Five Things to Know About the Trump Administration’s Case Against AT&T

The Department of Justice filed a lawsuit Monday to block the merger of telecommunications giant AT&T with Time Warner, the owner of HBO and CNN. Here are the key takeaways.

The Very Real Dangers that Triggered the Government’s Action

The $108 billion acquisition of Time Warner would be one of the largest mergers in America’s history. The government is concerned that the combined company would use its control over Time Warner’s valuable networks to hinder competition and innovation–harming American consumers. Since antitrust law forbids anticompetitive combinations that harm consumers, the government argues the merger is unlawful.

More specifically, the government says that the deal would change the bargaining position between video distributors–from Netflix and Sling to cable T.V. providers like Comcast and Verizon–and Time Warner. Currently, there are limits to what the distributors will pay for, say, HBO’s Game of Thrones. If Time Warner tries to charge too much for its content, video distributors will balk and not carry the content and Time Warner will lose viewers of those services and the attached advertising or subscription revenue. There’s a symmetry that encourages both parties to negotiate, strike bargains, and this benefits consumers.

Under AT&T’s ownership, however, this dynamic changes. After the merger, if a distributor refuses to pay what Time Warner demands, it will not necessarily lose viewers. Because it will be able to recapture some of them by getting them to subscribe to AT&T’s DirectTV distribution network. This extra-bargaining power breaks the old symmetry, giving AT&T the credible ability to block-out distribution networks that will not submit to its pricing demands.

AT&T’s Vague Promise of Benefits to Consumer

AT&T’s response to the Justice Department’s brief was not very persuasive. A lot of it focused on technical legal details relying on judicial precedents made in very different market environments. Its main argument seems to be that the Justice Department has not tried to stop many vertical mergers like this where one company buys another in its supply chain, instead focusing on horizontal mergers where companies buy competitors. It doesn’t seem to have occurred to AT&T that in an age where so much about content, communications, and technology is changing, the enforcement of antitrust law probably will have to change also.

AT&T claims the deal will benefit consumers but those benefits are, in the words of Bloomberg’s Matt Levine, “rather blathery.”

Here’s AT&T list of benefits:

This merger will benefit consumers by:

• Creating more competition in the evolving, multi-faceted entertainment industry.
• Giving consumers more choice and value—not less—in how they get their favorite content.
• Making entertainment more innovative, interactive and mobile.
• In short, Time Warner content will be distributed in more ways and to more places and people, not less.

Those are a lot of nice sounding buzzwords but hardly stand up against the very concrete risk of anticompetitive behavior described by the Justice Department.

Case is Rooted in a Conservative-Populist-Libertarian Theory of Antitrust

It may surprise some people that the Trump administration is blocking the case. Afterall, the Trump administration has been trying very hard to create a more favorable environment for American businesses, cutting corporate taxes, demolishing burdensome regulations, and even moving to cancel Obama administration net neutrality policies. How can the administration’s agenda to “deconstruct the administrative state” be squared with this deal?

The key to resolving this apparent contradiction can be found in a speech last week by the Justice Department’s top antitrust attorney, Makan Delrahim, that set out the ideas that form the foundation of the Justice Department’s case. Delrahim explained that antitrust should not be about expanding regulation but securing a market that is less regulated by government because it is properly regulated by competition.

Delrahim argued that the government had erred in its Obama administration era experiments that allowed illegal mergers but subjected them to certain behavioral commitments.  Those experiments often failed because the lawyers writing the behaviorial rules could not adequately anticipate how markets might develop after the deal, how businesses would react to those developments, and how profit-driven corporate executives would try to adapt to the rules to find anticompetitive ways to exploit them. Even if the rules could be well-written, policing them is almost impossible.

In some ways, AT&T’s response to the lawsuit confirms Delrahim’s argument. There’s a reason why AT&T prefers the behaviorial remedies: it very likely believes those will not pose an obstacle to accomplishing its alleged (and publicly denied) goal of weaponizing the combination of content and distribution.

The Elephant and the Fox in the Room

There’s been a lot of speculation that Donald Trump’s well-known animosity to Time Warner’s CNN may be responsible for the Justice Department’s opposition to the AT&T merger. Given the stellar reputation for intellectual integrity of Delrahim and the forceful explanation he gave for his approach in his speech, this is little more than an implausible conspiracy theory. If Trump were forcing the hand of the Antitrust Division of the Justice Department, we would certainly be hearing from the department’s career lawyers raising objections. Instead, over a dozen of the department’s attorney’s signed the complaint filed to block the deal.

Yet when AT&T’s attorneys and chief executive were asked about the “elephant in the room,” they decided to feed the conspiracy theory trolls by saying “we just don’t know.” That itself is implausible. After months of meeting with lawyers from the Justice Department, they should know all too well that the Antitrust Division believes its objections to the deal are well grounded in law. The willingness to engage in conspiracy theory talk just undermines AT&T’s crediblity.

Another conspiracy that’s been raised is that the Trump administration is somehow doing the bidding of Rupert Murdoch in blocking the deal. That’s not only unlikely because Trump and Murdoch are often at odds. It’s also hard to see how this case helps Newscorp or Fox, the later of which is reportedly looking to do a deal itself. If anything, the Justice Department’s lawsuit could scare off some potential suitors.

This May Be Just the Beginning

AT&T chief Randall Stephenson complained in a press conference Monday that the Justice Department’s decision to block the deal would throw the entire telecommunication, media, and technology industry into “uncertainty” about what kind of deals would be permitted. He is probably correct.

The growing power of combined communications, media, and technology companies is raising alarm on the political left and right. A new spirit of populism has arisen that wonders if American consumers are really benefitting from the market might of the likes of Google, Facebook, and Amazon. While breaking up the tech titans was almost unimaginable a year ago, the idea is quickly becoming mainstream.

Keep in mind that antitrust law itself was not written in a theoretical vaccum. It was written directly to address what were seen as dangerous business combinations of the past. It was a practical response to what was seen as a toxic environment created by America’s biggest business combinations, the so-called Trusts. And it was supplemented by rules that, for instance, forbid banks from owning commercial enterprises.

Many conservatives of the 19th and early 20th century were enthusiastic supporters of these laws. Some were free marketeers who believed the trusts were anticompetitive and wielded too much influence with government. Traditionalist conservatives were worried that the trusts were having deleterious effects on America’s social fabric, using their unfair advantages to uproot too many local small businesses and the communities they supported. That might sound familiar to those watching the developing fight over the fate of our tech sector.

Blocking the AT&T deal could be the first step in what will eventually become a policy of separating communications technology from media and commerce.