AT&T heads to trial in landmark merger fight

AT&T heads to trial in landmark merger fight
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The government and AT&T will square off in court this week to decide the fate of a massive media merger in a trial that will have far-reaching effects on the market and regulators.

The trial begins Monday in the Justice Department's (DOJ) lawsuit to block AT&T’s $85 billion proposed merger with Time Warner.

The case has been embroiled in controversy over whether President TrumpDonald John TrumpJoint Chiefs chairman denies report that US is planning to keep 1K troops in Syria Kansas Department of Transportation calls Trump 'delusional communist' on Twitter Trump has privately voiced skepticism about driverless cars: report MORE had any influence in the decision to block the merger as retaliation against CNN. Trump has long accused the Time Warner-owned network of biased coverage.

The DOJ and White House have denied any political interference.

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AT&T sought to make those questions a key to its case and requested communications between the DOJ and White House. A judge denied that request.

The trial will instead center on whether the deal could hurt competition or consumers. And the rest of the industry will be watching closely for cues on what types of deals they’ll be able to get away with in the future.

"I think it's safe to say that if the deal doesn't happen then we're basically throwing out the playing board with a lot of chess pieces moving around," said Brian Wieser, a media analyst with Pivotal Research Group.

The Justice Department will make the case that combining AT&T’s control over distribution channels with Time Warner’s popular content — which includes HBO, TNT and TBS — will give the company the power to squeeze out competitors and drive up prices for customers, and could have far-reaching consequences for the entire entertainment industry.

“[T]he decision in this case will chart the course for the future of video-content delivery in the United States—either important video content will be available through a competitive market to all distributors, including up-and-coming innovators, or it will likely only be available through vertically integrated, well-funded silos,” prosecutors wrote in a pretrial brief last week.

But AT&T says that the merger is essential for a telecommunication company to remain competitive as tech giants upend its industry. The company insists that it has no incentive to withhold any of the popular programming that it would obtain under the deal.

“There is no fact-based evidence that this merger will harm competition,” AT&T’s attorneys wrote in their own filing. “Nothing will be withheld from competitors; consumer prices will not go up.”

The stakes are larger than AT&T’s expansion efforts and the fate of CNN. The outcome of the trial will set the tone for future moves in the market and how the government treats these types of deals.

The case is significant in part because it is rare to see such a high-profile prosecution of a vertical merger, a deal that joins two companies from different sectors of the same industry that don’t compete directly with one another.

Under the Obama administration, the Justice Department approved a similar deal in cable giant Comcast’s merger with NBC. But regulators also attached certain “behavioral” conditions to restrain the combined company from engaging in the type of anticompetitive practices that prosecutors fear from AT&T and Time Warner.

That approach has come under increasing skepticism, including from Makan Delrahim, Trump's chief at the Justice Department’s antitrust division. Before he decided to sue AT&T to block the merger, Delrahim made clear last year that he believes behavioral conditions are ineffective against mergers that pose anticompetitive risks. Instead, he argued in favor of a “structural” approach that requires companies to divest from certain assets in order to win regulators’ approval.

Jeffrey Blumenfeld, an attorney at the law firm Lowenstein Sandler and a former antitrust prosecutor at the Justice Department, says that a behavioral approach won't be effective at policing a massive vertical merger.

“Once you own both the platform and the application, the incentives change. And behavioral remedies try to pretend either that the incentives have not changed or that you can override obligations to their shareholders to maximize their profits,” Blumenfeld, who helped prosecute the Justice Department case that led to the breakup of AT&T in the 1980s, said in an interview with The Hill.

AT&T’s attorneys point out, however, that it must now compete with companies like Amazon and Netflix, which control their own platforms while also producing original content. Compounding those concerns is the fact that consumers are increasingly looking beyond cable providers for video content.

“Among the problems that AT&T and [telecommunication companies] have in general is that they have very limited growth from their legacy businesses and they're looking for approaches that would support more scale and more growth,” said Wieser.

And if a federal judge decides to block AT&T’s merger, it could very well alter the course of the market by forcing telecommunication companies to find different ways of adapting to the evolving landscape. But Wieser argues that it won’t be enough to dissuade the major players from trying to consolidate.

“If market concentration is the concern, this isn't going to solve that. It's just going to take different forms,” Wieser said.

One thing is clear, the fallout from the decision could take a long time to settle.

"These things take so long to play out," said Wieser. "We may very well have another president by the time they do.”