News reports have circulated that the Justice Department could sue to block the AT&T/Time Warner deal. We believe the deal still ultimately wins antitrust approval. To the extent the Justice Department is pushing hard for conditions, however, the resolution of related concerns could moderate the deal's impact on rivals like Dish Network (DISH), Google (GOOGL) and Netflix (NFLX).
We would not be surprised if the government and AT&T are engaged in negotiations over merger conditions. From day one, AT&T's CEO Randall Stephenson has indicated the company's willingness to work out conditions to facilitate ultimate approval. The conditions would need to address concerns that AT&T could leverage Time Warner programming to disadvantage distribution rivals in legacy and over-the-top video services. Conditions would also address potential discrimination against unaffiliated content players seeking distribution over AT&T wired, satellilte and terrestrial wireless platforms.
These vertical foreclosure concerns have been investigated for months and we would not be surprised if career antitrust division staff have recommended tangible enforcement action to address them.
Still, we continue to believe a lawsuit to block the transaction outirght is not a compelling case. The deal does not eliminate a competitor in any relevant market and the combination offers efficiencies that could generate innovative offerings and benefit consumers. A consent decree with conditions to address vertical foreclosure concerns may make sense as long as AT&T does not believe the conditions meaningfuly impair operational flexibility, particularly as the FCC is nearing a decision to ease net neutrality regulations.
If the DOJ goes into overreach, AT&T could go to court and, if it prevails, the Justice Department would end up with nothing to show for the effort. More likely, even if DOJ filed a lawsuit to enjoin the transaction, some type of settlement would result without the case being fully litigated. This is what happened when the American Airlines/U.S. Air deal was challenged by the DOJ a few years ago. DOJ actually had a pretty good case, but the litigation was resolved after a few months with the divestiture of facilities at several airports.
Moreover, it should be noted that any consent decree worked out between AT&T and DOJ would require that DOJ file a lawsuit to block. This is what triggers the jurisdiction of the federal court so a consent decree can be filed concurrently. The court then approves the agreement which is subsequently reviewed for public interest consistency (Tunney Act review).
The Justice Department investigation and negotiation process in the merger context is confidential. Unlike the FCC review process, the DOJ does not release any details about potential concerns or the arguments against the deal being made by opponents of the transaction. The staff conclusions and recommendations are also private. This is a civil investigation with potential litigation consequences. The FCC is not reviewing this transaction.
We think the DOJ is in a tough spot. It can sue to block and commit substantial litigation resources to a case of questionable merit. The strategy short of that scenario is negotiating a deal while maintaining a credible threat that if will sue if it does not win the concessions it seeks (whatever those are). Striking that balance regarding this particular deal is a complex and delicate task for the antitrust enforcers.
Separately, we continue to doubt that President Trump's criticism of CNN's news coverage has any relevance to this matter. The Antitrust Division is not likely to take marching orders from the White House based on news coverage complaints. We doubt any White House or senior Administration political involvement. From a competition policy perspective, CNN does not raise any antitrust concerns.
More likelly, this is a discussion over classic vertical foreclosure concerns. But AT&T lacks content and Time Warner lacks control of distribution facilities. The DOJ is not likely to prevail if it brings a lawsuit, but it is also unlikely to win meaningful concessions or conditions without a credible threat of bringing a lawsuit. We expect continued discussions and a reasonable disposition through a consent decree.
There are some implications here for Comcast as the President, as a candidate, also suggested he would like to see the Comcast-NBC deal undone. We doubt the back-and-forth over conditions in the AT&T/Time Warner deal suggest a real threat to Comcast. But the DOJ is likely signaling it will not be a pushover on mergers, and that is noteworthy as other possible deals across multiple industries are considered and negotiated. The Sinclair-Tribune deal is also before the DOJ and criticism of that transaction has come from sources across the full political spectrum.
