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Why is AT&T trying to buy Time Warner?

Recode’s Ed Lee explains the pending merger — and why the U.S. Justice Department is trying to block it — on the latest Too Embarrassed to Ask.

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AT&T CEO Randall Stephenson and Time Warner CEO Jeff Bewkes
AT&T CEO Randall Stephenson and Time Warner CEO Jeff Bewkes
Mark Wilson / Getty

By next week, closing arguments will take place to see if one of the biggest media mergers in history will go through. More than two years ago, AT&T approached Time Warner about an $85 billion deal to buy its channels, which include CNN, HBO and TNT.

But the Justice Department sued to block the deal, and the case will wrap up over the next month or so.

For a lot of consumers who don’t follow the ups and downs of media M&A, it’s hard not to wonder: $85 billion? Why is AT&T willing to pay that much?

“Simply put, AT&T is having a hard time retaining customers,” Recode’s managing editor Ed Lee said on the latest episode of Too Embarrassed to Ask. “They’re in a pricing war with Verizon; cellphone bills keep going down, which is great for us, but not great for the companies. They think, by buying Time Warner, they’ll be able to create new kinds of online video and also sell what’s known as targeted advertising. They’ll marry AT&T’s data with Time Warner’s content and sell ads at a higher rate.”

Speaking with Recode’s executive editor Kara Swisher, Lee said Time Warner is motivated to look for a buyer because growing tech giants like Netflix, Google and Facebook are threatening to eat up its audience. However, even he — a longtime media reporter who has written at length about the merger here at Recode — is skeptical that the stated reasons for the merger are enough to justify the cost.

“Couldn’t you just have done that as a joint venture, or some kind of a business deal?” he asked. “Did you have to buy them outright? Or, if the concern is what’s happening in a Netflix world right now, couldn’t you just spend $85 billion building your own Netflix?”

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On the new podcast, Lee also talked about why the U.S. Justice Department sued AT&T last year to block the merger. He said a “vertical merger” like this one, combining two companies with different competitors, would usually get less regulatory scrutiny, while Disney’s planned acquisition of 20th Century Fox — a “horizontal merger” that would take out one of Disney’s largest competitors — normally would see scrutiny, but isn’t.

The answer starts with “T” and ends with “rump.” After noted CNN-hater President Trump took office, the White House enlisted a respected antitrust lawyer, Makan Delrahim, who had earlier told reporters that the merger shouldn’t be a big deal; after becoming the U.S. Assistant Attorney General for the Antitrust Division, he changed his mind and said it was a problem.

“The Justice Department is supposed to be independent of the White House,” Lee said. “But because this antitrust guy, Makan Delrahim, did this hard pivot, people are like, ‘Come on! That had to be Trump.’ There’s no evidence, there’s no reporting, there’s nothing to say that right now, but people can fill in the gaps.”

(In November, Delrahim said in a statement that “I have never been instructed by the White House on this or any other transaction under review by the antitrust division.”)

All that being as it may, he said the odds are in AT&T’s favor. Based on what questions Judge Richard Leon asked in court, Lee thinks the merger has a 60 percent to 70 percent chance of going through. And that might, ironically, lead to a dramatic turn in the Fox-Disney story.

“If AT&T succeeds in this, it might give other media companies the leeway to do other big deals,” he said. “Comcast* also made a bid for Fox, and they actually offered more money. And Fox turned them down, not because they didn’t think it was high enough, but because of regulatory concerns: ‘You already own NBC and there’s this AT&T case pending.’ If AT&T succeeds, Comcast might come back and say, ‘Hey Fox, we still want you, we’re going to give you even more money now.’”

(*Disclosure: Comcast owns NBCUniversal, which is an investor in Recode’s parent company, Vox Media).

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Correction: an earlier version of this story incorrectly stated a decision in the AT&T trial would come next week. Closing arguments start next week.

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