DOJ’s Got It Right: Block AT&T-Time Warner

Satellite Business News — As the public debate between the government and AT&T over the company’s plan to buy Time Warner takes more twists and turns, President Trump over the weekend denied his well-known disdain of Time Warner’s CNN news channel was playing in a role in the process.

As reported, the Department of Justice has told AT&T it must divest the Time Warner unit that owns CNN—as well as HBO, TNT, TBS, and other national networks—or DirecTV in order to gain government approval for the acquisition.

As a candidate, the president said he would oppose the transaction on the grounds it would put too much power in one company’s hands. That, combined with his criticisms of CNN, have cause many Congressional Democrats to charge the president intends to stop the AT&T-Time Warner deal.

But, according to pool reports, the president said that was not the case. “I didn’t make that decision,” Trump told reporters, according to the reports. “It was made by a man who’s a very respected person, a very, very respected person.”

President Trump was apparently referring to Assistant Attorney General Makan Delrahim, who head the agency’s Anti-trust Division and previously worked as part of the White House staff.

But the president did admit he “did make a comment as to what I think” about the deal, and again said he wanted to see as many different news sources as possible “especially since so many are fake [news].”

In an appearance in Los Angeles on Friday, Delrahim once again said he has not been ordered how to decide the AT&T-Time Warner matter by the White House, according to wire service reports. AT&T Chairman Randall Stephenson, in a televised interview, said he had not been told by anyone in the administration that AT&T had to sell CNN in order win the government’s approval of the deal. AT&T now says the timing of the closing of Time Warner deal is “uncertain,” but the company is prepared to fight for the deal in court.

Throughout the summer, and into this fall, Satellite Business News has reported that there are those on the permanent, professional staff of the Anti-Trust Division of the Department of Justice who have serious concerns about AT&T’s pending acquisition of Time Warner, and some want to block the deal.

Yet AT&T has repeatedly said—as recently as a week ago Friday—it expected to close the Time Warner purchase by the end of next month. That is, until last week.

Likewise, until last week, there was far too little consumer media attention paid to the issues raised by AT&T wanting to buy Time Warner given the scope and potential impact of the proposed transaction— and hence far too little public discussion of those issues.

But now, with those issues finally percolating, and more uncertainty about the deal closing than ever before, it makes sense to examine some of more pressing questions involved, and to truly see through the claims made by AT&T in lobbying for Justice Department approval.

After a remarkable week during which many of those issues were discussed in public by the Justice Department and AT&T—in a back and forth perhaps never seen before during an agency anti-trust review of such a mammoth deal— the most fundamental conclusion about the deal remains unchanged: If it wants to protect American consumers and the public interest, the Justice Department must block AT&T’s attempt to swallow up Time Warner.

There are no conditions that AT&T and Time Warner could agree to in order to gain approval of the deal that would make the transaction beneficial to American consumers.

There is no part of Time Warner—and especially not DirecTV—AT&T, even if were willing to—could sell to make the deal a good one for the American public. Such conditions simply cannot be written.

If the government wants to protect consumers from harm, from having fewer video options, and from paying much higher prices than they do now for the very same services, it must stop this deal. It must stand up for consumers.

AT&T Chairman Randall Stephenson advocated for the deal, and all but threatened to pound the Justice Department in court if the agency tries to prevent it, during a TV appearance last week.

At times, Stephenson’s statements seemed so wacky, and had so little connection to reality, that some might have wondered what universe he was living in.

Perhaps no other argument has been hawked more frequently by AT&T and Time Warner than their deal represents a so-called “vertical merger” that does not eliminate a competitor because AT&T is not a programmer and Time Warner is not video distribution company.

Stephenson repeated the mantra last Thursday, saying “not one of these [similar deals has been] challenged in the courts and defeated in 40 years.” In the first place, that is not exactly accurate. In the second place, even if it were true in the most literal legal sense, it would also be a classic example when a statement can be accurate but not totally true.

It is entirely possible, from the perspective of the market rather than the lofty pages of a law book, that a vertical merger may not literally eliminate a competitor to a company—but it does, in fact, have an absolute effect of eliminating competition in the marketplace. And in doing so, hammer away at the market forces that help foster competition and keep consumer prices in check.

That is exactly what is in play with AT&T buying Time Warner. AT&T does not deny the deal would vertically integrate the two companies. How can it? That is what AT&T wants to be more than anything else right now, a vertically integrated company which owns national distribution networks and must-have programming channels.

If there is one thing Justice Department must understand in assessing the possible AT&T-Time Warner deal, it is AT&T’s true motivations. AT&T could care not one bit about content, programming, or the creative world where such things are developed. Not one bit.

AT&T is a process driven, engineering and technical based bureaucracy of massive size which sees only its pursuit of scale for its data and wireless business. All AT&T wants is to push more and data, at less cost to itself, through its networks.

As its senior executives have publicly said numerous times in the last year, the pressure to reduce its costs includes the wholesale costs it pays for everything— including programming.

On Sept. 7, John Stankey, the AT&T executive who will head the division Time Warner reports to if the deal does close, repeatedly blamed the high wholesale prices charged by programmers for the problems in the market today.

That is the real reason AT&T wants Time Warner. The deal will not only mean AT&T will own Time Warner’s entire group of national programming services—and thus, in essence, pay itself for the programming, but it will provide AT&T that which it hungers for most: leverage over its competitors. And that is at the heart of AT&T’s quest to buy Time Warner and what the Justice Department must comprehend above all else.

AT&T hopes to squeeze programmers for lower wholesale costs of their channels by basically threatening its competitors with higher wholesale costs to HBO, CNN, TBS, TNT, and the rest of Time Warner’s channels.

AT&T has all but said that during the past year. That is why virtually every programmer—even the largest ones—fear AT&T closing the Time Warner deal. Likewise, how can it truly be a coincidence that AT&T has been all but giving HBO away, and often offering it at no additional charge during promotions, through its “DirecTv Now” on-line video service while hoping to soon own HBO?

It is understandable that even AT&T gets what a clunker of a service “DirecTv Now” is and that needs to be somehow be propped up. But it sure is fascinating that it virtually always turns to HBO—and not any other channel—for those promotions.

Some may ask, as Stephenson did last week, why AT&T should be prevented from buying Time Warner if Comcast was permitted to buy NBC? Another classic aphorism applies here as well: Do two wrongs make a right? Or, put in this context, has that deal helped or hurt consumers? Of course it has not.

Have any of the conditions Comcast agreed to done any good? Of course they have not. As predicted here and in many other places, the conditions imposed on Comcast and NBC were meaningless. They were so convoluted and complex they created more loopholes than anything else.

For example, satellite TV consumers in the Philadelphia area still do not have access to the Comcast owned regional sports network in that market despite a condition the cable giant agreed to that would have presumably accomplished that simple goal. Those were some conditions.

Ask satellite TV consumers in that region— including DirecTV subscribers—if those conditions are working. As bad as Comcast obtaining NBC was, consumers will be faced with an ever rawer reality if AT&T owns Time Warner.

Comcast does not own a national distribution network for programming or data services. AT&T owns two, DirecTV’s satellite service and its national wireless operation. And AT&T is one of two wireline high-speed data providers in vast chunks of the nation.

As many have argued, AT&T does not need any other company to reach every home in the nation. If it owned Time Warner, could any other major programmer or owner of such key content make the same statement?

That is why Stephenson’s claim last week that AT&T needs Time Warner to “give us a shot at competing with” companies like Facebook, Google, Amazon, and Netflix gave that most literary of phrases— “huh?”—a whole new meaning.

Seriously. Newsflash for Randall: Facebook, Google, Amazon, and the rest need a company like AT&T to reach their customers. Not the other way around.

One other inquiry for Randall: Does AT&T have some divine given right under which the government has to help a company whose annual revenues already dwarfs the gross national product of many countries gain a competitive edge on those companies?

Then there is DirecTV. For the first time since AT&T announced its plan to buy Time Warner, DirecTV has now become part of the discussion because the Justice Department has let it be known that selling DirecTV might be a path for AT&T to get the Time Warner rubber stamp.

Sadly, unless AT&T were to be forced to sell DirecTV at a bargain basement price—and to a company which has the resources and real interest in re-building and growing the DBS service—and that does not, repeat that does not, include Dish Network—that would do little to alleviate the immeasurable harm to consumers AT&T acquiring Time Warner would have.

Just look at what has happened to DirecTV under AT&T. As of June 30, 2015, at the end of its last quarter as an independent company, DirecTV announced it had 20,279,000 subscribers to its domestic DBS service. Many in the satellite TV industry were ecstatic that they lived long enough to see a DBS service with well over 20 million active customers.

That was also 24 days before AT&T would complete its purchase of DirecTv. A year later, as of June 30, 2016, AT&T would report DirecTV’s U.S. subscriber base was 20,454,000. On Sept. 30 of this year, little more than two years since AT&T bought DirecTV, the DBS service was reported to have 20,650,000 subscribers—only about 371,000 more.

At points during the two years-plus that AT&T has owned DirecTV, AT&T has told the SEC that as many as 70% of DirecTV’s net sub additions have been the result of conversions from AT&T’s dreadful wireline “U-verse” service to the DBS service. In the past 30 months, “U-verse” has lost almost 2.3 million subscribers, according to AT&T.

By any objective measure, by any realistic assessment, DirecTV has lost hundreds of thousands of customers under AT&T—maybe more than a million.

To be sure, the last two years have not been great for traditional video services. But DirecTV, under AT&T, has suffered the most all things considered. Without any doubt.

And in total contrast to all the marvelous promises Stephenson and former DirecTV Chairman Mike White made to the Justice Department, the Congress, the FCC, and the public in making their cases why DirecTV would be such a stronger service, a better company, and, most of all, provide even more robust competition to entrenched cable operators if owned by AT&T. In light of those broken promises for DirecTV, it is difficult to grasp why anyone at the Justice Department would believe AT&T again.

And as bad as the DirecTV numbers are, they do not tell the whole story. As heartbreaking it is to say, AT&T has all but decimated DirecTV as a company the last two years. The DirecTV that changed the very landscape of the video business when it was launched in June 1994, which paved the way for Charlie Ergen’s DBS service, and, most importantly, forced the cable TV industry to modernize, no longer exists.

It is too bad AT&T did not buy the government of North Korea two years ago. Most importantly, can anyone, anywhere make the argument that AT&T buying DirecTv has enhanced competition in the marketplace, has forced down consumer prices, or resulted in better choices for American TV homes?

And can anyone, anywhere really believe that consumers will fare any better if AT&T gets its hands on Time Warner? Hooked up to lie-detectors, if such a device really worked, there is not a person outside of AT&T and Time Warner who could honestly answer that question in the affirmative. And an awful lot of folks inside both companies as well.

For in programming companies in industry history—and the HBO brand that some would say was the foundation for the entire video distribution business—would be a catastrophe for consumers and for competition.

With Time Warner in its pocket, AT&T would have more market power, and the ability to exercise more influence over its competitors in several other business segments, than any company in industry history.

Two years from now, if Time Warner disappears as an independent company into the AT&T monolith, the exact same assessment of what has happened to DirecTV will have to be applied to Time Warner.

There is not a knowledgeable industry hand who does not cash an AT&T or Time Warner paycheck—or will get a fat payout if the deal is closed—who in their heart of hearts really believes consumers will benefit, and competition for video services will be strengthened, if AT&T gets the anti-trust nod to acquire Time Warner.

AT&T will take out of Time Warner what it wants—leverage and market power—and dump everything else—like it did with DirecTV. Why anyone who works at Time Warner other than a few senior executives and talent with contracts believes they will have jobs under AT&T two, three, or four years from now is bewildering.

Just ask all those gone from DirecTV, or those still left who show up for work every day wondering if “today is the day?” Jeff Zucker staying to run CNN under AT&T? Get real.

Speaking of that well-paid talent, most of them cannot possible think they will last under AT&T. Contrary to the pledge Stephenson made, there is no way AT&T will keep its paws off CNN. To anyone who actually bought the claim from AT&T, in Stephenson’s words on Oct. 28, 2016— days after the deal was announced but days before the presidential election—that “editorial independence is critical”—there are several bridges, batter’s boxes, and rainbows for sale at very low prices.

Those words were aimed at Hillary Clinton, who, of course, was widely predicted to win. CNN will become a public relations arm of AT&T, which might just change its name to “the why tax reform is great and wireless services are too cheap news channel.”

Do not laugh, sports fans. As for CNN on-air hosts like Chris Cuomo, Don Lemon, Anderson Cooper, Jake Tapper, et al., they should be carefully checking their contracts. Under AT&T, the last one to MSNBC will be an unemployed egg.

Many of the statements Stephenson made last week were so patently asinine that they were almost insulting to those who understand the business. His claim AT&T must own Time Warner to have “a shot at competing” with Google, Facebook, and the rest was one.

That, in his words, it “borders on comical” that those companies would have a harder time competing with a merged AT&T-Time Warner was another. But the most offensive and arrogant was the claim by Stephenson that “concentration of power is the least problem in this industry.”

Look, everyone understands that companies are in business for business—to make more and more profits. And the chief executive of any vast enterprise like AT&T is also the chief salesman for that company’s outlook.

But at some point, a business executive can make statements that are so nonsensical, so blatantly false, that they become a comical character to anyone who knows better.

The concept that AT&T is not already big enough is nauseating. AT&T is the poster-company for when too big is too big. If too big does not describe AT&T, what company does it? AT&T tentacles are already reaching into far too many aspects of the telecommunications and media businesses.

It now even controls the wireless network designed for first responders during emergencies. And when should the character, or in AT&T’s case, the lack thereof, be taken into account in judging business deals and how massive a company should be allowed to get and how much power it should have?

Under federal law, any transaction that might “substantially…lessen competition” has to be challenged. If AT&T buying Time Warner does not meet that standard, what deal will?

There is a single critical factor for the Justice Department to take into account: Will consumers be better off if AT&T buys Time Warner? Who in their right, impartial mind can say “yes” to that? When there is one cable company in each market, one floundering satellite TV service, a couple of interchangeable on-line video services, and two data and wireless services, will prices go up or down?

Price wars are good for consumers in the short-run. But they lead to devastating industry consolidation that are just the opposite for consumers in the long-run. That dynamic is undoubtedly about to take hold of the out-of-control on-line video business.

Anyone who thinks the on-line video business is the cure for everything, and can offset the harm to consumers that will occur if the AT&T-Time Warner deal closes, is, to be polite, just clueless about these industries.

Consumers are soon going to realize that they are paying more for their data and on-line video now than they were when paying for satellite TV or cable and data before.

If the only companies that can afford to survive are the few which have bought up all the others who did not have deep enough pockets, then who will become the losers? AT&T knows that. AT&T buying Time Warner will only accelerate that.

If AT&T is permitted to do to Time Warner what it has done to DirecTv— and, as result, to competition and choice—there will be no one responsible but the Justice Department. It is simply idiotic to argue that because an abstract anti-trust theory written decades ago does not totally track a specific transaction it is in the best interest of the public.

That is the consumer, marketplace, and economic equivalent of the old adage, “the operation was a success but the patient died.”

Only when it comes to AT&T buying Time Warner, American’s checkbooks are the patients.

Bob Scherman is the editor and publisher of Satellite Business News, an independent trade publication. Scherman has covered the satellite TV, cable, and related businesses for almost 35 years. Comments on this column can be sent to [email protected].