “foreclosure,” and left unchecked, it could negatively affect competition. The likelihood of this actually happening is expected to be a major point of contention in any lawsuit involving AT&T and DOJ. AT&T claims the deal will benefit consumers, because the targeted advertising business that the tie-up enables will allow AT&T to lower the price of subscription television.
So what now?
In addition to asking for divestitures, DOJ has the option to ask two merging companies to behave in certain ways going forward that may preserve healthy competition. Or it could sue to block a deal. Right now, analysts say a lawsuit appears likely.
AT&T's moves so far hint at a sophisticated legal strategy. Even if the Justice Department mounts a persuasive economic argument for why the deal should be blocked — which won't be easy, analysts say — it may quickly be dragged into questions about Trump's possible involvement or influence. That's risky territory for the Justice Department, analysts say.
What happens if either side wins?
If AT&T can persuade a court to rule in its favor, then AT&T gets to complete its deal without bending to any of DOJ's requests. If you're AT&T, that's a better outcome. You gain control of a much bigger slice of the media pie. The alternative is working with DOJ and potentially having to sell off some of Time Warner's valuable assets.
But if DOJ wins, it could give the government a stronger leg to stand on in the future when challenging these types of deals — acquisitions that involve companies that don't directly compete, but work in adjacent industries. Regulators have rarely opposed this type of “vertical” consolidation in the past, but defeating AT&T in court this time could change that, analysts say.
What do we know about Trump's possible involvement?
Both the White House and the Justice Department have issued carefully worded denials implying that no improper communications about the deal took place. That may well be true. But former government officials say Trump would not need to have privately directed Delrahim how to behave when the president's feelings on the deal are already abundantly clear.
Just as Trump's tweets about Muslims and immigration have convinced federal judges that his administration's travel ban is racially discriminatory, his remarks about AT&T could come back to haunt him.
“One argument AT&T could make,” said Blair Levin, a former Federal Communications Commission chief of staff, “is that there’s compelling evidence that this opposition by the government is actually a way of using the powers of government to silence a political voice. And that is a violation of the First Amendment.”
And that, analysts have said, could give AT&T an advantage in court. AT&T foreshadowed some of its other legal arguments last week as chief executive Randall Stephenson pointed out that the federal government rarely challenges mergers involving two companies that don't directly compete. Although DOJ might point to its foreclosure theory in response, the past 40 years of antitrust policy suggest that the burden will be on DOJ to explain why this case is different.
“DOJ isn't that great when it actually has to go to trial to block mergers, and the jurisprudence on blocking vertical deals is bad for any case the government would bring,” said Robert McDowell, a former FCC commissioner.