Donald Trump has given us a number of reasons to suspect that he may be behind the Justice Department’s lawsuit to prevent the entertainment company Time Warner from merging with the communications giant A.T. & T. Time Warner owns CNN, which Trump is in a running battle with. During last year’s election campaign, Trump said that his Administration would block the proposed merger, declaring, “It’s too much concentration of power in the hands of too few.”
Adding to the suspicions, Makan Delrahim, the head of the Justice Department’s antitrust division, which filed the lawsuit on Monday, worked as a lawyer in the Trump White House for a time before taking his current job. Delrahim has denied that any White House official exerted pressure on him, but, as the lawsuit proceeds, lawyers for A.T. & T. and Time Warner will surely ask when he changed his mind about the merger. Last October, shortly after plans for the merger were announced, Delrahim told an interviewer: “Just the sheer size of it, and the fact that it is media, I think will get a lot of attention. However, I don’t see this as a major antitrust problem.”
So, the lawsuit represents a dramatic about-turn on Delrahim’s part. But for all the political controversy surrounding his division’s decision to sue, there is also an important economic issue at stake—one that Elizabeth Warren, Bernie Sanders, and nine other Democratic senators raised in an open letter to the Justice Department in June. “Our constituents face significant and growing costs for telecommunications services,” the senators wrote. “Before initiating the next big wave of media consolidation, you must consider how the $85 billion deal will impact Americans’ wallets, as well as their access to a wide-range of news and entertainment programming.”
Actually, the merger is worth a hundred and eight billion dollars, the Justice Department says in its complaint. The document also notes that, “AT&T/DirecTV is the nation’s largest distributor of traditional subscription television. Time Warner owns many of the country’s top TV networks, including TNT, TBS, CNN, and HBO.” Were the merger to go ahead, the complaint argues, the “newly combined firm likely would . . . use its control of Time Warner’s popular programming as a weapon to harm competition. The proposed merger would result in fewer innovative offerings and higher bills for American families.”
If the case goes to court, lawyers for A.T. & T. and Time Warner will challenge these assertions. This week, the companies’ immediate reaction to the lawsuit was to accuse the Justice Department of breaking with precedent in challenging a so-called vertical merger, i.e., one in which the two companies involved don’t directly compete with each other. (A.T. & T./DirecTV is a media-distribution company; Time Warner is a media-content company.) At a press conference on Monday, Randall Stephenson, the chief executive of A.T. & T. said that “nobody should be surprised” that the question of political interference keeps coming up, “because we’ve witnessed such an abrupt change in the application of antitrust law here.”
In fact, however, the change isn’t as abrupt as Stephenson made it out to be. “There have been a lot of vertical mergers over the years, and the Department of Justice has challenged quite a few of them,” Daniel Rubinfeld, an N.Y.U. professor who served as the chief economist in the Justice Department’s antitrust division during the Clinton Administration, told me. He cited an example from the nineteen-nineties: a proposed merger between Lockheed, a manufacturer of warplanes, and Northrop, a maker of electronics systems for airplanes. Concerned that a combined Lockheed-Northrop would favor Northrop’s components over other potential suppliers, the Clinton Administration blocked the merger.
That’s far from the only example. Steven Salop, an economist at Georgetown, and Daniel P. Culley, a lawyer at Cleary Gottlieb Steen & Hamilton LLP, have put together a list of fifty-two enforcement actions concerning vertical mergers that the Department of Justice and the Federal Trade Commission have taken since 1994. One of them involved Time Warner, back when it owned a large cable company: its infamous merger, in 2000, with AOL. Although that deal went ahead, the Justice Department made AOL and Time Warner sign a consent decree in which they agreed to follow a number of steps that were supposed to protect competition in the broadband market, which was then pretty new.
The economic basis for challenging vertical mergers is known as “vertical foreclosure,” Rubinfeld explained. The term is used to describe a situation in which companies exploit the power they gain from a vertical merger to disadvantage their competitors, raise prices, or stymie innovations that could undermine their own position. In its complaint, the Justice Department argues that a combined A.T. & T. and Time Warner would be in a position to do all of these things: “AT&T/DirecTV would hinder its rivals by forcing them to pay hundreds of millions of dollars more per year for Time Warner’s networks, and it would use its increased power to slow the industry’s transition to new and exciting video distribution models that provide greater choice for consumers.”
That was another assertion. To prove its case, which it is bringing under Section 7 of the Clayton Antitrust Act of 1914, the Justice Department will have to persuade a federal judge that there is a “substantial likelihood” that the merger would lessen competition. That won’t necessarily be easy: A.T. & T. and Time Warner will argue that, far from being all-powerful players in their markets, they are both already besieged by online competitors. Rubinfeld, who has acted as a consultant in numerous antitrust cases since leaving the government, wouldn’t be drawn out on how he thinks the case will go. But he made clear that the government, in making its case, would be treading on familiar ground. “The vertical-foreclosure issue is very well known,” he said. “It has been studied widely, and there are people at the Justice Department who are expert in it. This is pretty mainstream stuff.”
If there is any novelty in the Justice Department’s behavior, it is in the tactics it’s using and the remedies it’s demanding. In 2011, when the cable giant Comcast acquired a majority stake in the content company NBCUniversal, the Obama Administration forced Comcast to accept a consent decree in which it pledged to make channels like Bravo, E!, and MSNBC available to other cable companies and streaming services on reasonable terms. This was similar to how the Clinton Administration handled the Time Warner-AOL merger, in 2000. Delrahim and his colleagues at the Trump Justice Department have taken a bolder approach.
According to numerous reports, before this week’s developments, the Justice Department had asked A.T. & T. to agree to sell either DirecTV or the Turner Broadcasting System—a division of Time Warner that includes CNN, as well as TNT, TBS, and other entertainment channels—as a condition of the merger. When A.T. & T. balked, the Justice Department went ahead and filed suit to block the deal, surprising many observers, Rubinfeld included. “What usually happens is that the parties agree to a consent decree restricting their behavior, or the parties give up on the merger,” Rubinfeld said. “I thought that is what would happen here.”
Delrahim, who also worked at the Justice Department under President George W. Bush, hasn’t publicly explained why a Comcast-NBCUniversal-type consent decree wouldn’t be sufficient in this case. In an interview with the Times a couple of weeks ago, he expressed reservations about consent decrees in general and said that he favored structural remedies, such as forced divestitures of the sort he reportedly demanded from A.T. & T.
The complaint filed this week provides some further insight into the Justice Department’s thinking. “Consumers are beginning to see new video distribution offerings,” it says. “For example, online distributors like Sling TV offer less expensive alternatives to traditional subscription television that do not require yearly contracts or cable set top boxes, but this merger would impede that innovation.” Once it had gained control of Time Warner’s popular channels, A.T. & T./DirecTV “could very well withhold that programming entirely” from some of its new competitors, seriously undermining their position. The complaint goes on to say: “Turner knows this. Its CEO has stated that it has ‘leverage’ over Dish, whose online Sling TV service ‘is shit without Turner.’ ”
In looking to block the merger, Delrahim and his colleagues have already received the support of some consumer-protection groups. “We welcome this effort by the Department of Justice to protect competition in the video industry,” Gene Kimmelman, the president of Public Knowledge, an organization committed to preserving affordable communication tools and freedom of expression, said in a statement. “The combined company would have the incentive and ability to harm rival video distributors and programmers, threatening the competitive future of online video, while giving the new company the ability to withhold programming or drive up prices for other satellite and cable players.”
To say the least, it is unusual to see a group like Public Knowledge line up with the Trump Administration. The organization is a staunch defender of net neutrality, and, on Tuesday, it launched a blistering attack on the efforts of another Trump appointee, Ajit Pai, the chairman of the Federal Communications Commission, to roll back Obama-era regulations that force broadband providers, such as A.T. & T. and Comcast, to treat all content, and content providers, equally. If Pai’s plan goes ahead, the providers will be allowed to deliver some content faster, which could lead to all sorts of abuses.
As the Washington Post’s James Hohmann pointed out, the Justice Department’s A.T. & T.-Time Warner lawsuit seems to be a marked departure from the Trump Administration’s pro-big-business stance, which is another reason to suspect it might be politically motivated. But concerns about Trump’s role don’t alter the fact that, on economic grounds, the merger demands rigorous inspection, which it would certainly get in a court case. “There is an established economic theory that it is possible for vertical mergers to be anti-competitive,” Martin Gaynor, a professor of economics at Carnegie Mellon, who was formerly the chief economist at the Federal Trade Commission, said to me. “It doesn’t have to happen that way, but it can.”
