On Thursday, the Wall Street Journal reported that the Justice Department was considering filing a lawsuit to block telecom giant AT&T’s (T) bid to buy entertainment powerhouse Time Warner Inc. (TWX). Time Warner’s shares fell 3.7%.
The news came as a surprise to Christopher Sagers, a professor at the Cleveland-Marshall College of Law and an expert in antitrust law. That’s because AT&T’s $85 billion bid to buy Time Warner is what’s known as a vertical merger, meaning that AT&T isn’t trying to buy a direct competitor.
“The big surprise is that they’re challenging it at all,” Sagers told Yahoo Finance. “The DOJ has rarely challenged vertical deals, and very rarely in Republican administrations.”
Vertical mergers occur when companies operating on different parts of a supply chain decide to join forces. They tend to face less antitrust scrutiny than horizontal mergers, which eliminate direct competitors and thus may affect prices and hurt consumers. In the past, the U.S. government has stood in the way of horizontal mergers including AT&T’s attempt to buy T-Mobile (TMUS) as well as United Airlines’ (UAL) attempt to buy competitor US Airways.
A different beast with different antitrust concerns
The AT&T-Time Warner deal is a different beast from a horizontal merger and brings with it different antitrust concerns. Rather than being a direct competitor of Time Warner, AT&T is a purchaser and distributor of its content. That content includes CNN, HBO, DC Comics, and Warner Brothers, among other big brands.
The main antitrust fear with a vertical merger like this is that AT&T will make that sought-after content more expensive for other distributors like Comcast (CMCSA) and Yahoo parent company Verizon (VZ). Another fear, as The New York Times has noted, is that AT&T might only promote HBO content to its customers instead of content from other providers like Starz and Showtime. AT&T may also give its wireless customers unlimited time watching HBO while making content from other providers count against data limits, The Times noted.
These concerns don’t necessarily mean that the Justice Department will sue to block the deal. Rather, the DOJ may be using threats of a lawsuit as a bargaining chip to get AT&T to agree to certain concessions to eliminate antitrust concerns. Those concessions might include certain behavioral remedies like requiring AT&T not to make Time Warner content more expensive for competitors.
Notably, federal regulators approved Comcast’s bid to acquire NBC Universal in 2015 only after they agreed to a number of conditions such as promising not to limit distributors’ access to content.
‘I’m pleased he’s at least willing to threaten a lawsuit’
Even if regulators at the Justice Department do sign off on the AT&T deal, it’s significant that the DOJ held up the deal, according to John Kirkwood, a law professor at the Seattle School of Law and a member of the American Law Institute.
“He cares about antitrust enforcement,” Kirkwood said, referring to the Justice Department’s new antitrust chief, Makan Delrahim. “I’m pleased he’s at least willing to threaten a lawsuit.”
In some ways, this latest development isn’t surprising. After all, during the presidential campaign, Donald Trump specifically threatened to block the AT&T/Time Warner deal.
Still, Maria Raptis, a lawyer at the law firm Skadden, predicted in January that Trump would take a more conservative approach to antitrust enforcement than his predecessor, Barack Obama. Indeed, Delrahim, who’s now in charge of antitrust enforcement at the DOJ, recently said that the goal of antitrust law is to “maximize economic liberty subject to minimal government imposition.”
Against this backdrop, some have speculated that the government may be holding up the AT&T deal because of Trump’s grudge against CNN (which is owned by Time Warner).
“I’ve always found that pretty implausible,” Sagers, the antitrust expert, told Yahoo Finance.
Erin Fuchs is deputy managing editor at Yahoo Finance.