Why the Department of Justice Put the Brakes on the AT&T-Time Warner Merger

Critics of the proposed AT&T merger with Time Warner were joined by an unexpected ally this week: the government of the United States.

Until recently, approval for the deal by the Department of Justice was considered a shoe-in. While the government might require some promises about not treating competing media companies unfairly or some sort of net neutrality-style pricing agreement, it was not expected to place any substantial obstacles in the way of the deal.

By all indications, AT&T would combine Warner Bros, HBO, DirectTV, and CNN–the largest film studio, the largest premium television channel, the largest pay-TV provider, and one of the largest cable news networks–and there was nothing that anyone could do to stop it.

It was a strange set of circumstances, to be sure. Politicians of all sorts were critical of the deal, including Donald Trump, Tim Kaine, Senator Al Franken of Minnesota, Senator Bernie Sanders of Vermont, and Senator Elizabeth Warren of Massachusetts. On the campaign trail in Gettysburg, Pennsylvania, Trump went so far as to say he would block the deal.

But corporate leaders and business columnists told us that the government was unlikely to take significant actions to halt or require a major restructuring of the deal. Somehow the American government was expected to be paralyzed when it came to taking action to block a politically unpopular $85.4 billion deal.

“I kept asking: what happened to the American government that it was suddenly incapable of doing anything to stop this corporate behemoth? Did someone secretly pass a constitutional amendment that protected corporate interests against American democracy?” one former advisor to the Trump campaign who never entered the administration said.

Now we know that the government does indeed believe it has the authority to require serious changes to the merger and perhaps even to block it altogether. The Justice Department has told AT&T that to win approval for the deal it must shed some assets, including giving AT&T a choice of selling DirectTV or CNN and other Turner assets.

Behind the confidence that the deal would be permitted to proceed seems to have been a pair of misconceptions about U.S. antitrust law and the way it is enforced.

For decades the legal community largely considered that the breakup of the original AT&T was badly handled. In large part, this was because it essentially put control of the U.S. telecommunications sector into the hands of the federal judiciary. In reaction, legal scholars and government regulators formed a consensus around the idea that pre-deal structural remedies–requiring businesses to be divested or broken up–were preferable to post-deal behavioral remedies–which often require close government supervision. The Justice Department, for instance, believed it lacked the necessary expertise to effectively implement many behavorial remedies.

This approach was changed by the Obama administration, which was much more comfortable with administrative and judicial monitoring to enforce behavioral results. When Comcast sought approval for its acquisition of NBC Universal, for example, Obama’s Justice Department sued to block the deal. That case ended in a consent agreement in which Comcast accepted certain conditions that limited its behavior but didn’t require any major divestments.

Critics believe that consent agreement has been largely ineffective at discouraging anti-competitive behavior. And, more broadly, many in the legal community are still wary of imposing behavioral remedies on these huge deals, not least because misbehavior can be hard to detect or prove once a deal is completed. Georgetown Law Professor Steven Salop and Clearly Gottlieb Steen & Hamilton attorney Daniel Culley wrote in a 2015 paper “the anticompetitive conduct may not even be elected after-the-fact.”

But many of those who confidently predicted that the AT&T deal would pass muster appear to have believed the Obama-era policy of openness to post-deal, behavioral enforcement would stick. As it turns out, antitrust policy may be undergoing a change in direction in the Trump era, like many other policies enacted by the Obama administration outside of the formal rulemaking process, much less involving actual changes to legislation. Makan Delrahim, the Trump administration’s head of the Justice Department’s antitrust division, has said that he prefers structural remedies to behavioral.

Another error appears to have been the notion that so-called “vertical mergers” were largely immune to challenges. A vertical merger is where a company buys a supplier, such as an automaker buying a parts maker. In horizontal mergers, companies buy competitors who are in the same or very similar business lines.

While horizontal mergers have received the most scrutiny in recent years, there is indeed some very recent precedent for blocking vertical mergers. While Comcast’s attempt to buy Time Warner Cable (the cable provider that was spun off from Time-Warner company AT&T is pursuing now) is sometimes portrayed as a horizontal deal, it was actually a vertical deal, since the two cable providers were not in direct compettition with each other. In general, cable providers seldom compete with each other and enjoy regional monopolies. That deal was blocked in 2015.

One of the red flags that likely brought on the Justice Department’s criticism of the deal is the potential for the merged AT&T Time-Warner conglomerate to freeze out competitors. This could be accomplished by privileging its own content, for example by giving CNN or its other networks beneficial positions in pay-TV bundles or advantageous placement inside cable television menus. Alternatively, the merged company could limit the ability of competitor distributors to carry its networks or impose higher costs.

Another potential problem for the deal is consumer harm considered more broadly. As an integrated content and distribution company, AT&T could flex its muscles by locking out competing sources of news and information from its network. This would limit consumer access to a diversity of viewpoints, which many would consider a harm against the consumer.

The requirement that AT&T choose either to divest itself of CNN or DirectTV would seem to point to this concern about potential restrictions on viewpoint diversity. Without its own news network, AT&T would have no reason to shut out competing news networks. And an independent DirectTV wouldn’t be incentivized to favor one network over the others.

Even more broadly, the deal poses few if any public benefits. Indeed, it’s hard to even identitify a single public benefit from the deal. Given the potential costs in terms of viewpoint diversity and risks of other anticompetitive behavior, those will likely weigh against the deal inside the antitrust division of the Justice Department.

Those familiar with the Justice Department say there is little chance that this has anything to do with the president’s personal war with CNN.

“The idea that DOJ is doing this because Trump calls CNN ‘fake news’ is fake news itself,” one former DOJ employee said.