DOJ Issues With AT&T/TW Could Point to Pendulum Swinging Toward Structural Fixes

Indications the Justice Department is pushing AT&T for divestitures as part of its proposed buy of Time Warner (TW) (see 1711080047) point to Justice swinging back toward favoring structural rather than behavioral conditions for problematic deals, experts said. On the behavioral remedies on vertical deals in recent years, such as Comcast's buy of NBCUniversal, "most people think they're failures," said University of Baltimore Venable professor of law Robert Lande. The Obama administration was more favorable to employing behavioral conditions than was the George W. Bush administration, experts said, citing the Bush administration's 2004 antitrust guidelines. DOJ didn't comment Monday.

It's hard to say from one data point DOJ is now favoring structural remedies, but in a combination of this size it’s likely, because behavioral or regulatory remedies "would be exceedingly complex," said Boies Schiller telecom and antitrust lawyer Travis LeBlanc. He said HBO is likely a very problematic part of the TW portfolio, since it's must-have content and AT&T's DirecTV could offer it on more favorable terms than competitors. LeBlanc said structural conditions are more common in horizontal mergers, but Justice also might have presented some behavioral condition options to AT&T alongside the reported pushes for divestiture of either DirecTV or Turner.

"The new administration is finding its way" and taking a different approach, antitrust lawyer David Balto said during a Wells Fargo-organized call with investors Monday. Transaction cases rarely get litigated and most end up getting settled, with the threat of litigation often playing a role, he said. He noted the Obama administration often believed in settling after a complaint is filed, and it's not clear if the Trump administration will follow suit. Such a complaint could come by month's end, he said, adding a trial -- even on expedited basis to try to hold the deal together -- might not come for three to four months. He said one potential structural remedy might be setting up a system for complaints about AT&T use of exclusive sports content to the disadvantage of MVPD rivals.

Word that Justice is pushing for divestitures could be saber rattling to pressure the telco into accepting conditions, said Cleveland State University Thomas law professor Christopher Sagers. Conversely, AT&T could have leaked about the department pushing for a CNN sale to put pressure on the antitrust overseer, an antitrust lawyer said, saying Justice likely got angry and pushed AT&T to correct the record, leading to CEO Randall Stephenson's comments that CNN isn't for sale.

President Donald Trump Saturday denied any direct involvement in DOJ's approach, according to pool reports. He acknowledged speaking out against the deal in the past (see 1610220002): "You should have as many news outlets as you can, especially since so many of them are fake." He said the deal could end up in litigation.

Concerns about New AT&T having too much distribution power with DirecTV or too much must-have content ignores AT&T's rationale for the deal -- an advertising platform to compete in mobile and desktop with ad giants Google and Facebook, telecom consultant Jonathan Lee blogged Monday. That competition would require AT&T to expand, not restrict, TW content, he said. He said a Turner divestiture would just lead to more consolidation, since the buyer would likely be a media conglomerate, and a DirecTV divestiture would similarly have perverse effects.

Divestiture of must-have content or of distribution via DirecTV "is precisely the remedy you would expect" if the deal presents vertical integration harms, Public Knowledge Senior Vice President Harold Feld blogged Thursday. He said since company and DOJ negotiations are just starting, behavioral conditions could still be the end result.

There's no clear picture of what happens if the government sues to block the deal. LeBlanc said the department could have a tough time proving its case given the merger's vertical nature. If AT&T's options are either divesting DirecTV or not buying Turner, it's likely the company fights that in court, which could make other options beyond those two more attractive, he said.

Sagers said it wouldn't be surprising if AT&T fought divestitures in court, particularly as the company may be "getting pretty fed up" with the department after its 2011 failed takeover bid for T-Mobile. He said the company has a strong view that vertical deals don't get challenged, though that's not quite correct since government conditions on vertical mergers are commonplace. If DOJ sues and AT&T fights it in court, it wouldn't be surprising if government wins either by a ruling on the merits or by AT&T eventually walking away, Sagers said. Lande said just being in limbo for a sizable period of time could make AT&T drop the deal.

A move to block the acquisition carries heavy risk, since if it fails, AT&T/TW would happen without any conditions, Boston College Law School associate professor Daniel Lyons blogged Monday. Justice might be wiser to seek voluntary consent to behavioral remedies "than to roll the dice on divestiture," he said.