The ONE Key Takeaway From AT&T’s Reply To the DOJ

In Monday’s response to the DOJ complaint, the legal team at AT&T hit all the expected notes.  Yes, the industry is changing rapidly.  Yes, the key competitors are now Google and Facebook, not Dish Network and Comcast.  And yes, most of Time Warner’s content is nice-to-have, but not really must-have, and therefore lacks the kind of pricing muscle the DOJ argues that it has.  None of that is surprising, and it is all almost self-evidently correct.  And none of it would be likely to be decisive in a trial, assuming that is where we are headed.

What is genuinely important in AT&T’s filing is the following passage:

Specifically, contingent only upon the closing of this merger, Turner has formally and irrevocably offered its distributors licensing terms that, for seven years after closing, (i) entitle the distributor to invoke “baseball style” arbitration if it is unable to reach a satisfactory distribution agreement for Turner Networks and (ii) forbid Turner from “going dark” on any Turner distributor during the arbitration process. Under this approach, if a distributor reaches an impasse with AT&T/Time Warner over access to Turner content, the parties will submit their respective “best offers” to the arbitrator, and the arbitrator will choose the one that best represents fair market value, subject to a right of judicial review under the Federal Arbitration Act.  This contractual regime is self-executing and will require no monitoring or enforcement by the Government or this Court.  

AT&T’s offer is clever.  In a single commitment, AT&T has gotten to the very heart of the DOJ’s case.  This commitment captures the very essence of the so-called “non-exclusivity provisions” of the erstwhile Program Access Rules about which we have written so frequently in the past.  And by making the commitment irrevocable, they have alleviated the take-it-or-leave-it nature of the decision that would otherwise have faced Judge Leon. This both reduces pressure on Judge Leon – he no longer has to consider the deal as if it has no behavioral remedies whatsoever, as would have been the case absent this commitment – and increases it, as it now becomes much harder to reject the deal when AT&T is committing to exactly the same behavioral remedy to which Comcast committed (and for the same amount of time).  Irrespective of the merit of all of the other arguments (about Google and Facebook and nice-to-have-versus-must-have content), this commitment alone makes it reasonably likely, in our view, that Judge Leon will ultimately approve this transaction.

It would be difficult for the DOJ to argue that this commitment doesn’t effectively address their most important argument; i.e., that AT&T would be able to raise the wholesale price of its content to its direct distribution competitors, ultimately forcing them to pay more and, therefore, their consumers to pay more as well.  By agreeing to forgo the option of “going dark,” AT&T has effectively agreed to abandon what would otherwise be their only real source of leverage in a negotiation.

To be sure, there are missing pieces here. For example, AT&T is silent on the conditions under which it would guarantee carriage of its content by would-be OTT competitors.  And it isn’t clear exactly who would administer this, or who would appoint the arbitrator, were a negotiation to come to that (the FCC?).  But this commitment so effectively addresses the risk of foreclosure to existing competitors that one might reasonably argue that, well, there is nothing left to argue about (other than perhaps the fact that AT&T’s self-imposed “consent decree” comes with a seven-year sunset provision… but then again, Judge Leon himself agreed to exactly the same seven-year sunset in Comcast’s acquisition of NBCU, so it would be hard for him to argue for a different standard now).

Of course, the very effectiveness of this proposed (committed-to?) remedy raises a separate question. To wit: absent the ability to “go dark,” will AT&T not only forgo any potential for super-normal affiliate fee increases at Turner, but actually consign themselves to below normal affiliate fee increases instead?  It is certainly not unreasonable to conclude that might be the case when they are giving up a programmer’s most effective negotiating tool.

Finally, a note on timing.  AT&T and Time Warner have proposed to start the trial on February 20, 2018, suggesting it should last ten days.  The DOJ had proposed to start the trial on May 7, 2018, a date that comes only after the current (oft-extended) merger agreement is set to expire on April 22.

By Craig Moffett, MoffettNathanson

November 30, 2017               

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