At AT&T Trial, Government Sends a Message About Future Deals

The Wall Street Journal

Executives recount tough negotiations, implying that new mergers will face opposition

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The Justice Department kicked off its antitrust case against AT&T +1.00% by calling a string of media executives to the witness stand, including an executive from Time Warner TWX +0.50% itself. Their presence, meant to expose the dangers of mega media mergers, is a warning from the government that it will look hard at future deals.
These star witnesses are part of Justice’s attempt to prove its theory of competitive harm—that when you combine content assets like Time Warner’s programming with distribution assets like AT&T’s DirecTV—the company can force distributors to pay higher rates and favor its own operations over rivals.
“DOJ is bringing in all these people from the industry to show real examples of episodes in which they’ve used, or contemplated using, content as a weapon,” says Ketan Jhaveri, a former antitrust attorney for the Justice’s Telecommunications Task Force and current co-CEO of Bodhala, a legal tech platform.
The prime example in the industry is sports programming, which is must-have content for distributors. Time Warner can threaten to cut off its Turner Sports programming unless distribution companies agree to its terms. Its other major weapon is HBO.
Warren Schlichting, Dish Network’s executive vice president of marketing, programming, and media sales, acknowledged this problem in his testimony. Turner networks are important to Dish, he said, and AT&T could use that programming to raise carriage fees for distributors like Dish and Sling. That risk grows because AT&T owns Dish competitor DirecTV. By withholding Turner content, AT&T could even try to win Dish’s subscribers over to DirecTV.
But the government’s real coup was testimony from John Martin, chief executive of Turner. His testimony included a cache of emails detailing negotiations in which Turner threatened to cut off its programming in an attempt to get higher rates.
For the DOJ, that evidence is “like a dream,” says Mr. Jhaveri. While AT&T’s lawyers can attack the motivation of witnesses from Dish and Comcast , who are AT&T’s rivals, it’s much more awkward to attack their own witness. (Turner, as a division of Time Warner, is part of the defense.) Their cross-examination has tried instead to show that Time Warner has no incentive to black out distributors. For instance, Coleman Breland, another Turner executive, said that cutting off Dish cost the company more than $30 million.
If the government’s argument succeeds, it will be bad news for a lot of media companies seeking to do deals. Comcast has particular reason to worry. Mr. Jhaveri expects that the DOJ will use upcoming Comcast witnesses to expose the flaws of the company’s consent decree, in which it agreed to certain conditions in its 2011 takeover of NBC.
The point is to show that structural separation is the only viable option for AT&T and Time Warner. Next in the government’s crosshairs could be Comcast-NBC.