Why AT&T-Time Warner Wasn’t Forced to Sell CNN

Hindsight is 20/20. And in hindsight, the Trump administration’s U.S. Department of Justice might have saved a lot of time and money if it had steered clear of the courtroom and simply negotiated to impose tough conditions on AT&T and Time Warner in exchange for regulatory approval for their $85.4 billion, experts tell TheWrap.

Had they not gone to court, government antitrust officials might have been able to squeeze out some semblance of a win, according to Villanova Business professor Mary Kelly.

“In hindsight, you have to wonder would they have been better served by just trying to negotiate and maybe they could have extracted some sort of condition from AT&T,” she said. “That might have been seen as a win… but now, AT&T has gotten the red carpet rolled out.”

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“I was truly surprised there were no conditions,” CFRA analyst Tuna Amobi told TheWrap. “Under normal circumstances — had the government not challenged — for a deal of this magnitude, one would have expected there to be conditions.”

Instead, U.S. District Judge Richard Leon last week delivered an outright rejection of the Justice Department’s argument and essentially rubber-stamped AT&T’s acquisition of Time Warner.

Despite President Trump’s very public opposition to the deal, Kelly noted that Leon “seemed to be very very critical of the analysis of the merger brought by the DoJ witnesses and didn’t feel they proved the harm they were arguing.”

Department spokespeople did not respond to requests for comment on this story.

During the 2016 presidential campaign, Trump vowed, while openly feuding with CNN, to block the merger if and when he took the White House.

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The government had talks with AT&T last November in hopes of reaching a deal for regulatory approval that would have come with conditions attached — one being floated at the time was forcing AT&T to sell the Turner TV division, or even just CNN.

When Comcast bought NBCUniversal in 2011, it agreed to cede management rights of its minority stake in Hulu and was limited in the deals it could make with other video programmers and distributors. There were more than 150 conditions set on the deal by regulators, some of which began expiring this year.

In the end, the government and AT&T could not agree to structural remedies to a deal, according to a person familiar with the negotiations, so the Justice Department opted instead to sue AT&T in an attempt to prevent the merger altogether.

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The DoJ argued that AT&T and Time Warner’s merger would hinder competition among media and entertainment companies and that the combined company would use its newfound power to strong arm distributors during licensing negotiations, ultimately hurting consumers.

These are concerns that could have warranted behavioral conditions like requiring AT&T to offer the content acquired from Time Warner to its competitors at fair and reasonable prices.

AT&T did include an arbitration provision, which promises it won’t black out Time Warner channels during negotiations with carriers. The provision also requires the combined company to enlist a third-party negotiator to use fair-market value to determine prices for things like licensing fees.

During the trial, Georgetown economics and law professor Steven Salop said a lot was riding on Leon’s reading of the arbitration provision. Salop didn’t believe it was enough.

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Structural conditions, which would have been more likely if say a content company were buying another content company, would have required AT&T to divest some of the Time Warner assets. During the trial, the DoJ suggested a partial divestiture wherein AT&T might have to sell CNN. AT&T CEO Randall Stephenson vehemently opposed to this idea.

Judge Leon concluded that the government did not sufficiently argue its case that the AT&T-Time Warner merger would hurt competition or consumers. He even laid out the uphill battle the DoJ was facing, writing: “The basic economic reason for limiting horizontal mergers is well-founded and rather generally accepted… unfortunately, there is no comparable theoretical basis for dealing with vertical mergers.”

In his written opinion, he noted that previous vertical mergers like the AT&T-Time Warner one were settled with regulatory or court-ordered conditions — “conditions that will not apply to the challenged merger,” he wrote.