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AT&T Likens DoJ Suit to Shaved Persian Cat

Mari Silbey
3/12/2018
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Not one to mince words, AT&T has submitted a pre-trial brief laying out its arguments against the federal government in the lawsuit that has the Department of Justice seeking to block the telecom operator's proposed $85 billion acquisition of Time Warner. With court proceedings set to begin next Monday, AT&T makes the case that "there is no fact-based evidence" that a merger with Time Warner would harm competition in the video marketplace. The operator asserts that it has already disproven the notion that it could "credibly threaten to withhold" Time Warner's Turner programming from other distributors in the wake of an acquisition, and that what is left of the government's case is virtually immaterial.

Or, in the actual words of the AT&T pre-trial brief -- which borrows from a 1992 case centered on content distribution power -- the substance of the government's lawsuit, "like a Persian cat with its fur shaved, is alarmingly pale and thin."

Image source: Flickr user megan ann
Image source: Flickr user megan ann

Colorful language aside, AT&T Inc. (NYSE: T) points out that it has already agreed to forego the use of content blackouts in licensing negotiations if it is allowed to acquire Time Warner Inc. (NYSE: TWX). Blackouts are the primary way that content providers exercise leverage in these negotiations when they attempt to raise fees for pay-TV providers. AT&T says that it could not afford to withhold programming from other distributors in any case because of the loss of licensing and advertising revenues, but that with its agreement to refrain from content blackouts, the argument by the Department of Justice is entirely moot.

Further, AT&T argues that its proposal to buy Time Warner is not about the opportunity to raise prices on programming. Instead, the company says the deal is about making both AT&T and Time Warner more competitive in a video industry that has radically shifted in the Internet era.

First, AT&T states that owning Time Warner would allow it to create new video products better aimed at mobile viewers. Without the deal, the telco says it has been too difficult to obtain distribution rights for programming that would allow it to "achieve its vision for the next wave of products and packages, including lower-cost, ad-supported services."

Second, AT&T notes that with Time Warner in house, it would also have the necessary scale to create a new targeted advertising platform. Such a platform would put pressure on existing ad giants, Facebook and Google (Nasdaq: GOOG), bringing more competition to the digital market.


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The argument against Facebook and Google is part of a larger point that AT&T tries to make about the power of Internet companies in the video industry today. AT&T says that "in just a few years' time, Netflix, Amazon, Google and others have harnessed the power of vertical integration to disrupt and displace content suppliers and distributors alike. These vertically integrated firms have succeeded by using their direct customer relationships to better provide customers the programming that most interests them."

While AT&T's argument is true, it doesn't entirely address issues with the level of vertical integration the company is pursuing in the Time Warner deal. Yes, companies like Netflix Inc. (Nasdaq: NFLX) and Amazon.com Inc. (Nasdaq: AMZN) have created new direct-to-consumer business channels, but they don't own the broadband connections that consumers use to access their content. A big reason that opponents are fighting the AT&T/Time Warner merger is because of AT&T's nationwide mobile distribution footprint. (See Does AT&T Deserve Time Warner?.)

The big challenge for the DoJ in blocking the AT&T deal, however, is that it already approved a similar transaction in Comcast Corp. (Nasdaq: CMCSA, CMCSK)'s buyout of NBCUniversal earlier this decade. That fact is likely to be a major point of contention as the AT&T court case begins next week, and it's a legal hurdle that the federal government may not be able to overcome.

— Mari Silbey, Senior Editor, Cable/Video, Light Reading

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mendyk
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mendyk,
User Rank: Light Sabre
3/15/2018 | 10:59:52 AM
Re: Minced or diced
Are delivery mechanisms still important? Where do you think the real money is? Content is a means to an end, and the end is $$$, with the biggest chunk of that $$$ going to those who control access to that content.
brooks7
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brooks7,
User Rank: Light Sabre
3/15/2018 | 10:39:47 AM
Re: Minced or diced
Yep, Dennis - content has been king for about 5000 years.

 

Think about the Illiad or the Bible.  Ask yourself...are the delivery mechanisms still important?

The challenge for content makers is to adjust revenue formulas now that they are not getting huge $$ amounts directly from cable.  Gee...I wonder what the NFLs TV deal is and who thinks they are in charge?

seven

PS - Non-premium content has no value...that is why the business model is different than networks.  There are 100 TV shows for every Big Bang Theory,
mendyk
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mendyk,
User Rank: Light Sabre
3/14/2018 | 9:41:31 AM
Re: Minced or diced
Content has always been in charge? A lot of people who develop content would have a good laugh at that -- present company included.
brooks7
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brooks7,
User Rank: Light Sabre
3/14/2018 | 9:36:10 AM
Re: Minced or diced
 

Dennis,

You are wrong and the model has been in place for years and it has not happened:  Comcast NBC-Universal.  The model that you are describing makes the mistake that does not compare cable systems to the Internet.  The Internet is becoming the equivalent of linear pay TV.  What is really changing is how content is paid for.  

Content has always been in charge and has received the bulk of the money.  Custom content can have great value, but like products has a hit or miss investment model.  Network Operators work on the "we only invest in things that make us money within 24 months" model.  That is the disparity that makes this work.  By the time that an content company sees that it will have an ROI or not, content distribution will be interesting.

As to Netflix, remember their hits are still really small compared to Network TV.  We will have to see what happens when they stop making say "Orange is the New Black" and if they want to syndicate it.  What do they do when nobody buys their channel for their exclusive content because it is all old.

seven

 
mendyk
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mendyk,
User Rank: Light Sabre
3/13/2018 | 4:04:32 PM
Re: Minced or diced
The "successes" in OTT involve content exclusivity. And yes, that includes Netflix. The subscription fees go to Netflix for that content, not to the carrier. As all content companies shift to the OTT model, that ability to deliver exclusive content over any broadband connection -- with the revenue flowing to the content owner -- will carry the day. Meanwhile, though, there's a whole legacy content delivery system -- pay TV -- that will be around for years, if not decades. That's the part that's at issue here. It's not impossible to imagine a media/carrier conglomerate keeping its content assets on its own legacy systems and using the OTT model to bypass rights fees in other markets.
brooks7
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brooks7,
User Rank: Light Sabre
3/13/2018 | 3:51:25 PM
Re: Minced or diced
Dennis,

Call me when Netflix says that Comcast subs can not get their video.  You are trying to compare apples and oranges with that.  Netflix would like their service and their content available to every person on the planet for a price.  That is the way to maximize the value of content.  Might TW make some content available only from their online service?  Yes, but I bet it will still be availble on that service for Comcast subs.

seven

 
mendyk
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mendyk,
User Rank: Light Sabre
3/13/2018 | 9:09:35 AM
Re: Minced or diced
It's not like companies have never done anything stupid. In this case, the business units do operate with some degree of autonomy. The argument that "We wouldn't do that because it would be dumb" falls short of a guarantee. The number of carriage skirmishes over the years proves this is not beyond the realm of possibility. Also, the OTT guys are all about exclusivity. That approach can easily be extended to the legacy players, whether or not it makes sense.
Clifton K Morris
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Clifton K Morris,
User Rank: Lightning
3/13/2018 | 2:44:36 AM
Compare other DoJ acquisitions.
Well, let’s look carefully at the previous mergers this Administration’s DoJ weighed in on. As an example, when CenturyLink announced their merger with Level(3), the benefits pushed forward in press releases focused on the two companies’ combined B2B line-of-businesses, and a reduction of billing and customer service costs. To my knowledge, CenturyStink didn’t provide any consumer-facing benefits in the press for that merger.

With that prescedent already set, (By Trump’s DoJ) I don’t understand how a logical argument based on “cost control” and strawman questions of pricing can be made. The argument the DoJ is making also conveniently overlooks facts related to an industry facing falling revenue, subscriptions, actual consumption (measured with TV ratings and cost-per-ad), all while the meanwhile, spectrum licenses formerly used by TV broadcasters are being auctioned off by another part of the Federal Government. Market forces are showing that the 70-year old industry can’t survive solely on captive audiences reliant on “broadcast” technology.

Comparing this, AT&T wants to make content delivered over the internet more reliable and on-par with broadcast, possibly more interactive. This is quite an ambitious goal which takes skills, talent. From a higher level, and also considering how many key Federal Government positions remain vacant, it’s no surprise the only argument against TW+AT&T is based in constricting distribution and possibility of higher priced products. HBO was the first to sound the alarm that when its supply chain is constricted by a requisite requirement of a “basic cable” package, it’s content will be amongst the most pirated content online. They built an app to create their own distribution channel- direct-to-consumer.
brooks7
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brooks7,
User Rank: Light Sabre
3/12/2018 | 6:37:26 PM
Re: Minced or diced
Dennis,

If it is such a great idea to withhold content, then why has NBC-Universal not done it?

Because withholding content is a stupid idea and content people know it.  They want the content available to every eyeball possible to maximize revenue.

Sorta like if Light Reading was only avaiable to AT&T subscribers but not Comcast, Charter, Verizon...etc.

seven

 
mendyk
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mendyk,
User Rank: Light Sabre
3/12/2018 | 12:37:47 PM
Minced or diced
Whether or not AT&T ever minces words is debatable. But some of its "arguments" in this case are questionable, starting with the idea that withholding content for more money would be bad for business.
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