Yesterday the U.S. Department of Justice’s Antitrust Division sued to block AT&T’s proposed $108 billion acquisition of Time Warner. The suit breaks with decades of past practice where the DOJ has permitted “vertical mergers” (deals between companies operating in different segments of an industry) accompanied by certain operational limitations (so-called “behavioral remedies”). AT&T has pledged to counter sue, which means the deal’s outcome will now be decided in court.
Though I’m not a lawyer, I’m willing to bet that AT&T is going to prevail for one simple reason: the DOJ’s complaint virtually ignores realities in the TV and video industries. It is only by ignoring these facts that the DOJ is able to lay its foundation for asserting that the AT&T-Time Warner would have too much power, potentially harm competitors and stifle innovation. AT&T’s task is to demonstrate the DOJ’s foundation is faulty, and therefore that its decision to block the deal is unfounded.
The DOJ’s core premise is that if AT&T controlled TW’s content, it would be unfairly advantaged against other video providers. There is an argument to be made that TW could be tempted to bargain harder with its distributors under AT&T’s ownership than it would if it were independent. But ultimately less distribution would hurt TW not help it, so AT&T would still be highly motivated to have TW’s networks as widely carried as possible, including on skinny bundles.
The DOJ’s complaint spends a lot of time on this issue, going so far as to suggest AT&T might be helped by withholding TW’s content from competitors because then consumers would switch to one of AT&T’s own video services. This assertion encapsulates the DOJ’s outdated view that consumers are drawn solely to traditional pay-TV providers for video service.
This ignores how popular SVOD services like Netflix, now with 50 million U.S. subscribers, have become. The DOJ also never brings up that Netflix, Amazon and Hulu alone will spend approximately $15 billion creating high-quality original content in 2018, becoming competition for the traditional pay-TV industry. In this era of “Peak TV”, over 450 scripted programs are now created annually, up 10x vs. 2007. These alternatives, plus countless others from YouTube creators, have driven an acceleration in cord-cutting, with pay-TV operators losing a record 1 million multichannel subscribers in Q3 ’17. In fact, the term “cord-cutting” - the single biggest challenge in the pay-TV industry - isn’t used a single time in the complaint.
Outside the big 3 SVOD providers, other powerful players like Apple, which plans to spend $1 billion creating original shows, Facebook, which is pivoting to be a “video first” company and YouTube which is the 800-pound gorilla of the online video world, are also never mentioned. The term “skinny bundles” gets a single mention in the complaint and the only one of a half dozen competitors identified is Sling TV. YouTube TV, backed by Google’s deep pockets and which just spent untold millions presenting the World Series 2 weeks ago, is never brought up.
Even AT&T’s own skinny bundle DirecTV Now is only mentioned once. And while the complaint repeatedly asserts that AT&T “fears” how online services will “disrupt” the traditional pay-TV model, it ignores how aggressively AT&T is already using DirecTV Now to support its wireless business, at the expense of U-Verse and DirecTV. AT&T has amassed 800K DirecTV Now subscribers (which the complaint acknowledges) by practically giving it away to lure and retain unlimited tier wireless customers (which isn’t acknowledged while the threat of AT&T raising prices is repeatedly raised).
Also unmentioned are Amazon’s Channels program, which allows easy access to dozens of SVOD services for tens of millions of Prime members. The word “devices” is not raised a single time in the complaint. It’s as if tens of millions of Roku, Apple TV, Fire TV, Chromecast, smart TVs, iPhones, iPads and every other conceivable device that consumers use to view content outside the pay-TV ecosystem in their living rooms and on the go don’t even exist in the DOJ’s world.
Yet another thing the DOJ doesn’t mention is the outsize role Google and Facebook are playing in digital advertising and how eager they are to pursue TV ad dollars, improving the economics of delivering high-quality TV programs online with an ad-supported model. All TV networks are investing heavily to compete effectively with data-enabled, highly-targeted ads. Improving ad targeting is one of the main reasons AT&T points to for justifying the deal.
In short, there is more innovation and investment occurring in the TV/video industries these days than ever. But you’d never know it reading the DOJ’s complaint, which instead characterizes the industry and consumers’ choices as if it were 1997, not 2017. I found myself wondering about the DOJ’s attorneys who signed the complaint. Do they watch Netflix? How many of them have cut the cord? Do they have kids at home who are glued to their phones watching YouTube? What devices are they buying this holiday season? Do they not observe on a daily basis how vastly different the video industry is than the one they describe in their complaint?
Anything can happen in a courtroom, but when AT&T has presented all of the above and more, the court would have to literally ignore all that is happening in the market these days in order to side with the DOJ, which will bear the burden of proving the likelihood of the deal’s harms it is asserting. As if all of this isn’t enough, AT&T will be aggressively highlighting President Trump’s own comments against the deal and his relentless trashing of CNN as “fake news,” which will taint the DOJ’s argument as being politically motivated.
The DOJ’s case harkens back to an era when pay-TV operators dominated TV distribution to the home. Operating their “closed networks,” they exercised enormous power in deciding which TV networks would be carried and which wouldn’t. The Internet changed all that - today’s “open networks” mean any content provider can reach their targeted audience directly. How the DOJ completely ignores this reality, which all consumers benefit from daily, is a total mystery. The DOJ has set itself up to prove an implausible argument about power that it believes AT&T has, but in reality doesn’t. Therefore its claim is likely to be rejected in court.