At the Federal Communications Commission, officials gathered to discuss the big Time Warner deal, which promised to upend the telecommunications world with innovation and synergy.
Someone in the room asked whether the FCC had jurisdiction over the internet. There was a pause, silence and some puzzled looks before the agreement that, indeed, it did.
“Unspoken and lingering in the air was the thought that this is far too big for us not to have jurisdiction,” says a former FCC official.
That was in 2000, and the deal was Time Warner and AOL.
Hanging in the air last week after AT&T’s audacious $85 billion bid to gobble up Time Warner, using nearly identical language about innovation and synergy, was the question of whether the FCC would have any role in reviewing the deal and whether, whoever vets it, that deal goes through. (In retrospect, most involved may have wished that the disastrous AOL TimeWarner marriage could have been canceled at the altar.)
Forget for a moment that many Wall Street analysts are scratching their head over the dubious value of the intended corporate synergies of the deal. Many are clearly worried that the hurdles at the FCC, the Department of Justice and in a populist-minded Congress may be too high for the companies to clear. Indeed, the fact that shares of Time Warner, one of the largest content companies in the world, are still trading at a hefty discount to AT&T’s takeover price is a clear sign that many on Wall Street are concerned that the deal will actually close.
The FCC, regardless of who is chairman, has a strong public interest standard that is often subject to political pressure from the president and/or Congress with no deadline to meet.
The agency reviews mergers when licenses change hands, and while Time Warner has only a single TV station, WPCH Atlanta—which it could spin off to potentially avoid that review—it also has several earth station licenses it uses to distribute HBO and TBS. Those would be harder to unload to get out from under FCC oversight of the deal.
FCC officials weren’t commenting on what licenses Time Warner had (through its ownership of Turner) beyond WPCH Atlanta—formerly Superstation WTBS—and how that might give the commission a role beyond consultation with the Department of Justice . But a check of the FCC’s list of active satellite earth station licenses included Turner and HBO.
While Time Warner could spin the station off, the FCC would have to approve that deal, or any other earth station licenses. The former FCC official said it would be interesting to see if the FCC can resist finding some other way into the deal if that happens, adding: “This one will be a real thrill to watch.”
Media watchers will need an extra-large bucket of popcorn. Given the size of the deal and the intervening election and administration change, it will likely not be until late next year before a decision is reached.
On business networks and on conference calls last week, Time Warner CEO Jeff Bewkes and AT&T CEO Randall Stephenson argued the pro-business merits of the deal. They see it as a way to stay competitive with big cable companies and free up some of that Time Warner content for digital distribution more broadly, particularly in the mobile space.
Clearly, positioning the deal as creating competition to cable and more access for online content was a pitch aimed at Washington, where the current administration is always looking to create more video competition and access, particularly online.
But securing the deal—and monetizing all of that newly acquired Time Warner content—could come at a stiff price given that the quid pro quo is making it accessible to others under the same conditions at the same rate.
The FCC has made it clear that it has authority over the distribution of content over the internet, which is what the deal announced last week—combining mobile broadband with a leading film and TV portfolio from CNN, Warner Bros., HBO, TNT and more—is all about.
“I think it will be difficult to evade FCC review, even if there are no licenses to be transferred, due to the ‘public interest’ standard and the implications for consumers,” says Adonis Hoffman, former chief of staff to FCC commissioner Mignon Clyburn.
But even if DOJ, whose focus is antitrust, is the lead agency, if it concluded the deal could hurt competition for online content or shelf space, it could sue to block the deal. Or, the department could seek spinoffs (Time Warner ’s 10% ownership interest in Hulu, for example) if it is concerned about that online video programming asset in combination with DirecTV Now. Or, in the most likely scenario, it will apply conditions.
The DOJ only months ago took the lead on conditions in the Charter-Time Warner Cable merger, preventing contractual impediments to that online competition. DOJ can also consult with the FCC for its expertise whether or not it is an official participant.
Deal defenders, including AT&T, pointed out repeatedly last week that the Department of Justice had not nixed any vertical deals. “In the modern history of the media and the internet, the U.S. government has always approved vertical mergers like ours, because they benefit consumers, strengthen competition, and, in our case, encourage innovation and investment,” David McAtee, AT&T senior executive VP and general counsel, blogged last week.
There is a first time for everything, and as AT&T itself pointed out, this is the first deal combining content with a wireless broadband company, billing it as the next revolution in video.
It would also be the first big media merger review of a Clinton administration. If Donald Trump manages to win, he has pledged to block the deal, and maybe even unwind Comcast/NBCU, but that clearly seems more about striking back at news outlets like CNN and MSNBC that he perceives as part of a conspiracy to rig the election against him.
The deal-vetting will come at the same time a new administration will be coming in, which could delay the proceedings and bifurcate the process.
“Given the hyper-partisan political environment in the Senate, the fact that the Senate Judiciary Committee may be tied in knots over the Supreme Court and the ordinary delays at the start of any new administration, the new attorney general and assistant attorney general for Antitrust may not be in office until late spring or even early summer,” says media regulation attorney Andrew Schwartzman. “That means that the bulk of the analysis and initial recommendations may be done by career staff and/or Obama holdovers, who have been very aggressive.”
A Distinctly FCC-ish Flavor
Looking at the composition of each body, the Justice Department has a distinctly FCC-ish flavor to it. Currently heading the DOJ antitrust division, which will be reviewing the deal, is Renata Hesse. Until last April, she was a merger advisor to the FCC, including supervising the review of AT&T/T-Mobile, which the FCC did not approve.
The new deputy attorney general for Antitrust is Jonathan Sallet, who until July was the FCC’s general counsel. He was part of the team that concluded Comcast should not be allowed to merge with Time Warner Cable.
Hesse addressed the online conditions on the Charter deal back in the spring. “Online video distributors offer consumers greater choices for video services,” she says. “This merger would have threatened competition by increasing the merged company’s leverage to demand that programmers limit their licensing to these online providers.”
DOJ’s FCC connection was not lost on Wall Street.
In his advisory to clients, MoffettNathanson senior analyst Craig Moffett wrote that based on their histories with those deals, “one might guess they enter with a negative bias.”
MoffettNathanson pointed out to clients that the FCC already has ways to prevent content exclusivity among vertically-integrated companies, both traditional and online. The program access rules require companies to make their traditional MVPD content available to competing distributors on a nondiscriminatory basis, while the Open Internet rules do not allow preferential treatment of owned content.
Whoever does the reviewing, access to online content will be a major issue. “For the first time, a nationwide mobile broadband provider will have a major content provider as an ‘anchor tenant’ to support a broader array of video offerings,” says AT&T’s McAtee. “Of course, those offerings will include content from many other providers.”
Regulators will of course not be taking that on faith, he adds.
But they will be looking for a combination of features. They will see if offered concessions and applied conditions mean the digital rights to more of the Time Warner cable library are available to competitors as well as AT&T’s wireless platform, and if that makes AT&T a strong online video competitor to the traditional cable companies. Such a result could be enough to get it by Washington as a net-net pro-competitive deal.
The price of the deal to get all that new content may be that AT&T’s ability to exploit its value is restricted by conditions preventing content exclusivity—even under current program access rules.
Naturally, the announced deal brought media consolidation critics out in full force.
Michael Copps, who is arguably the elder statesman of anti-consolidation activists, including opposing big mergers in his time as FCC commissioner, wasn’t looking at the deal as vertical or horizontal. It was simply a bridge too far.
“Allowing a communications behemoth like AT&T to swallow the Time Warner media empire should be unthinkable,” he says. “The sorry history of mega mergers shows they run roughshod over the public interest.”
Many of the groups are already planning to highlight access to online content, as well as online privacy and data collection.
AT&T may have been positioning the deal as creating stronger competition to cable, and more opportunities for opening up digital rights to Time Warner content, but Public Knowledge saw it differently. “AT&T might make it more expensive or difficult for competitors to DirecTV or to its streaming service to access Time Warner programming, hoping to drive customers to its own platforms,” says John Bergmayer, senior counsel at Public Knowledge. “AT&T could also give preferential treatment to its own programming and services on its broadband networks. Indeed, it has already announced that it plans to zero-rate its upcoming online video service.”
“They’ll have new ways to monetize the data to benefit their own programming,” Public Knowledge president Gene Kimmelman tells B&C. “More broadly, we see many competition concerns related to preferencing their own services and content in ways that may harm consumers.”
Moffett suggests zero rating will be off the table if the deal is approved. The FCC is currently reviewing whether such plans, which exclude some services from usage-based pricing, violate the Open Internet rules by favoring some content over others.
Moffett says that AT&T can “forget about” zero rating Time Warner content or DirecTV Now content on AT&T’s networks (excluding them from subscribers’ data use budgets), and he expects that would be the case via DOJ consent decrees if the FCC did not get a chance to impose behavioral remedies.
Congress has no role in the review, other than registering its opinions with the relevant agencies, and conducting oversight hearings.
Sens. Al Franken (D-Minn.) and Bernie Sanders (I-Vt.), probably the biggest consolidation critics in the Senate, were not wasting any time, with Franken calling for the “highest level” of scrutiny and Sanders dissing the deal outright. Franken is in the minority, but could put a bigger spotlight on the deal if Democrats retake the Senate and he regains a leadership position.
Senate Judiciary Committee chairman Sen. Charles Grassley (R-Iowa) has scheduled a Dec. 7 hearing in the antitrust subcommittee on the deal.
Moffett had the odds of the deal being approved at a coin flip. A coin, by the way, worth about $85 billion.
WHO DOES WHAT?
The FCC and the Justice Department each review media mergers, though in the FCC’s case only if a license changes hands.
JUSTICE DEPARTMENT: Reviews for any potential antitrust violations. Options: find no antitrust issues sufficient to block deal; find some anticompetitive issues, but recommend actions (spinoffs) that would resolve those issues; sue to block.
FCC: Reviews for public interest concerns beyond simply antitrust. Options: approve; approve with conditions (i.e. diversity initiatives, access to programming, spin-offs); disapprove (designate for hearing before an FCC Administrative Law Judge with a recommendation to disallow).