AT&T and Time Warner plan to merge in a $85 billion deal that would unite one of the largest distributors of content with one of the biggest producers of content, a roster that includes hits like HBO’s “Game of Thrones,” the Harry Potter films and major cable franchises like CNN.
But not if the Justice Department has its way. The U.S. government has sued to block the deal, a move that some fret is actually political reprisal for CNN’s reporting on President Trump. The trial begins on Wednesday, March 21.
Here’s what’s at stake and what to look for.
Why is the Justice Department suing AT&T?*
The government says the merger will be bad for consumers. A combined AT&T and Time Warner would have much more heft and could force higher prices on TV distributors, leading to higher cable and satellite TV bills.
“Consumers will end up paying hundreds of millions of dollars more than they do now to watch their favorite programs on TV,” the Justice Department said in court filings.
AT&T’s counter? The government’s analysis relies on an improbable hypothesis: In order to extract higher fees, AT&T would have to withhold Time Warner channels like CNN and TNT from the pay TV distributors.
In theory, that would also allow AT&T to raise prices on its own TV customers (via AT&T’s U-verse and DirecTV), since it would be the only place a viewer could watch Anderson Cooper or key games of the NCAA basketball finals.
But the economic harm from doing so would far outweigh whatever gains AT&T could get, the company says, making it an unworkable bargaining tactic. AT&T has also made a commitment to not black out any TV channels in any future fee disputes, removing its most powerful bartering tool. In short, prices won’t go up, and the TV landscape will remain competitive.
What are the stakes for AT&T and Time Warner?
Time Warner could lose out on $85 billion — which would go to its shareholders, including to executives. Anyone who bought stock prior to news of the deal stands to gain at least a 36 percent profit based on AT&T’s offer of $107.50 per share.
But after the government filed its suit in November, shares dropped below $100, a sign of low-to-medium confidence that the merger will be approved.
If AT&T loses, it would also have to pay Time Warner $500 million in what’s known as a reverse breakup fee. That’s small relative to the typical payout, usually between 3 percent to 9 percent of the deal size. In this case, it’s less than 0.6 percent. Time Warner and AT&T, it seems, were confident the deal would pass regulatory muster, which might explain the low fee. The Trump Administration, of course, ignores all past precedent.
It would also be a blow to Time Warner CEO Jeff Bewkes, who sees this deal as his grand exit.
For AT&T CEO Randall Stephenson, buying Time Warner is a way to set the company apart from its key rival, Verizon, which has done its own content deals by acquiring both AOL and Yahoo. Pricing wars have pushed down monthly cellphone bills, which has been good for consumers but not so great for mobile phone operators.
AT&T’s key thesis in buying Time Warner is that the combined company could speed up the development of new types of online video (which it would own), and drive bigger profits by marrying AT&T’s consumer data with Time Warner’s TV content to sell targeted advertising, which is worth more than the usual advertising.
What it means for the media industry
But there’s something bigger in play here.
If the court rules against the acquisition, it might chill other media mergers in the works. Disney plans to buy Fox’s entertainment business and CBS and Viacom are working on a merger. There’s also Comcast’s bid for European pay TV operator Sky, a deal that appears to be designed to spoil Disney’s play for Fox — more on that here.
If, however, you believe President Trump is just trying to punish CNN with the suit, then you’d also have to think these other media deals are safe, since, in the Disney-Fox case, Trump is an avowed fan of anything Rupert Murdoch owns, specifically Fox News, and so is happy for him to succeed; in the CBS-Viacom merger, neither side has been a target of Trump’s ire, despite the reporting of CBS News.
If that’s too cynical a take for you, then you’d have to allow that these deals would have to be in doubt, and therefore would/should invite the same Justice Department scrutiny.
The Disney-Fox proposal, for example, takes a competitor out of the marketplace by marrying two different content companies. In other words, Disney would no longer just be bringing its own TV networks (ESPN and ABC and Freeform) when bargaining with Comcast or Dish, but also Fox’s channels (its regional sports networks, FX and National Geographic).
Same goes for a tie-up of CBS and Viacom, which would put Nickelodeon, Comedy Central, MTV, CBS and Showtime all under one roof.
Ironically, the AT&T-Time Warner deal is the one media merger that doesn’t change the content portfolio, which is to say that since AT&T doesn’t already own any TV networks, the addition of Time Warner wouldn’t reduce the number of competitors in the marketplace — what’s known as a vertical merger. That, in fact, has been the essence of AT&T’s legal argument.
You could also argue that since AT&T doesn’t get a distinct advantage by owning Time Warner, the merger actually doesn’t make sense.
But why are so many mergers happening in the first place? Because the media industry has turned into a zero-sum game. Fewer people are paying for TV, which means fewer people are watching TV, which means there’s less in subscriber fees and advertising dollars to go around.
That’s why the merger landscape has turned into a fight for assets, all the while as Netflix and Google and Facebook continue to eat into TV’s audiences.
Who is the real competition?
AT&T has stated pretty clearly in court filings that Google, Netflix, Facebook and Amazon are the real threats to its business as well as that of Time Warner’s. “Google,” for example, appears on 16 pages of the brief it filed on March 9. “Netflix” appears on 19 pages; “Facebook,” 15 pages; “Amazon,” 12 pages.
Meanwhile, “Fox,” “CBS,” “Viacom” and “Disney” each appear on no more than five pages; “Verizon,” only two pages. “Apple,” interestingly enough, also only appears on two pages.
*Is it really because Trump doesn’t like CNN?
The president has said publicly he had nothing to do with the Justice Department’s decision to block the purchase. Reminder: The Justice Department is supposed to remain independent of the White House.
But AT&T CEO Stephenson questions the timeline of events.
The source of his acrimony might trace back to his relationship with the network’s president, Jeff Zucker. The two were compatriots at NBCUniversal**, where Zucker was CEO until 2011. He had hired Trump for the reality show “The Apprentice,” which became a ratings success.
The fact that each ended up in adversarial positions naturally creates tension, but CNN’s aggressive coverage has only stoked Trump’s animus; his ties to Zucker seem to suggest he feels a keen sense of betrayal.
The thinking goes that by stopping AT&T’s purchase of Time Warner, it would hurt Time Warner and thus CNN.
In fact, while Trump was on the campaign trail, he vowed to block the merger in the first 100 days of his presidency, saying it “concentrates too much power in the hands of too few.”
Months after he took office, however, it appeared that AT&T’s merger gambit would pay off. The Justice Department had enlisted a new antitrust czar, Makan Delrahim, who just months prior to his appointment had publicly stated that AT&T’s purchase of Time Warner shouldn’t be an issue for regulators. “I don’t see this as a major antitrust problem,” he said.
But by the end of last year, Delrahim had pivoted. The Justice Department now wanted AT&T to sell Time Warner’s Turner unit — which includes CNN — in order to proceed with its acquisition, according to a report in the Financial Times and in the New York Times.
AT&T refused, and the Justice Department sued.
Worth noting: Delrahim’s reversal was eye-opening enough to inspire AT&T to attempt an unusual legal strategy. It included him on its witness list, and asked the court to compel the Justice Department to provide any communications it had with the White House via emails and phone logs about the merger, part of an effort to show Trump may have prompted the suit because of his feelings toward CNN.
It was a long shot. The bar for compelling that kind of information is very high, and the court denied the request. AT&T also removed Delrahim from its witness list with the understanding that it could still call him later to testify if there was good enough reason.
Who’s the decider?
The case is what’s known as a bench trial, so the presiding judge, in this instance Richard Leon, will make the sole determination. There’s no jury.
Antitrust cases are typically a battle between experts, and AT&T has already started harping on the government’s analysis. The company cites Justice’s claim that the merger would lead to a 45-cent increase in a consumer’s average monthly TV bill, which AT&T calls a “remarkably small size,” and a finding it nonetheless still doesn’t accept.
AT&T even characterized the government’s case as like ”a Persian cat with its fur shaved...alarmingly pale and thin,” an allusion to another case that nevertheless drew eyebrows given the fact that Delrahim was born in Iran. His family immigrated to the U.S. as Jewish refugees.
Judge Leon is arguably already an expert on the economics of the TV business — or has at least been exposed to experts. He approved Comcast’s acquisition of NBCUniversal in 2011.
There is, however, a key difference this time around.
In the Comcast case, the Justice Department cleared the deal pending certain conditions, known as a consent decree — a set of rules designed to prevent potential harm to consumers or to competition. It was signed by Judge Leon.
The order laid out what Comcast could and could not do with NBCUniversal after the acquisition. As an example, it had to forfeit management rights over Hulu, a joint venture one-third-owned by NBCUniversal.
With AT&T, however, the Justice Department is asking the judge to block the deal outright.
The potential second part of the case
Some finer points to understand: The judge could wholly find in favor of the government and block the merger altogether, or he could find the government failed to prove its case and let the merger go through.
There is a third option: If Leon finds that the merger is anticompetitive, he could still let the deal go through with conditions or remedies to address anticompetitive concerns. Which would bring us to the potential second part of the case where each side will argue the merits of certain rules that would govern how AT&T manages Time Warner.
The Justice Department will likely argue that no conditions should be allowed and the deal shouldn’t go through, since 1) any conditions would do nothing to curb consumer harm, and 2) even if some rules proved useful, it would be far too costly for the government to monitor.
AT&T will argue it has already made a pretty big promise — to not black out any Time Warner channels in any future disputes for a period of seven years, with any disagreements subject to third-party arbitration. In other words, with that promise, AT&T has effectively already built in a key condition.
The judge could also apply his own prescriptions to the merger, but even then he would only do so very narrowly. If he does, he may work off the decree from the Comcast-NBCUniversal merger over which he presided.
Why won’t the government just allow for conditions?
Despite Delrahim’s reversal (or maybe in spite of it), when it comes to antitrust, he and many others in the legal community believe in what’s known as a “structural remedy” over “behavioral remedy.”
Comcast’s consent decree is considered “behavioral” fix to what the government saw as potential harm to consumers. But Delrahim has expressed skepticism that it has actually worked out. As an example, Comcast had met with fellow owners of Hulu back in 2013 over the streaming platform’s future, which could be seen as a violation of its agreement.
And as a conservative, Delrahim doesn’t believe that government should be meddling in a for-profit business, and behavioral remedies require government to make business judgments.
A structural remedy, on the other hand, is a do-it-once-and-walk-away process. That usually amounts to forcing a company to sell something, which would explain Justice Department’s request that AT&T sell Turner as part of the deal.
The case number is 17-cv-2511: United States of America v. AT&T Inc. et al., and it will take place at the U.S. District Court for D.C. The trial starts March 21 in Courtroom 18.
The proceedings will be open to the public, but Judge Leon has banned reporters from bringing in electronic devices, which goes against the standard policy. Leon was agitated by press leaks and warned both sides the case shouldn’t be litigated in the media.
The trial could last as long as two months, a change from the original three-week estimate. That’s because both sides have been arguing over the admissibility of certain types of evidence as well as what kinds of evidence should be kept confidential, such as rate pricing for TV channels.
Most of the testimony will likely feature economists and experts with charts and graphs. But the appearances of Stephenson and Bewkes (and possibly Delrahim) will be the ones to pay attention to.
** NBCUniversal is a minority investor in Recode parent company Vox Media.
This article originally appeared on Recode.net.