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The case against the AT&T-Time Warner deal has gone badly

NEAR the end of the antitrust trial over AT&T’s $109bn acquisition of Time Warner, Richard Leon, the presiding judge, asked Randall Stephenson, chief executive of AT&T, what the pay-television market would look like in seven years’ time. Mr Stephenson mused in his folksy Oklahoma drawl that seven years ago his predictions for today would have missed “so hard” when it came to the decline of pay-TV and the rise of competition from Silicon Valley.

The exchange sounds self-deprecating but it highlighted what AT&T argued was a crucial weakness in the government’s case. The Department of Justice, which is seeking to block the deal, has chiefly looked back to the past, not forward to a video and advertising market increasingly shaped by Netflix, Google and Facebook. Many analysts agree, and are cautiously optimistic about AT&T’s chances of a favourable settlement or ruling in time for the deal’s closing deadline of June 21st.

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Further media consolidation would then unfold as big competitors pursue similar vertical mergers of content and distribution businesses. Comcast might immediately launch a hostile bid for much of 21st Century Fox, for example, potentially upending Disney’s planned acquisition of much of Rupert Murdoch’s entertainment business. It would take only months for the marketplace to transform again.

The central question of the trial, which adjourned on April 30th with closing arguments, is whether AT&T, which owns DirecTV, a satellite provider, would extract higher prices from other pay-TV distributors and thus from their customers, by threatening to withhold Time Warner’s TV networks from them. The government argued that AT&T could do so, at a cost to consumers of more than $400m a year, because networks such as TNT and CNN represent “must-have” content.

Daniel Petrocelli, AT&T’s lead lawyer, and defence witnesses, punched several holes in this argument. They argued it would be “absurd” for AT&T to withhold content from anybody because it would cost them dearly to do so. They said the government’s expert witness, Carl Shapiro, had used an economic model based on unreasonable assumptions, overestimating how many consumers would switch pay-TV providers if Turner networks were temporarily blacked out. And they said that Mr Shapiro and the government had not sufficiently reckoned with the pay-TV industry’s rapidly declining hold over customers. Several million customers each year are dropping expensive pay-TV packages, including from DirectTV, as consumers flee for cheaper options like Netflix. In other words, ever-fewer people must have Time Warner’s so-called “must-have” TV networks.

In his testimony Mr Stephenson played up such struggles. He said he wants to use the billions AT&T is still earning from the declining satellite business to invest in cheaper video options for mobile-phone customers, something he is already doing without Time Warner. He argues that the battleground has moved to mobile in the fight with Netflix, Google and Facebook for subscriptions and advertising.

That reasoning suggests what may be the real long-term goal for AT&T, which is to use entertainment content to improve its position (it is currently in second place) in wireless, and to take away broadband customers as wireless data speeds become more competitive with fixed-line broadband. If the Time Warner merger goes through, Verizon, the largest wireless provider, may likewise feel compelled to acquire an entertainment firm (concentration in the wireless sector is partly what led this newspaper to recommend blocking the deal when it was announced, in 2016). It is hard to predict how the market will look in seven years. But this is unlikely to be the last time that antitrust regulators and industry lawyers clash in court.

This article appeared in theBusinesssection of the print edition under the headline“Vintage legal drama”

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