Why yesterday’s AT&T and Time Warner merger appeal matters — and why it’s a long shot

(Source: www.theverge.com)

Yesterday, the Department of Justice appealed the recent merger of AT&T and Time Warner, a deal that seemed effectively settled and officially closed last month. The government is asking the DC Circuit Court of Appeals to overturn a ruling that was overwhelmingly in favor of the merger. It’s also suggesting it could put the brakes on similar deals by other companies, which have been emboldened by the decision.

This appeal doesn’t have any immediate effects on AT&T and Time Warner’s plans since the Justice Department didn’t ask for a legal stay while it filed its appeal. But it signals the department’s plans to keep fighting consolidation, which could help shape the landscape for future mergers. Here’s why the appeal is meaningful but also a serious long shot.

The Justice Department is late to the party

The Justice Department had 60 days to file an appeal after US District Judge Richard Leon ruled in favor of AT&T and Time Warner on June 12th. The agency is well within that time frame, but, practically, it waited a long time to announce its decision since the two companies merged weeks ago. Judge Leon discouraged the Justice Department from trying to block the merger while it filed its appeal, calling such a move “unjust.” The Justice Department followed his advice, letting the deal go forward while it decided on its next course of action. After the six-day limit for requesting a stay ran out, it didn’t even confirm it was appealing — though it kept the possibility open.

The decision is also a bit surprising because the Justice Department just approved another huge, similar merger. In late June, it gave its blessing to Disney’s acquisition of 21st Century Fox under the minor condition that Fox spin off its regional sports networks.

AT&T and Time Warner are already proving the original ruling wrong

Judge Leon’s ruling argued that AT&T and Time Warner could offer better and cheaper options to customers by merging. (The Justice Department basically made this case for the companies, estimating that DirecTV and U-verse users could save a total of around $350 million per year.) Leon also claimed that vertically integrating content production and distribution — like the same entity making and distributing a TV show, as Netflix and Amazon do — would let producers gather more data about what customers liked, and sell more valuable targeted ads instead of charging subscribers more.

AT&T promised cheaper service and better TV, and it’s probably delivering neither

As we’ve explained before, this argument is deeply flawed, and we’re already seeing warning signs. AT&T gestured toward fulfilling its promise of lower prices during the trial, announcing a new $15 live TV bundle without sports channels. Then, as soon as the merger was approved, it raised the price on its existing DirecTV Now service from $35 to $40 per month. So customers who want to downgrade their service will save money, but ones who maintain the status quo will pay more.

And far from producing better television, the merger is threatening to make Time Warner’s crown jewel HBO worse. AT&T said earlier this week that the network would “need a lot more [content] to be even better.” It’s an ethos that abandons HBO’s existing hyper-focused strategy in favor of a Netflix-style churn of hit-and-miss television. So while AT&T could hypothetically still deliver on its promises, that favorable ruling’s reasoning is looking shakier all the time.

This appeal could put other companies on notice

AT&T and Time Warner were pursuing a “vertical” merger where two companies that offer complementary services combine, as opposed to a “horizontal” merger where the companies are direct competitors, like AT&T’s failed bid to buy rival carrier T-Mobile.

Vertical mergers are often less controversial than horizontal ones, and this isn’t the first time a huge cable company has merged with a huge media company: in 2013, Comcast purchased NBCUniversal after the Justice Department approved of the acquisition. But Judge Leon was still unusually permissive, approving the deal without the kind of mitigating legal conditions that regulators set for Comcast. (Disclosure: Comcast is an investor in The Verge’s parent company Vox Media.) That’s worrying because these mergers give a few companies incredible power over the media market as a whole, letting them charge higher prices or favor their own media on your cable or internet service.

Vertical mergers give a few companies a lot of power

Judge Leon’s decision encouraged other companies to make merger bids. Comcast quickly made a play to purchase 21st Century Fox after the decision. In an investors meeting last month, Verizon Wireless’s chief financial officer Matthew Ellis told investors, “I’m not going to say never on anything” when asked if the company had any plans to acquire a mass of media assets as well.

If the Department of Justice successfully appeals the decision, it could make all these deals less likely to succeed, setting a precedent for considering vertical mergers potentially as monopolistic as horizontal ones. And just filing the appeal could have a chilling effect on merger bids in the short term. Comcast, for example, is planning to undercut Disney and make a counteroffer to buy 21st Century Fox. But this appeal could make it think twice.

What comes next?

If the Justice Department successfully appeals the merger, AT&T could be forced to split off the renamed Warner Media, which is still being operated as a separate group. But that’s probably not going to happen. Public Knowledge president Gene Kimmelman told The New York Times that the appeal “signals to the market the government isn’t throwing in the towel, but I think it’s a long shot.” The court could fast-track the case and hear it in a matter of months — because the longer the process takes, the more integrated the companies become.

After the DC court decision, either AT&T or the Justice Department could appeal to take the case to the Supreme Court, which would stretch the timeline significantly longer.

AT&T is sticking to its original plans while the appeal proceeds, and since the merger closed last month, there aren’t any practical barriers to doing so. “We think the likelihood of this thing being reversed and overturned is really remote,” AT&T CEO Randall Stephenson said on CNBC. “We’re about executing our plan.”

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