The basics of the case
Briefly: AT&T is trying to buy the media titan Time Warner — a massive company that owns well-known brands like HBO, CNN, TBS, TNT and Warner Bros. The federal government has sued to block the deal, alleging that the merger will lead to higher prices for TV subscribers and less technological innovation. AT&T, meanwhile, says prices for consumers will go down, and that it'll lead to new forms of mobile entertainment and a targeted advertising business that can compete with Google and Facebook.
Much of the legal debate so far has revolved around the popularity of Time Warner's content. Here's why.
The Justice Department is arguing that AT&T could “weaponize” CNN or TNT after the merger by withholding those channels from other cable companies. To make that case, regulators must prove that Time Warner's content is so valuable and popular that other cable companies “must have” them to be viable.
Government lawyers have pointed to March Madness, which was broadcast exclusively this year by Time Warner, as an example of the type of programming that a cable company can't do without. But in the litigation, AT&T sought to downplay the significance of Time Warner's programming. For example, the head of a Time Warner subsidiary, Turner chief executive John Martin, testified that his channel doesn't air any professional football games.
Still, under questioning by the Justice Department, Martin revealed that Turner pays $2 billion a year for sports, a significant sum that appeared to astonish the judge, Richard Leon.
The new skinny bundles of streaming TV
In recent years. we've seen the rise of online services such as Sling TV, PlayStation Vue and YouTube TV — cheaper packages of just a few cable channels. Offering live TV, these virtual cable companies offer a slimmed-down alternative to the traditional cable bundle. And these novel services could be harmed the most by the merger, according to the government.
Programmers like Turner have an economic incentive to make sure all their channels are carried as widely as possible. In practice, this means content owners will try to make distributors — cable and satellite companies, as well as these skinny-package providers — pay for more channels than they would otherwise prefer.
If the AT&T merger proceeds, the combined company would have more leverage in negotiations to make that happen, according to Warren Schlichting, a Dish Network exec and the head of Sling TV. That, he told the court, could “break” his company's business model.
This argument is important to the government's case because it is trying to show how AT&T-Time Warner could affect competition in the television industry.
Surveys and economic predictions
Another core part of the government's case is an economic formula — one that the Justice Department claims will prove how satellite and cable TV might become more expensive after the merger.
According to the government's modeling, the price of subscription television could go up by 45 cents a month if the deal is approved. While that may not sound like much, it adds up to hundreds of millions of dollars every year, regulators allege. This projection is vital to the government's case, because antitrust officials are charged with protecting what's known as “consumer welfare” — and prices are a concrete way of measuring it.
Because the model relies on certain numbers and assumptions, the litigation has zeroed in on whether those figures are realistic. For example, one important input is an estimate of how many subscribers a rival TV provider would lose if AT&T-Time Warner decided to “go dark” with that cable company and deny access to Turner channels.
If that happened, as many as 12 percent of a cable company's subscribers could leave for greener pastures, according to John Hauser, a marketing professor at the Massachusetts Institute of Technology and a Justice Department witness. But under cross examination, Hauser admitted that that was based on a hypothetical scenario posed to survey respondents and not on real-world cases. The day before, Schlichting said that in a “blackout” scenario with Turner in 2014, Dish lost about 30,000 subscribers, or less than 1 percent of its customer base.
To mitigate some of the alleged harms of the merger, AT&T sent 1,000 letters last year to competing TV services. The letters contained an offer of arbitration: If, after the merger, the competing providers felt AT&T-Time Warner was gouging them, they could ask a third-party arbitrator to step in, evaluate a proposal from either side, and then pick one based on how it compared with “fair market value.” In return, AT&T would agree not to go dark with its channels.
AT&T's arbitration offer has taken on significance in the case, because it could be one factor that persuades Leon to approve what he might otherwise conclude is an anticompetitive merger.
Opponents of the deal say it's unclear what exactly they'd be signing up for by accepting the arbitration offer, and that based on their understanding of the letter, it would give AT&T a huge bargaining advantage. The arbitrator would not necessarily be familiar with the TV industry and might not be able to determine which proposal — AT&T's or its competitor's — is a more accurate reflection of real-world prices and terms and conditions.
But, under questioning by Leon himself, some of AT&T's competitors have acknowledged they could live with the arbitration proposal if it were structured to be more “fair,” whatever that means.
As part of its case, the Justice Department this week highlighted research by some AT&T officials on the looming sunset of certain regulatory restrictions on Comcast, the cable giant that also owns NBCUniversal.
Internal AT&T emails revealed at trial suggested that the expiring conditions on Comcast could mean “NBC can play hardball” with other TV providers who wish to carry NBC content. The AT&T executive charged with leading the study, Timothy Gibson, later told the court that it was an early opinion that didn't make it into a final draft.
Comcast's purchase of NBCU in 2011 may be an important precedent for this case. In terms of its structure, it is one of the few deals that bears a resemblance to AT&T-Time Warner. And Leon also was the judge who oversaw the Comcast merger, helping to approve the deal with restrictions on Comcast's behavior. Those conditions were aimed at preventing the type of anti-competitive behavior the government is alleging will occur if AT&T buys Time Warner.
The case is dragging on much longer than initially expected
What was initially billed as a two- or three-week trial has been extended to as many as six to eight weeks, and Leon seems eager to get this wrapped up. He has repeatedly urged both sides to be efficient with his time, instructing attorneys to pare down witness lists and be ruthless about what evidence they truly need to complete the trial. Should the case extend into May, he has said, he will be unable to provide a decision by June 21, a drop-dead date for AT&T and Time Warner to close their deal. The opinion could take as long as four or five weeks to write and is already looking to be roughly 200 pages, Leon has said.