AT&T and Time Warner versus the DOJ: What's happened so far

Time Warner and AT&T just wrapped up legal arguments in defense of their proposed $85 billion merger. Next up: The Justice Department gets a chance at a rebuttal.

Marguerite Reardon Former senior reporter
Marguerite Reardon started as a CNET News reporter in 2004, covering cellphone services, broadband, citywide Wi-Fi, the Net neutrality debate and the consolidation of the phone companies.
Marguerite Reardon
6 min read
Kena Betancur / AFP/Getty Images

AT&T and Time Warner are done making their case that the US government needs to get out of the way of their marriage.

AT&T Chairman and CEO Randall Stephenson, Time Warner CEO Jeff Bewkes, and John Stankey, the AT&T executive in charge of the merger, all took the stand this week to defend the $85 billion media deal, which the US Justice Department has sued to block.

Bewkes called the government's claims "ridiculous" and said they "make no sense." Stephenson said the idea that AT&T and Time Warner would be able to raise prices on competitors following the merger was "absurd."

It "defies logic to me," Stephenson said, according to Reuters.

The comments cap off the more than a month spent in the courtroom as the Justice Department and AT&T and Time Warner all made their arguments to US District Judge Richard Leon. His decision could have ripple effects on future deals between internet service providers and media companies, as well as affect what streaming services look like in the future. AT&T has invested heavily in a streaming video service called DirecTV Now, and it's looking to Time Warner to bulk up its original programming.

A Justice Department victory in the case could have a chilling effect on different companies looking to merge at a time when other streaming giants, like Netflix and Google's YouTube, are capturing more eyeballs. Both Bewkes and Stephenson pointed to new rivals like Google, Facebook and Netflix as the bigger threat.

Their testimony marked the end of the defense's case. The DOJ, which presented its arguments first, gets to rebut. Here's everything that's happened so far.

Watch this: Trump's DoJ fights to block AT&T-Time Warner merger

The government's case

At the center of the Justice Department's case is whether AT&T's distribution network, which includes not only its wireless and broadband networks but also satellite TV service DirecTV, combined with Time Warner's popular cable networks, including CNN, HBO and TNT, would lead to higher prices for consumers. The government also argues the merger could threaten competitors, like Dish Network's Sling TV streaming service, that offer smaller bundles of programming over the internet.

A key witness for the government was an economist from UC Berkeley, professor Carl Shapiro, who produced a report showing the merger would lead to higher prices for consumers and that Time Warner would be able to negotiate for higher carriage rates from AT&T's rivals. The report indicates that pay TV subscriptions would increase by $436 million annually. AT&T has pointed out that the figure breaks down to about 45 cents per month.

When questioned by Leon, Shapiro admitted his analysis assumes Time Warner would have an incentive to act in a way that would benefit AT&T's interests. He said he couldn't prove that would turn out to be the case.

The Justice Department also called other witnesses, such as executives from AT&T's rivals. Tom Montemagno, an executive vice president of programing acquisition at Charter Communications, testified that he's concerned the merger would result in "excessive" price increases for Time Warner content. A study Charter commissioned ahead of negotiations with Time Warner in 2016, before the merger was announced, suggested the company could lose 9 percent in current and potential subscribers if it lost Turner channels.

AT&T has proposed that it will agree to third-party arbitration for seven years if disagreements over pricing for Time Warner's networks should arise with distributors. It also promised it wouldn't black out any programming during arbitration.

But competitors that oppose the merger say that's not good enough. Warren Schlichting, a group president of Dish's Sling TV streaming service, said during his testimony that the agreement was too vague. He also noted that it doesn't include HBO, which is important given that one in five of Dish's subscribers subscribes to HBO, Schlichting said, according to a Reuters report.

"It's a high-risk proposition to put your business in the hands of an arbitrator who may or may not understand your business," he said.

He went on to say there's nothing preventing Time Warner from forcing Dish to take more channels, which would push up the cost of the SlingTV bundle. SlingTV and streaming services like it are meant to provide consumers with a slimmed down and less expensive bundle of cable TV channels.

AT&T's defense

AT&T has fought back on all these claims, a process that culminated in the testimony of the CEOs this week.

Time Warner CEO Jeff Bewkes arrives for opening statements back on March 22.

Time Warner CEO Jeff Bewkes arrives for opening statements back on March 22. 

Jim Watson/Getty Images

"Ridiculous" was how Bewkes characterized the government's argument that the combined company would have leverage over cable and satellite competitors to demand more money to carry Turner networks, according to Variety.

"It is not how this works," he said.

He argued that Time Warner couldn't afford an extended programming blackout, saying the lost advertising revenue and subscription fees would be "catastrophic for us." The 2014 blackout of some Turner channels on Dish Network cost the company $150 million in lost revenue, he said.

He also argued against the government's assertion that a combined AT&T and Time Warner could work with rival Comcast to hurt streaming services like Dish's Sling or Google's YouTube TV. Instead, it's in Time Warner's interest to be on those new platforms, he said. And it "doesn't make sense" for the company to restrict high value channels like HBO from AT&T's rivals.

"We need to be in every outlet," he said, according to Variety. "We need to have as many subscribers as we can get."

He said the TV industry is going through a" tectonic" shift and noted that the trend toward targeted advertising has been "really bad for TV companies." Companies like Time Warner are unable to access consumer data in order to compete in this new world. He pointed to flat advertising growth, and increased pressure on Time Warner's Turner cable channels to raise carriage fees to make up the difference. But he said this comes at a time when consumers have "had it up to here with subscription prices."

Randall Stephenson, CEO of AT&T, during a 2016 Senate Judiciary Subcommittee hearing. Stephenson was in federal court this week defending his company's merger with Time Warner.

Randall Stephenson, CEO of AT&T, during a 2016 Senate Judiciary Subcommittee hearing. Stephenson was in federal court this week defending his company's merger with Time Warner. 

Mark Wilson/Getty Images

Stephenson, who took the stand Thursday, echoed those sentiments.

The AT&T chief tried to show that the rationale for the merger was never to gain leverage over competitors, but instead to transform AT&T's business and compete in the targeted advertising market with Apple, Google and Facebook.

He called the merger with Time Warner a "significant shift in strategy" for AT&T, explaining the company knew that smaller acquisitions for content wouldn't work. He said the company needed to take a giant leap into the content business.

"We knew we had to have scale," he said, according to Variety.

Wrapping up

The trial, now in its fifth week, will be coming to a close soon. Stephenson was the final witness for the defense. The Justice Department will now call rebuttal witnesses.

It's difficult to say how the case will shake out.

The head of the DOJ's antitrust division, Makan Delrahim, seems confident of a victory. He's the one who made the decision to file the lawsuit last year. When asked at a conference last week about whether losing the case might make it more difficult to challenge similar deals, he said flatly: "We're not going to lose."

Still, there's reason to doubt that everyone else is as convinced. Leon has expressed skepticism about the government's case, according to Bloomberg. When the government's key witness testified about the study predicting higher consumer prices, Leon seemed confused about how the price increase was calculated.

"Well, I look forward to rereading your testimony," Leon told him, according to the Bloomberg report. "I'm not sure I got it, but it's too late and too hot to belabor the point any further."

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