As it became clear in November that the Department of Justice was heading for a legal showdown with AT&T over its Time Warner merger, the telecom giant offered a proposal that it said would address the government’s concerns about competition.
But thus far, only 2 percent of AT&T's rivals have expressed support for that plan, according to lawyers for both sides. The revelation came as AT&T and the Department of Justice faced off in court Tuesday, the second day of a trial whose consequences will reverberate across the economy.
Of the 1,000 letters sent by AT&T to competing TV providers in November notifying them of the proposal, just 20 received a positive response, according to company and government lawyers.
The lukewarm interest highlights the enormous stakes facing the entertainment industry as the Justice Department this week challenges AT&T over its $85 billion acquisition of Time Warner.
AT&T's proposal zeros in on a key objection from antitrust regulators: that the tie-up could prompt the merged company to charge higher fees to cable companies that wish to carry channels owned by AT&T. To address that concern, AT&T said in its proposal to rival TV providers that it would be willing to let any price disputes with other cable companies go to an outside arbitration process.
Should a federal judge allow the merger to proceed, that proposal could shape the future relationship between AT&T-Time Warner and other TV providers, some of which are expected to testify against AT&T as part of the government's antitrust case.
AT&T's lead attorney, Dan Petrocelli, said Tuesday that a handful of companies have already agreed to support the proposal, which is contingent on the deal surviving the court challenge. “You know all the others are going to sign up for it if the merger is approved,” he said.
But Craig Conrath, a Justice Department attorney, told Judge Richard Leon that it is significant that so few have agreed to sign up at this stage. “They sent 1,000 letters,” Conrath said of AT&T. “If only 20 sign up, that's a pretty good indication people are voting with their feet.”
Cable companies fear that AT&T's ownership of Time Warner's content could give it more power in price negotiations. If AT&T raises the price of that content beyond what its cable rivals will pay, AT&T could pull its Time Warner programming and cause a blackout for consumers, the government alleges.
While the blackout would hurt the customers of both AT&T and its cable competitor, Conrath said, it would be less painful for AT&T because it could simply encourage consumers to switch to AT&T's own, proprietary TV service — DirecTV — to restore the missing programming. AT&T would then have gained a subscriber even as it punishes the cable company with a price hike.
AT&T said in court that the reason more of its competitors have not signed onto its proposal is because it would essentially require them to admit that the merger could be acceptable under certain conditions — such as the arbitration condition.
In what became something of a preview of the two sides' opening oral arguments, Petrocelli said AT&T would have little incentive to want a programming blackout, which could mean millions per month in lost carriage fees and advertising revenue. And consumers are already fed up with high cable bills and are cutting the cord, he said, abandoning their legacy TV subscriptions for Internet-based TV alternatives.
The argument underscores how Silicon Valley's technological disruption of the TV ecosystem has prompted AT&T to seek consolidation and a new business model. Citing companies such as Facebook, Amazon.com, Apple and Google, AT&T argued that the rise of streaming online video and targeted advertising has made the tech industry's dominance in these areas impossible to ignore. (Amazon chief executive Jeffrey P. Bezos owns The Washington Post.) Cord-cutting has put increasing pressure on traditional TV providers and programmers alike; large chunks of their respective businesses depend on subscriber fees and ad revenue that is in decline.
“Turner is suffering,” said Petrocelli, referring to Time Warner's cable network. “The advertising dollars are going to digital companies because they offer more relevant ad opportunities.”