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Why the strongest case for AT&T's merger with Time Warner is also the case against it


This weekend, AT&T announced plans to acquire Time Warner in an $85 billion deal —the largest deal the media industry has seen in several years. If approved by regulators, it will put HBO, the Warner Bros. movie studio, and several major cable channels under the control of one of the nation’s largest telecommunications companies.

But the deal’s future is very much in doubt. On paper, it looks a lot like the 2011 merger between Comcast and NBC Universal, which regulators approved. But the political climate has changed since that deal was approved by the Obama administration, and both the Trump and Clinton campaigns have signaled skepticism.

“AT&T is buying Time Warner and thus CNN, a deal we will not approve in my administration,” Trump said on Saturday. “It's too much concentration of power in the hands of too few.”

There’s growing concern on both the right and the left that major media conglomerates are becoming too concentrated. In particular, there’s a high level of resentment against incumbent telecommunications providers, which are seen as charging high prices and offering poor service. That makes opposing the deal good politics.

Luckily for AT&T, antitrust decisions are supposed to be made based on the law rather than on political considerations. AT&T’s fate will rest in the hands of whoever runs the Justice Department’s antitrust division in the next administration. But in making the case for the deal, the company has a big problem: The most compelling business arguments for the deal — that the new megacompany can boost profits by giving Time Warner content favorable treatment on AT&T’s wired and wireless networks — are also the arguments that are most likely to attract skepticism from regulators.

Because of that conundrum, AT&T executives have effectively been forced into telling a somewhat self-contradictory story, talking vaguely about synergies the deal will allow while simultaneously insisting they won’t exploit those synergies so much that it could damage competition.

“The world of distribution and content is converging,” AT&T CEO Randall Stephenson said on CNBC Monday, saying that the merged firm would “do something truly unique, begin to curate content differently, begin to format content differently for these mobile environments.”

Yet in an apparent bid to appease regulators, Stephenson assured people that “we are not talking about changing how the content is made available to other people or customers or distributors.”

The case for the deal is a bit of a mystery

House Judiciary Committee Holds Hearing On Proposed Merger Of AT&T And DirecTV
Randall Stephenson, CEO of AT&T, at a congressional hearing in 2014.
Photo by Win McNamee/Getty Images

There are certain things companies always say when defending big mergers to Wall Street. They say they’ll save money by eliminating redundant functions and boost revenues by having the companies sell each other’s products.

That’s what AT&T meant when it said that “AT&T expects $1 billion in annual run rate cost synergies within 3 years” and that “AT&T expects to achieve incremental revenue opportunities that neither company could obtain on a standalone basis” in its press release announcing the deal.

But these are arguments that would apply to literally any merger you can imagine. Normally you need something more to justify the cost and complexity of stitching two enormous companies together.

AT&T’s main argument here is that having content and communications networks under the same roof will allow the combined company to innovate in the way it distributes content and makes money from it.

For example, AT&T knows exactly where its wireless customers (or at least their phones) are at any given point in time. In theory, AT&T could use that data to help advertisers target the customers that are most likely to be interested in an ad.

AT&T could also potentially help Time Warner improve how its content performs on mobile devices by providing it with detailed data on which content people are watching.

That’s not a crazy theory for how the merger could create value. Verizon made similar arguments to justify its recent acquisitions of AOL and Yahoo, which attracted less regulatory scrutiny since the takeover targets were so weak. But there’s reason to doubt that customers actually want AT&T doing this kind of thing.

There are already big technology companies — Google, Facebook, Apple, Netflix, and so forth — with a lot of experience distributing the content users want to watch and (in some cases) showing them ads based on it. It seems more likely that AT&T will annoy customers with ham-handed efforts to promote alternatives to these products than that they’ll provide real value for consumers. Customers don’t necessarily want their internet service providers using their intimate knowledge of customers’ online activities to target content or ads at them.

The business case for the deal is also the political case against it

The larger problem is that if this strategy were likely to work, then it would also likely set off alarm bells for a lot of policymakers.

If AT&T figures out a way to use its control over major broadband networks to give HBO and Warner Bros. content a leg up over content from other companies, that’s going to put independent content companies at a systematic disadvantage in the marketplace. That, say critics like Bernie Sanders, would be bad news for consumers.

The big question is whether regulators responsible for reviewing the merger will see things the same way Sanders does. And that’s far from clear.

The two key agencies will be the Department of Justice — which will conduct the overall antitrust review — and the Federal Communications Commission, which regulates the telecommunications sector. Reuters has reported that AT&T may be able to avoid FCC review of the deal by selling off the one television station Time Warner owns.

As far as the Justice Department goes, AT&T’s best hope is that the agency approved the very similar merger between Comcast and NBC Universal back in 2011. AT&T is hoping that Justice Department lawyers will follow the precedent in that case and approve this merger as well.

However, the decision is likely to be reviewed by whomever the next president chooses to lead the Justice Department’s antitrust division. Donald Trump has already vowed to oppose the merger — a view that would be surprising coming from a normal Republican. Hillary Clinton hasn’t weighed in on this specific deal, but she has signaled that her antitrust team will enforce the law more strictly in general, and her campaign said there were "a number of questions and concerns" about the deal.

On the other hand, Justice Department lawyers could decide they don’t have a firm legal foundation for blocking the merger. Under the Obama administration, the DOJ has blocked at least two mergers between major telecommunications companies — AT&T’s proposed acquisition of T-Mobile in 2011 and Comcast’s attempt to merge with Time Warner Cable (which, confusingly, is a different company from the one AT&T wants to acquire).

But there was an important difference: Those cases were mergers between companies in the same industry — known as “horizontal” mergers in industry lingo. AT&T and T-Mobile competed directly with each other, so allowing them to merge would have deprived customers of a competitive choice. Comcast and Time Warner Cable didn’t compete directly with each other, but the combination would have given them a lot more bargaining power in negotiations with content providers.

In contrast, AT&T’s proposed acquisition of Time Warner is a “vertical” merger between companies in different parts of the content supply chain, like Comcast’s acquisition of NBC Universal.

Because horizontal mergers reduce competition in a direct and obvious way, it’s easier for regulators to make the case that they’re harmful to competition. That’s not so simple with vertical mergers like AT&T’s proposal to buy Time Warner, since AT&T could argue in court that the deal won’t reduce anyone’s choices.

Still, antitrust law is flexible enough that if the Clinton or Trump Justice Department decides the deal is bad for competition, it will likely be able to come up with a plausible legal theory.

And if the Justice Department announces its opposition, AT&T might decide to abandon the deal rather than fight on, since a years-long antitrust battle with the federal government would be a huge distraction for both companies. Indeed, that’s what AT&T did after regulators announced their opposition to its acquisition of T-Mobile.

The deal won’t have an immediate impact on customers

Regardless of what regulators decide to do, the deal will have little impact on consumers in the short term. AT&T has said that the companies will largely be run at arm’s length after the merger; we’re not going to have AT&T executives reviewing Game of Thrones scripts.

The longer-term impact is unclear. Skeptics say it will mean fewer choices and higher prices for consumers and less innovation for the economy as a whole. AT&T, for its part, argues that we’ll see more innovation that will ultimately benefit customers. The deal’s fate may depend on whether regulators find this argument persuasive.