AT&T/TW Wouldn't Discriminate Against Non-TW Content, Stephenson Tells Senate

Stephenson assured Lee the takeover would lead to lower prices “by virtue of the innovation,” as it did with his company’s recent buy of DirecTV. The TW acquisition “is taking the innovation of DirecTV Now to a whole different place and a whole different level,” he said, referring to the recently launched streaming service (see 1612060065). He committed to subcommittee ranking member Amy Klobuchar, D-Minn., that the combined company wouldn't discriminate against non-TW content: “There’s no advantage to it, nor would we do it.” DOJ should “formulate an approach” ensuring AT&T abides by certain promises, Stephenson said. Klobuchar mentioned “growing skepticism” that conditions can be truly effective. Justice doesn’t have the engineers and network experts to really assess, Kimmelman told Klobuchar.

TW CEO Jeff Bewkes testified the combined company would have neither incentive nor ability to use increased leverage on carriage negotiation nor the financial incentive to use it for its benefit. “It would make no sense … to not sell HBO on the Comcast cable system, on the Verizon system,” Bewkes said of that TW premium channel. “It would make no sense not to offer it.” He disputed the company would charge more: “The market’s way too competitive for that kind of thing.”

Congress has no direct power in approving the transaction. Justice would review it but it’s unclear if the FCC would have a role (see 1612060051). President-elect Donald Trump pledged in October that his administration would reject the deal. AT&T is widely seen as a lobbying heavyweight and in the 2016 cycle AT&T’s federal political action committee donated thousands of dollars each to Lee, Klobuchar and the full Judiciary committee leadership plus multiple senators who defended the deal.

“I would like to see the FCC involved in this,” said Sen. Al Franken, D-Minn., referring to what he saw as an important FCC role in addressing Comcast/NBCUniversal issues following that acquisition.

“We’re working through that process right now, senator,” Stephenson told Franken. “The trigger for FCC review is whether we assume any licenses from Time Warner.” AT&T is assessing “license by license” now and can't speak to whether it would file for commission review until it’s finished, but it will “keep the FCC posted on our process whether we file for formal review or not,” Stephenson said. Kimmelman said the FCC’s oversight would depend on “what assets are involved in the transaction” but would prefer a role: “It would be beneficial to the public policy process.”

Telecom Implications

Lee questioned witnesses on whether TW’s business would become exempt from Section 5 of the FTC Act given the agency's common carrier exemption. “They would come under the FCC’s purview, in terms of regulating these issues,” Stephenson told Lee, acknowledging “confusion about a content company under the purview of the FCC” and urging Congress bring “some clarity” through legislation. “Obviously with the net neutrality provisions, our privacy standards are under the purview of the FCC,” he said. The FTC’s exemption applied to TW “would be a cause of concern” for some, Lee warned.

“The FCC can only regulate their common carriage business,” Kimmelman said. “They are restricted by Congress. … There is a gap there that I think is significant.” He referred to the 9th U.S. Circuit Court of Appeals' ruling that the FTC lacks jurisdiction over AT&T in a data throttling case: “We believe the court decision was horrible and needs to be appealed.”

Both Lee and Judiciary Committee Chairman Chuck Grassley, R-Iowa, identified zero rating among possible deal concerns. Grassley complained of personally struggling to find a favorite DirecTV channel and failing due to a contract dispute. “There’s concern that a combined company will give preferential treatment -- for example, favorable channel placement and zero rating pricing -- to Time Warner’s premium entertainment programming to the disadvantage of other content producers, in particular small independent producers,” Grassley warned. “AT&T’s ownership of these channels could also potentially force DirecTV’s rivals into a Hobson’s choice of higher prices or limited Time Warner content, knowing that many customers would migrate to DirecTV if its rivals refuse to pay the higher Time Warner prices,” Lee said in his opening statement, noting “potential anticompetitive favoritism.” He invoked “the siren song of zero rating,” which he said “appears to be consumer friendly” but noted its critics, including the FCC’s recent concern on AT&T practices: “Critics say that such concerns would only be exacerbated if AT&T were able to bring Time Warner content under its fold.”

“It’ll combine two titans of industry,” said Judiciary Committee ranking member Patrick Leahy, D-Vt., worrying about the loss of net neutrality protections in light of such a change. Those rules “appear to be under serious threat by the incoming administration,” Leahy said, saying Trump has “formally named three staunch net neutrality opponents to oversee his FCC transition.” Harms “would only be exacerbated” by further consolidation, Leahy said. Franken pressed Stephenson to attempt to stop Trump and Congress from rolling back net neutrality. “I am not a strong opponent of net neutrality,” Stephenson replied, saying AT&T “supported” and “helped craft” the previous 2010 net neutrality rules. “We went to court against Title II categorization of our services; that is not synonymous with net neutrality.”

“I have yet to be convinced the benefits outweigh the harms to competition and possibly to consumers,” said Sen. Richard Blumenthal, D-Conn., ripping into Trump’s unhappiness with TW's CNN news coverage as a factor in his opposition to the deal: “For a public official to use the blunt heavy instrument of law enforcement to try to silence or change coverage by a news department of any company is for me absolutely abhorrent.” Stephenson and Bewkes defended their commitment to independent journalism and pledged coverage wouldn't be influenced. “I’m a novice in the world of politics,” Stephenson told Blumenthal.

GOP Support

Several Republican senators struck a sympathetic note, pressing the CEOs to elucidate benefits. “We have to consider who the competition really is,” said Sen. Jeff Flake, R-Ariz., citing power “among the edge providers.” Stephenson said the combined company is necessary to take on cable incumbents. “How does this size of the merged company compare to the real competitors we’re talking about, some of the edge companies?” Flake asked.

“The combined market cap, depending on the day you look at the market, is 300, 350 billion,” while some of the big tech companies “are about two times that size,” Stephenson said. “We have to recalibrate what size means in this new world.”

“Size today does not necessarily correlate to dominance,” said Sen. David Perdue, R-Ga., considering that the deal may be necessary for innovation. “I think this merger opens those doors.” Sen. Orrin Hatch, R-Utah, prompted Stephenson on why it wouldn’t make sense for AT&T to raise prices and freeze out competitors and to “degrade service speeds for nonaffiliated content.” Stephenson said he sees no economic or customer rationale.

“If we just continue to focus on where the puck is, not on where the puck is going,” said Sen. Thom Tillis, R-N.C., “we’re going to disadvantage some real innovators.” He complained of “constraints” imposed “using old-world models.” Kimmelman agreed companies “will skate to where the puck is” and want to “control as much of that distribution as possible.” A lot of the new market players aren't charging $200 a month for access to content, he said: “Somebody’s paying, and I just want to make sure it’s a fair price.” The internet-focused tech entrants to the market don't control the wired and wireless access to households, he said: “And you can probably only get it from a couple players, and that’s where there’s an antitrust problem.” Franken said the puck is going in the direction of wireless. “I’m hoping we’re going to have a hearing [in 2017] on some of these broader communications issues next year,” Klobuchar said of the big tech companies.

“The present model needs disruption,” Stephenson told senators. “DirecTV Now is step one. Acquiring Time Warner is step two.” He described a need for more flexible programming bundles, such as ones that don't involve sports.

The Consumer Federation of America released a 240-page report Wednesday blasting the influence of AT&T, Verizon, Comcast and Charter Communications as a “tight oligopoly on steroids.” Written in conjunction with Public Knowledge, the report was mentioned by Klobuchar and Kimmelman during the hearing. CFA Research Director Mark Cooper wrote the document urging deal opposition and said “there will still be a lot of work to do to control the abuse of market power by the dominant communication giants” even with rejection. “For a typical household with two wireless subscriptions, a [landline], broadband Internet access service, and multi-channel video, the total overcharge is about $45 per month ($540 per year),” the report said. “The aggregate overcharges are almost $60 billion per year.”

RFD-TV CEO Patrick Gottsch issued a statement to the subcommittee saying he backs swift AT&T/TW OK. He opposed the unsuccessful Comcast/Time Warner Cable, but AT&T “is honoring its commitment” to rural America, Gottsch said. “AT&T’s new DIRECTV NOW over-the-top service includes RFD-TV in its most basic package, which ensures that consumers across the country will have access to rural-oriented programming.” Free Press didn't testify but slammed the deal: “In the absence of strong antitrust enforcement and nondiscrimination rules, we know how AT&T will use acquisitions like this,” said Policy Director Matt Wood. “It’ll deny programming to other distributors and favor its own content -- slashing its own costs, but without passing any of those savings along to its customers.”