June 13, 2018 / 8:15 PM / 8 days ago

Breakingviews - Holding: As AT&T case ends, trustbuster woes begin

NEW YORK (Reuters Breakingviews) - The antitrust case against AT&T’s purchase of Time Warner may be over, but the trials of President Donald Trump’s top trustbusters may just be starting. The U.S. Department of Justice’s total loss in court batters the tough but savvy reputation earned years ago under President Barack Obama. Flimsy legal theories flummoxed experts while stalling other possible deals like a Comcast bid for assets of Twenty-First Century Fox. After Tuesday’s court decision, the watchdog can expect fresh charges of putting politics over the law.

Chief Executive Officer of AT&T Randall Stephenson speaks during a press conference in New York City, New York, U.S. November 20, 2017. REUTERS/Shannon Stapleton

Federal Judge Richard Leon’s ruling allowing the $85 billion merger to proceed was, in legal terms, a slam dunk. His refusal even to impose any conditions on the deal vindicates serious doubts about whether the challenge should have ever been brought.

The Justice Department hasn’t sued to block this kind of transaction – a so-called vertical merger – since 1977, when it failed to squelch Hammermill Paper’s acquisition of two distributors. Combining companies in different, if complementary, businesses just doesn’t raise the anticompetitive concerns of horizontal mergers, which involve direct rivals and might result in raised prices or reduced quality if they are allowed to combine.

AT&T, essentially a distributor of shows and other content, and Time Warner, a content creator, overlap in the horizontal sense only to the extent of AT&T’s indirect stake in MLB Network and a few similar channels. Otherwise, this was a classic vertical merger that the companies argued would strengthen competition against tech giants like Amazon and Netflix.

Trump’s trustbusters disagreed, contending the combined firm might charge cable competitors more for HBO and other Time Warner content, withhold programming over pricing disputes and undermine emerging online alternative distributors like Sling TV. That was always a stretch, considering that Time Warner derives about half of its revenue from fees charged to an array of distributors and denying them content could eat into those sales. And nothing about the merger seemed to make higher prices likelier than they were before the transaction. What’s more, Justice Department projections of the deal’s cost to consumers proved significantly exaggerated at trial.

DOJ antitrust boss Makan Delrahim tried to calm fears and confusion over his aggressive tack with assurances that “our approach to vertical mergers has not changed ... most vertical mergers are procompetitive or competitively neutral.” Yet targeting the AT&T-Time Warner deal injected damaging uncertainty into the market. For example, it handed the Fox board, which had agreed to a $52 billion asset sale to Walt Disney, an excuse to dismiss a competing and perhaps superior bid from Comcast because of “regulatory risks.”

The real damage, though, may have been done to the Justice Department itself. After weak efforts under President George W. Bush, antitrust enforcers flexed their muscles under the Obama administration, gunning down major beer, hospital and airline deals. Pummeling the likes of food-service giants Sysco and US Foods at trial gave the DOJ credibility in court. The clear message that department lawyers would go to the mat killed, for example, General Electric’s sale of its stoves, cook-tops and ovens business to Sweden’s Electrolux. Even overreaches such as a challenge to the merger between US Airways and American Airlines parent AMR ended in face-saving settlements.

Critics of Obama’s antitrust enforcers might say they had a strong track record only because they played it safe – or, more charitably, knew how to pick their spots – and that Delrahim was at least trying to get more aggressive. Even allowing an element of that, the AT&T case was a bad call. The current watchdogs have now largely squandered their department’s hard-earned credibility – and with a lawsuit whose origins always raised questions.

In 2016, then-candidate Trump had already slammed Time Warner-owned CNN as “fake news” and said his administration would not approve an AT&T merger with Time Warner “because it’s too much concentration of power in the hands of too few.” He and Delrahim have denied any White House pressure, but it’s reasonable to wonder how else such a boneheaded legal move could have happened.

The potential harm is serious. Even the perception of weakness could skew the give-and-take over future antitrust enforcement in favor of companies. Dealmakers may take threats to block mergers less seriously and trustbusters might more readily back down, fearing another embarrassing loss. Dodgy deals could go unchallenged. What’s more, judges may now view the government’s allegations of antitrust violations with greater skepticism.

These developments come as legitimate concerns are brewing over vertical combinations that create tightly integrated companies. Thanks to the influence of Yale law professor Robert Bork, current U.S. antitrust law says size doesn’t matter as much as competitive pricing and efficiency. Yet the rise and influence of Alphabet’s Google, Amazon and other mega-firms has cast doubt on that proposition, especially in the media industry: Unlike Hammermill paper products, shows like “Game of Thrones” are not fungible.

As Europe has already acknowledged, sheer size may alone amount to a sort of market power. Exactly how has not been tested recently in American courts, and it probably deserves to be. The Justice Department’s failure to show that it’s up to the task may be the real significance of this week’s loss in court.

Breakingviews

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