Federal judge allows AT&T acquisition of Time Warner
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Federal judge allows AT&T acquisition of Time Warner

Judge Richard Leon of the US District Court for the District of Columbia [website] ruled [opinion, PDF] Tuesday that AT&T could go through with its multi-billion dollar acquisition of Time Warner.

The Department of Justice (DOJ) [official website] had brought suit [JURIST report] in November arguing the merger would violate section 7 of the Clayton Act. The DOJ claimed that the acquisition would negatively affect competition in “the video programming and distribution market nationwide” because AT&T would be able to increase costs to access Time Warner’s networks for its rivals. AT&T and Time Warner naturally disagreed claiming that with high-speed internet access, competition from services like Netflix, Hulu, Amazon, Facebook and Google has caused decreased video subscription to their services and stagnating television advertising revenues. AT&T and Time Warner claimed the merger would help them be a better contender in the market and increase competition in the market.

The DOJ conceded that the merger would save DirecTV (a property of AT&T) customers, in aggregate, estimated $352 million every year as AT&T would not have to pay Time Warner accounting for a profit for its content. This would give AT&T an incentive to make its services more competitive as it would garner more profit itself.

The court ruled that the DOJ did not meet its burden to prove that the merger would cause decreased competition in the market by creating an imbalance in bargaining power regarding access to Time Warner’s content. There was no precedent regarding such an “increased-leverage theory” being in violation of the Clayton Act and the DOJ’s case did not persuade the court. With that determination, the idea that the “increased-leverage theory” would cause decreased competition was not necessary to resolve.

The court also found that the DOJ did not meet its burden showing that the merger will harm virtual Multichannel Video Programming Distributors (MVPDs) that offer live video content over the internet (including YouTube TV, Hulu Live, etc). The DOJ claimed that AT&T would be able to slow the growth of new players in the market. AT&T claimed that it was not attempting to stifle that industry by supporting its own virtual MVPD, DirecTV Now. During trial, testimony and evidence showed that AT&T would have incentive to license content to virtual MVPDs instead of hindering them as an increasing amount of consumers have decided to “cut the cord” and move to MVPDs to view content.

The court found the DOJ’s final theory that the merger will cause Time Warner property HBO to be restricted as a promotional tool for other distributors by AT&T as also unpersuasive. The DOJ claimed that if other distributors used HBO as a promotion, it would draw customers away from AT&T giving AT&T incentive to restrict use of HBO for marketing schemes. AT&T showed the court that HBO’s business model was extremely reliant on promotion by distributors as it does not run advertisements, causing subscription to be its greatest source of revenue. This business model encourages higher volume subscription and continued reliance on distributors. The court also found that the DOJ could not adequately show that the substitutes for HBO in the market would be inferior causing customers to flock to AT&T in the event of restricting HBO.

Based on the findings of the court, Leon denied the request of the government to enjoin the merger allowing the merger that some media outlets believe [CNN report] will reshape the industry.