Bipartisan Senate Duo Urge Thorough AT&T/TW Review

Signal potential issues to Attorney General Jeff Sessions
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The Republican Chairman of the Senate Antitrust Committee, Mike Lee (Utah), and Democratic ranking member, Amy Klobuchar (Minn.), have potential concerns about the deal and called on new Attorney General Jeff Sessions to insure it gets a thorough review.

In a letter to Sessions Friday, they said that the proposed deal "raises complex questions that will require a fact-intensive investigation that has yet to be completed, as well as a deep understanding of the economics of the digital content creation and distribution markets,” the senators wrote. “The stakes for consumers are high.”

"[T]he Department has previously recognized that vertical mergers involving video content providers and video content distributors can raise significant competitive issues," they wrote. "The Department has rigorously analyzed those issues using well-accepted legal and economic principles and should follow that approach in its review of the AT&T-Time Warner transaction."

Among the issues they want Justice to focus on in its antitrust review are 1) "whether the transaction would provide AT&T the incentive and ability to suppress rival content companies’ distribution"; 2) whether "the proposed transaction might create the incentive and ability for AT&T to undermine rival MVPDs and Online Video Distributors"; and 3) whether there are "practical obstacles to the enforcement of any conditions it may impose."

The FCC will not be reviewing the deal for public interest issues, though the two companies sent a group of senators--not including Klobuchar or Lee--a public interest statement Friday (Feb. 17)making the argument for the deal's pro-consumer effects.

The full text of the letter is below, supplied by Klobuchar's office:

"Dear Attorney General Sessions:

"As Chairman and Ranking Member of the Senate Judiciary Committee’s Subcommittee on Antitrust, Competition Policy and Consumer Rights, we write concerning AT&T’s proposed acquisition of Time Warner, Inc. The proposed transaction raises complex questions that will require a fact-intensive investigation that has yet to be completed, as well as a deep understanding of the economics of the digital content creation and distribution markets. Although the purpose of this letter is not to focus on the ultimate antitrust decision, we want to highlight three considerations we believe the Department should take into account in evaluating the proposed transaction. At the same time, the Department has previously recognized that vertical mergers involving video content providers and video content distributors can raise significant competitive issues. The Department has rigorously analyzed those issues using well-accepted legal and economic principles and should follow that approach in its review of the AT&T-Time Warner transaction.

"First, the Department should consider whether the transaction would provide AT&T the incentive and ability to suppress rival content companies’ distribution. AT&T has a substantial position in every platform used to distribute video content. It is the second-largest wireless provider, with 133 million subscribers; the largest Multichannel Video Programming Distributor (MVPD), with 25 million subscribers split between DirecTV and U-Verse; and a major internet service provider, with 16 million broadband customers. Time Warner is one of the largest programming and content creation companies in the United States. Among other television networks, it owns CNN, HBO, TBS, and TNT, and it makes its own content through Warner Brothers Pictures and Warner Brothers Television. Time Warner sells its content to movie theaters, streaming services, and MVPDs—including AT&T.

"As a result, AT&T would be both a distributor of and competitor to many content providers (HBO, for example, competes with premium channels such as STARZ and Showtime; CNN competes with MSNBC; and small independent content providers compete with Time Warner’s content). AT&T could conclude that it’s beneficial to limit competing content providers’ access to AT&T’s distribution services. As one witness explained, if AT&T goes down this route, its decisions might disproportionately affect independent programmers that meet unique market needs, thus affecting the type of content available to consumers. In response, AT&T has pledged not to restrict access to AT&T’s distribution networks. For example, Randall Stephenson, AT&T’s CEO, testified before our Subcommittee that that the market demands that each MVPD “better have a wide array of content” and that “you will lose customers if you do not” because “[t]here are too many alternatives.” These statements, made under oath, should factor into the mix of information considered by the Department.

"Second, the proposed transaction might create the incentive and ability for AT&T to undermine rival MVPDs and Online Video Distributors (OVDs). The Antitrust Division has focused on similar concerns in evaluating previous transactions. In reviewing Comcast’s acquisition of NBC Universal (NBCU), for example, the Antitrust Division explained that Comcast “will have a strong incentive to disadvantage its competitors by denying them access to valuable programming or raising their licensing fees above what a stand-alone NBCU would have found it profitable to charge.” AT&T may likewise find it beneficial to increase the price of popular Time Warner content to rival MVPDs in an effort to benefit AT&T, and this behavior may raise antitrust concerns. The popularity of Time Warner’s must-have content may leave competing cable providers—particularly smaller or regional cable companies—with no alternative but to pay higher prices and pass these higher prices on to consumers. AT&T could benefit directly from higher carriage prices or indirectly by undercutting rival MVPDs’ prices. Because AT&T’s television services, such as DirecTV Now, are available across the country, AT&T competes directly with many MVPDs, and that concern could be more prominent than in similar mergers. In response, AT&T has pledged not to restrict distribution of Time Warner content, including in testimony before our Subcommittee.

"In addition, AT&T may attempt to undermine rival OVDs. As a result of the proposed transaction, AT&T has launched its own online video distribution platform, and AT&T may use its mobile and broadband networks to undermine rival OVDs’ ability to compete. During the hearing, there was significant discussion about zero-rating and whether it could be a tool to undermine competing OVDs. AT&T has promised to offer zero-rating to all content providers on nondiscriminatory terms, consistent with the FCC’s Open Internet Order. At the hearing, however, Mr. Stephenson acknowledged the challenge in devising an approach to ensure that AT&T lives up to that promise, explaining that “I think we ought to allow the Department of Justice to formulate an approach for doing that.” More generally, AT&T has explained that the merger would be a key factor in disrupting the existing pay-television industry. Mr. Stephenson testified that, “[a]s a result of the transaction, we [AT&T] will be a significant content company for the first time. We will have a strong incentive to optimize the additional value of our content by having a robust mobile network that can deliver the advanced video services that the transaction makes possible.” Stephenson predicted that, “when AT&T rolls out these offerings, others will follow suit,” leading to increased competition in video distribution.

"Third, while we do not take a position on the appropriateness of conditions in general or in this case, we urge the Department to consider practical obstacles to the enforcement of any conditions it may impose. As the Department is aware, adjudicating disputes over the interpretation or application of merger conditions can be a time consuming and resource-intensive process. In some cases, the time and resources needed to enforce a condition may render it ineffective.

"The stakes for consumers are high. If the deal has anticompetitive effects, it will increase consumer prices and may inhibit future innovation. But the companies maintain that the deal may also be an important catalyst in breaking the existing pay-television model that so many consumers find frustrating. In response to Committee questions, Mr. Stephenson said the merger “will bring the consumers better-priced options.” The Department must determine whether the evidence supports or disproves that claim. We trust that the Department will engage in a careful analysis guided by the facts in evidence and agreed-upon economic principles. Thank you for your attention to these matters, and we look forward to following up with you regarding this transaction."

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