DOJ Blocks AT&T-Time Warner Deal, Alters Media Landscape

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The Department of Justice’s decision to block a proposed merger between Time Warner and AT&T, the telecom giant who also owns DirecTV, could represent a significant precedent in how the administration approaches mega-mergers between content producers and distributors. Or, considering that Time Warner is the parent company of Turner Broadcasting Systems’ most prominent news network, CNN, this could be a one-time instance of showmanship against the president’s greatest media adversary.

Most assume that the DoJ’s decision, done in the spirit of upholding antitrust laws and protecting American consumers from potential, if not likely, price hikes should AT&T come to possess valuable assets such as HBO and the rights to the NCAA March Madness basketball tournament, is more than mere pettiness. The decision casts a shadow over other media distributors who were hoping to acquire major studios and content production companies, and many see it as a logical step in the long game of stanching further consolidation of the media landscape into fewer, more iron-fisted hands.

The Justice Department complaint states that, should AT&T successfully purchase Time Warner for the proposed price of $85.4 billion, the ‘acquisition would substantially lessen competition, resulting in higher prices and less innovation for millions of Americans.’ The primary assets which Time Warner offers to AT&T include HBO, whose Game of Thrones series has seen unprecedented popularity, sports offerings including Major League Baseball and National Basketball Association regular season and playoff games, the aforementioned March Madness tournament, and a stable of networks which currently bring in high subscription revenues from cable companies.

The DoJ complaint adds that, ‘the combined company would use its control over Time Warner’s valuable and highly popular networks to hinder its rivals by forcing them to pay hundreds of millions of dollars more per year for the right to distribute those networks.  The combined company would also use its increased power to slow the industry’s transition to new and exciting video distribution models that provide greater choice for consumers, resulting in fewer innovative offerings and higher bills for American families.’

As one example, it isn’t beyond the realm of possibility that AT&T could offer HBO, which it would own in this scenario, to its customers, while charging other non-DirecTV television provides substantially higher fees to carry the premium subscription channel and its related streaming platforms, HBO Go and HBO Now. This would seem to be the most obvious benefit of AT&T’s acquisition of Time Warner, especially in a media landscape in which content creators such as Netflix and Amazon also provide their own distribution networks, making such mergers unnecessary in remaining competitive.

Proponents of the merger argue that, amidst a landscape where the likes of Amazon and Netflix produce and distribute their own original content, AT&T could not plausibly raise the price of their own DirecTV subscription and remain competitive. This argument misses the point of the DoJ complaint.

By attaining the rights to far and away most popular show on television, Game of Thrones, through its acquisition of HBO, AT&T would not need to raise the price of its DirecTV services. In fact, it could include HBO in subscription packages at rates far lower than before. We have seen the company hinting at this through its ‘HBO For Life’ promotion. At the same time, AT&T could charge competing cable companies higher fees to carry HBO and its roster of Time Warner networks, with resulting subscription costs driving more users toward DirecTV as a result.

The pro-merger argument also ignores the reality that, while cord-cutting is a very real phenomenon, live sporting events – especially March Madness and professional sports playoffs – remain some of the few, and strongest, pull factors for subscription television providers. By procuring more professional playoff games and the most betted-upon, widely-viewed sporting tournament in America in March Madness, AT&T would be able to leverage these programming rights against its competitors the same way it would HBO’s immense popularity.

In an era where the appeal of paying monthly fees for cable and/or satellite television is less apparent than ever, AT&T’s acquisition of some of the platform’s most coveted assets, Game of Thrones and live sporting events, is one that does fall under the jurisdiction of antitrust legislation. DirecTV already has exclusive rights to broadcast NFL’s Sunday Ticket programming, and further consolidation of live sporting events would, as the New York Times phrases it, ‘create a media and telecommunications behemoth’.

It has been proposed that, in order for the merger to be permitted, AT&T would need to divest in certain aspects of Time Warner. Currently, the Turner stable of networks brings in the greatest percentage of revenue for Time Warner, in large part due to the sporting events that AT&T surely covets. That said, much of this revenue is due to cable channel subscription models that many see as unsustainable.

Conversely, while HBO contributes less than one-third of Time Warner’s operating income, it would represent an immense asset in the content arms race currently being led by the likes of Amazon and Netflix, a race seen by many as the primary driver of the AT&T-Time Warner merger. The same can be said for Warner Bros. Studios, which would give AT&T the rights to such lucrative franchises as ‘Wonder Woman’, ‘Harry Potter’, and the endless stream of spinoffs that have and would continue to be derived from them.

If, in fact, AT&T is forced to divest from at least one branch of the Time Warner stable of Turner, HBO, and Warner Bros. Studios in order to complete a merger, it may have to make the choice between subscription revenue/sports and content. In the 2017 media landscape, it seems most likely that content will be the more forward

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