Divestitures Could be Route to Fix AT&T/TW Clayton Act Woes, DOJ Says
The court overseeing DOJ antitrust litigation against AT&T has structural condition options beyond just an injunction stopping the buy of Time Warner, like allowing purchase of only parts of TW, minus Turner, or requiring AT&T divestiture of DirecTV, said Justice antitrust attorney Craig Conrath Monday in U.S. v. AT&T/TW closing arguments. Conrath told U.S. District Judge Richard Leon of Washington that defense arguments New AT&T would be structured in ways to preclude undue coordination between its content and distribution arms "ask the court to suspend logic and principles of economics" since businesses do all they can to maximize returns. Besides, Conrath said, such structuring "can change in a heartbeat."
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Companies' counsel Dan Petrocelli of O'Melveny & Myers said any alternative remedy like divestitures is actually an effort to kill the deal. Removing Turner or DirecTV from the New AT&T mix negates the point of the merger since the combination of those two is where the synergies arise, he said.
Leon said he will try to have a ruling by June 12, so as to accommodate the June 21 termination date of the deal (see 1712220012) and the six-day deadline for the losing side to seek a stay. He set a hearing for 4 p.m. June 12 to announce it. He said the opinion might not be finished by that date, but if he gets the opinion done sooner the hearing will be moved up.
Among those in the courtroom Monday was AT&T CEO Randall Stephenson. DOJ cited him numerous times in its close. Conrath said Stephenson called the department's worries about diminished industry competition absurd, but emails between Stephenson and TW CEO Jeff Bewkes in 2016 when TW bought a 10 percent of Hulu, which he said showed Stephenson sounding concerned about AT&T being denied access to TW content, sounded a lot like the concerns rivals expressed about New AT&T. Conrath said Stephenson testimony that notes he wrote to himself when AT&T/TW was pitched to the board were to remind him to make clear his company couldn't use the acquiree's content to favor its own distribution business strains credulity and it was far more likely those notes were about what New AT&T could do.
Conrath acknowledged industry witnesses called by his agency have a self interest in the case in the form of a big new rival in New AT&T, but said defense witnesses have their own self interests and the interests of DOJ expert witnesses parallel consumer concerns. In its close, DOJ went after defense arguments in favor of the deal. Conrath said AT&T assertions the deal is needed to compete with the FAANG companies -- Facebook, Amazon, Apple, Netflix and Google -- don't jibe with that fact that in the traditional pay-TV business, AT&T is dominating. AT&T's interest in being more competitive in the targeted ads market doesn't give it a pass to hurt competition in the pay-TV market, he said. He said defense arguments about efficiencies in the deal were all speculative and its estimates groundless.
Conrath said the defense "took potshots" at DOJ's economic expert's modeling, but the model's output still showed net harm to consumers even at the most conservative end of its range. The lawyer said the defense argued that TW content won't be any more valuable as part of New AT&T so a price increase isn't logical, but the issue is that a successful carriage deal with Turner is worth less since New AT&T will have other ways of making money such as trying to lure rival MVPDs' subscribers. Leon interrupted Conrath once early in his close, asking what evidence backed the lawyer's assertion that New AT&T makes money either way.
Petrocelli said the DOJ case is "theories in search of facts" and it's almost unheard of for a challenge to a vertical merger that doesn't involve allegations of foreclosure of substantial inputs. He said the price increases DOJ estimates will hit consumers are statistically indistinguishable from zero. He said AT&T/TW is motivated in large part by video industry trends like cord cutting, and DOJ estimates only 10 percent of subscribers that would leave a rival MVPD due to New AT&T machinations involving Turner content are questionable. He said using the economic model that's the basis of the DOJ case, if that cord cutting was instead 20 percent, the resulting price impact on consumers goes from a net expense to a net savings.
That economic model -- which AT&T/TW counsel went after aggressively in court (see 1804120023) -- was largely on trial during closing arguments. "This whole case is a house of cards," Petrocelli said, spending much of his 90-minute close challenging and critiquing various aspects of and inputs into the model.
Leon interjected several times during both sides' closing arguments. During defense closing, he questioned Petrocelli on the department assertion that New AT&T will use its video leverage to get subscribers to leave other MVPDs for DirecTV. For that to work, New AT&T would have to actually be able to withhold content, but that's not what Justice is alleging, Petrocelli replied.