Tag Archives: time-warner

Judge ignored fundamental economics in approving AT&T, Time Warner deal, justice department says

by Steve Blum • , , , ,

The judge who unconditionally blessed AT&T’s purchase of Time Warner’s content companies “rejected fundamental principles of economics”, according to a motion filed by the federal justice department as it launched its appeal of that decision…

The “assumption” the court criticized was the fundamental economic principle, recognized in case law, that the merged firm would maximize its corporate-wide profits (rather than instruct Turner and DirecTV to operate independently at the expense of overall profits to the parent corporation). This basic economic axiom of corporate-wide profit maximization forms the basis for much of corporate and antitrust law.

The brief opened with a stark warning about the danger of allowing AT&T to use its monopoly/duopoly control over broadband access to maximise its return on its Time Warner investment…

The government’s lawsuit challenging AT&T’s acquisition of Time Warner concerns the future of the telecommunications and media industries in the United States. Its outcome could determine whether the participants in these industries will be permitted to merge into vertically integrated firms that control valuable programming content as well as the means of distributing that content directly to end-customers in a manner that hurts competition and therefore consumers. If AT&T is permitted to control Time Warner’s most valuable media assets, the merged firm will have both the incentive and the ability to raise its rivals’ costs and stifle growth of innovative, next-generation entrants that offer attractive alternatives to AT&T/DirecTV’s legacy pay-TV model—all to the detriment of American consumers.

The Washington, D.C. appeals court agreed to the justice department request to put the case on a fast track. It set out a schedule for written arguments, with the final briefs due in mid-October. That’s just for the first round, though. If the appeals court decides to take up the case, a decision will likely be many months away.

Not so fast, doc. Justice department appeals AT&T Time Warner decision

by Steve Blum • , , , ,

In a terse filing, the federal justice department gave notice last week that it is appealing a judge’s decision to allow AT&T to buy Time Warner’s content companies, with no strings attached.

The justice department didn’t outline a specific goal, but one possibility is that it wants AT&T to give up some of its new empire, perhaps Turner channels such as CNN. According to a story in Variety by Ted Johnson, it could turn out to be a risky maneuver…

Larry Downes, senior industry and innovation fellow at the Georgetown Center for Business and Public Policy, said that the Justice Department’s appeal carries risks for the government. Leon’s decision does not hold precedent, he noted, while the D.C. Circuit decision likely would.

“The court could use the opportunity to comment generally on the legal standards for opposing vertical mergers, for example, or reaffirm in broad terms the general principles of consumer harm that have guided antitrust law for the last forty years — rejecting, in effect, recent calls for expanding antitrust to take into account the economics of online platforms that don’t charge consumers and therefore don’t raise prices when they acquire other companies,” he said via email…

“The DOJ is really gambling — and could wind up losing not just this case but its ability to challenge future deals in a wide range of industries currently undergoing disruption,” he said.

Perhaps. But federal trust busters won’t get anywhere by rolling over and playing dead either. Immediately after the decision, Comcast saw daylight and moved to add Fox to its menagerie of captive content. AT&T followed up with a price hike for its Internet video service, DirecTv Now, repudiating lawyerly claims it made during the trial that consumer costs would come down.

Vertical mergers – where a company acquires its supply chain – aren’t always anticompetitive. But it always will be when dominant, monopoly model Internet service providers like AT&T and Comcast can manipulate broadband traffic to favor in-house content, as the end of network neutrality allows them to do.

Judge allows AT&T to buy Time Warner, no strings attached

by Steve Blum • , , , ,

A federal judge decided yesterday that AT&T may buy Time Warner’s video and motion picture content companies, including HBO, CNN and the Warner Brothers movie studio. Judge Richard Leon, who was appointed by president George W. Bush, put no conditions on the acquisition. He simply ruled “the government’s request to enjoin the proposed merger is denied”.

The 172 page decision does an excellent of outlining the current state of the video distribution market. AT&T wants to buy Time Warner so its DirecTv and other video services – delivered via satellite and mobile and wireline networks – can better compete with the likes of Netflix, Comcast (which also owns an extensive stable of content companies) and Amazon. Leon’s decision picks apart, and ultimately rejects, the federal justice department’s claim that the deal would “substantially lessen competition in the video programming and distribution market”.

What the decision doesn’t do is examine AT&T’s ability to use its monopoly/duopoly control over consumer Internet access in the U.S. to freeze out competing programming and online content distributors, and to raise prices for captive subscribers. That concern is particularly high this week, with the end of federal network neutrality rules that might have prevented that kind of harm.

AT&T will use its online muscle to make the most of this $85 billion purchase, as Leon’s decision makes clear

AT&T witnesses testified that they believe the company’s future lies in the use of online and mobile wireless connections to access premium video. As John Stankey, the AT&T executive who will be tasked with running Time Warner should the merger proceed, explained, AT&T acquired DirecTV in 2015 not in an effort to double down on the satellite business—a concededly mature and indeed declining asset—but to “pick up a lot of new customers that we could work on migrating” to new, innovative products necessary to compete in the future.

It’s possible that the federal justice department will challenge Leon’s decision, and could ask an appeals court to put the deal on hold while it’s under review. That’s all speculative, though. As of now, AT&T and Time Warner can close the sale next week as planned.

If you don’t stop it, fix it, justice department tells AT&T-Time Warner trial judge

by Steve Blum • , , , ,

It’s up to a federal judge to decide whether or not AT&T can buy Time Warner, and all the content and video channels that come along with it. The federal justice department tried to make the case that the deal would be anti-competitive and should be blocked. AT&T, naturally enough, claimed it wasn’t.

Some experts who followed the trial closely thought AT&T made the better case. The justice department has to prove that a vertical merger – when a company buys its supplier – would have the same destructive effect on competition as a horizontal one, when a company buys a competitor. That’s a tough sell, and it seems that justice department lawyers aren’t counting on total victory. In its closing brief, the justice department offered Plan B: a “targeted divestiture” – either allow AT&T to buy some of Time Warner’s content assets (HBO and Warner Brothers, but not Turner channels) or force it to give up ownership of DirecTv.

Usefully, the justice department argued strongly for a “structural”, rather than a “behavioral” remedy. The difference is that a structural solution involves a permanent change – divesting DirecTv or not acquiring Turner, for example – while a behavioral change only involves a promise not to do bad things in the future…

While structural relief eliminates the risk of harm, behavioral relief assumes regulatory conditions can effectively constrain a business’s natural incentives to maximize profits…Behavioral relief is also less effective at protecting competition than structural market-oriented remedies because it “can hardly be detailed enough to cover in advance all the many fashions in which improper influence [over the acquired company] might manifest itself.”

Just so. Behavioral remedies require ongoing oversight by regulators with little experience or interest in the business at hand, and lead to perpetual evasion by corporate execs and lawyers with all the incentive and resources in the world.

A decision is expected by mid-June.

Justice department picks up free market ball as FCC drops it

by Steve Blum • , , , ,

Cable and phone companies may soon be free of any obligation to meet common carrier standards of behavior, but that doesn’t necessarily mean they can exert their monopoly muscle on the broadband market without fear of consequences.

Last week’s other big broadband story offers hope of an even more effective counterweight to broadband monopolies: anti-trust law. When the federal justice department sued to block AT&T’s takeover of Time Warner, it made a clean break from recent practice and went after the root cause of the problem – pursued a structural remedy – instead of nibbling around the edges with temporary and often tangential behavioral restrictions on the companies. It’s a strategy – and philosophy – outlined in a recent speech to the American Bar Association by Makan Delrahim, the new assistant attorney general in charge of anti-trust enforcement…

Like any regulatory scheme, behavioral remedies require centralized decisions instead of a free market process. They also set static rules devoid of the dynamic realities of the market. With limited information, how can antitrust lawyers hope to write rules that distort competitive incentives just enough to undo the damage done by a merger, for years to come? I don’t think I’m smart enough to do that.

Behavioral remedies often require companies to make daily decisions contrary to their profit-maximizing incentives, and they demand ongoing monitoring and enforcement to do that effectively. It is the wolf of regulation dressed in the sheep’s clothing of a behavioral decree. And like most regulation, it can be overly intrusive and unduly burdensome for both businesses and government.

The justice department’s complaint called out the problem. When Comcast bought NBC-Universal – a similar deal – the justice department and the Federal Communications Commission extracted promises of good behavior. Some targeted direct, anti-competitive problems, while others went after unrelated side benefits, like discounted broadband rates for low income households. But it won’t matter much longer whether those promises did any good: they all expire next year. Comcast will be free to be, well, Comcast.

The justice department is taking a better approach with AT&T and Time Warner. It’s trying to avoid damage, rather than ineptly mopping up around the edges. The same thing happened with CenturyLink’s takeover of Level 3 Communications. The combined company is giving up dark fiber strands on 30 key long haul routes. It’s arguable whether that’s sufficient, but it is a structural cure aimed at preventing a monopoly from forming. The contrast with the weak and irrelevant behavioral conditions imposed by the California Public Utilities Commission is stark.

The broadband market in the U.S. is mostly a mix of outright monopolies and cozy duopolies, which are themselves collapsing into monopolies as cable companies outstrip telcos’ ability to deliver broadband at the federal advanced services standard of 25 Mbps download and 3 Mbps upload speeds. The Federal Communications Commission is determined to let that happen. With its new found zeal for trust busting, the justice department is the unexpected last line of defence.

Feds flex anti-trust muscle and sue to block AT&T-Time Warner deal

by Steve Blum • , , , ,

The federal justice department challenged the proposed merger of AT&T and Time Warner in court yesterday, on anti-trust grounds. The problem, according to the justice department’s complaint (h/t to Brian Fung at the Washington Post for the pointer) is that if it owns the entire content creation-ownership-distribution chain, AT&T will use that market power to muscle out its competitors, – traditional linear distribution companies and emerging over-the-top players alike…

If allowed to proceed, this merger will harm consumers by substantially lessening competition among traditional video distributors and slowing emerging online competition. After the merger, the merged company would have the power to make its video distributor rivals less competitive by raising their costs, resulting in even higher monthly bills for American families. The merger also would enable the merged firm to hinder the growth of online distributors that it views as a threat to the traditional pay-TV model…

AT&T/DirecTV perceives online video distribution as an attack on its business that could, in its own words, “deteriorate the value of the bundle.” Accordingly, AT&T/DirecTV intends to “work to make [online video services] less attractive.” AT&T/DirecTV executives have concluded that the “runway” for the decline of traditional pay-TV “may be longer than some think given the economics of the space,” and that it is “upon us to utilize our assets to extend that runway.” This merger would give the merged firm key, valuable assets, empowering it to do just that.

The core problem, according to yesterday’s filing is the proposed combination of DirecTv, which, when combined with AT&T’s Uverse service, is the nation’s largest television distributor, and Time Warner’s Turner networks. That lends credence to reports over the past couple of weeks that federal anti-trust lawyers wanted AT&T to give up one or the other in order to avoid going to court.

AT&T isn’t backing down. It’s immediate response was to call the lawsuit “a radical and inexplicable departure from decades of antitrust precedent”.

Charter is ripping off Internet subscribers, says NY attorney general

by Steve Blum • , , ,

Time Warner Cable executives deliberately under provisioned and over promised Internet service to its subscribers in the State of New York and Charter Communications is allowing the practice to continue, claims New York attorney general Eric Schneiderman in a lawsuit filed earlier this week. It’s a follow on to an investigation kicked off in 2015.

Charter purchased TWC in May 2016. It took over operation of systems and customer equipment that couldn’t delivered speeds that were advertised or that customers purchased and “even now, [Charter] continues to offer Internet speeds that we found they cannot reliably deliver”, Schneiderman alleges. TWC went so far as to rig speed tests run by the Federal Communications Commission, according to the lawsuit

[Time Warner Cable] leased older-generation modems to over 900,000 subscribers in New York State…However, [Time Warner Cable] knew that, in practice, these older-generation modems were incapable of achieving the Internet speeds its subscribers were led to believe they were paying for…

[Time Warner Cable] managed its cable network in a way that did not deliver the promised Internet speeds over any type of connection. It cut corners by packing too many subscribers in the same service group, which resulted in slower speeds for subscribers, especially during peak hours. It also failed to add more channels for each service group, which similarly resulted in slower speeds for subscribers…
[Time Warner Cable] further deceived the FCC by manipulating the average Internet speed results in the FCC’s speed tests. The company inflated the average speed results by providing increased Internet speeds when service groups were less utilized to offset (and conceal) test results showing slower speeds when the service groups had heavier usage. By gaming the FCC speed tests in this manner, [Time Warner Cable] concealed the fact that it failed to consistently deliver the promised speeds to its subscribers under actual network conditions.

Charter’s response to an enquiry from Ars Technica blamed TWC but stopped short of admitting there was actually a problem or promising that it would actually fix anything.

Haven’t seen the facts about AT&T, Time Warner merger, Trump says

by Steve Blum • , , , ,

Translation: never mind.

Donald Trump is backing off from his stated opposition to the AT&T – Time Warner transaction. According to the Axios blog, Trump said in an interview

“I have been on the record in the past of saying it’s too big and we have to keep competition. So, but other than that, I haven’t, you know, I haven’t seen any of the facts, yet. I’m sure that will be presented to me and to the people within government.”

Wall Street’s optimism about a kinder attitude toward big mergers in Washington, DC appears to be a safer bet.

Don’t make U.S. telecoms market failure worse, says The Economist

by Steve Blum • , , , ,

Land of the rent-seekers and home of high prices.

AT&T should not be allowed to purchase Time Warner, according to a pointed editorial in The Economist. AT&T’s monopoly power in some market segments and its cozy duopolies in others already gives it too much control over what people in the U.S. can see, how much they have to pay and how much money gets stuffed in the pockets of politicians, says the London-based newspaper and free market advocate

There are two reasons why trustbusters should now take a tougher line. First, the telecoms industry is already a rent-seekers’ paradise. Americans pay at least 50% more for mobile and broadband service than people in other rich countries. For each dollar invested in infrastructure and spectrum, American operators make 28 cents of operating profit a year, compared with 18 cents for European firms. That reflects the lack of competition. AT&T and Verizon control 70% of the mobile market, and are the only firms that reach 90% or more of Americans with high-speed services. Half of the population has no choice of fixed-broadband supplier. The lack of downstream competition in pipes could distort competition in upstream content…

A second concern is that AT&T-Time Warner would have vast political and lobbying power, allowing it to bend rules over time, including any antitrust remedies that it agreed with regulators. It would capture 28% of the media-and-telecoms industry’s pre-tax profits and 2% of all corporate profits, making it America’s third-biggest domestic firm. Media and telecoms regulation is already intensely political, and AT&T today is no shrinking violet, being a vocal opponent of net neutrality, the rules that ensure that all online traffic is treated equally.

I’d argue that CenturyLink’s purchase of Level 3’s fiber network – particularly the extensive overlapping routes the two companies share – is a more direct and immediate threat to what little remains of telecoms competition in the U.S. But from the big picture point of view, The Economist has it right.

Only one regulatory hurdle looms for AT&T-Time Warner deal

by Steve Blum • , ,

Clearing it is not a given, though.

AT&T’s bid to acquire Time Warner has little direct effect on the broadband industry, but the indirect effects have set off anti-competitive alarm bells. Compared to other recent mega-deals, though, there will be relatively little regulatory review of the transaction.

Time Warner already spun off its cable systems into an independent company, which was snapped up by Charter Communications earlier this year. That followed a similar, unsuccessful attempt by Comcast. Both deals triggered reviews by the California Public Utilities Commission, the Federal Communications Commission, and the federal justice department’s anti-trust team. Comcast’s purchase of Time Warner was scuppered by the FCC and the federal justice department; Charter successfully ran that gauntlet. As did Comcast when it took control of NBC Universal, at least at the federal level.

But AT&T is in much different position. Time Warner is a content company. It doesn’t own any regulated telephone subsidiaries, which is what caused the California Public Utilities Commission to become involved in the Charter and Comcast transactions. It does own one television station, WPCH-TV (formerly WTBS-TV) in Atlanta, and the FCC would have to approve any change in ownership, but that might be finessed. According to the joint statement issued by the two companies on Saturday

AT&T and Time Warner are currently determining which FCC licenses, if any, will be transferred to AT&T in connection with the transaction. To the extent that one or more licenses are to be transferred, those transfers are subject to FCC review.

Translation: we don’t want the FCC coming anywhere near this deal, so we will try like hell to figure out some other way to get rid of the television station.

The justice department will do a standard, anti-trust review and, likely, impose conditions that’ll be limited to direct, competitive issues like exclusivity of its programming or zero rating the bandwidth that mobile subscribers consume to watch it. Or it could simply kill the deal on the grounds that the anti-competitive harm is beyond mitigation. But at this point, that’s not the way to bet.