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From Antitrust Law Daily, November 29, 2017

AT&T defends TWI acquisition as ‘procompetitive’ in answer

By Lynn Stanton, TR Daily

AT&T, Inc.’s proposed $108 billion acquisition of Time Warner, Inc., is "a procompetitive, pro-consumer response to an intensely competitive and rapidly changing video marketplace," AT&T said yesterday in the filing of its answer in response to the Department of Justice’s lawsuit to block the merger in the federal district court in the District of Columbia.

The DOJ’s Antitrust Division filed the lawsuit last week, saying that the combined company "would hinder its rivals by forcing them to pay hundreds of millions of dollars more per year for Time Warner’s networks, and it would use its increased power to slow the industry’s transition to new and exciting video distribution models that provide greater choice for consumers."

In its answer filed yesterday in U.S. v. AT&T, Inc., Directv Group Holdings LLC, and Time Warner, Inc. (Case No. 1:17-cv-02511) before Senior District Judge Richard J. Leon, AT&T emphasized that AT&T, a video programming distributor, and Time Warner, a creator of video programming, are not competitors.

"To challenge a vertical merger, the Government must prove that the merging parties enjoy sufficient market power in their respective markets to cause antitrust concern. Otherwise, the vertical combination of two companies occupying different levels of the supply chain cannot substantially lessen competition in violation of Section 7 of the Clayton Act. On this threshold issue, the Government cannot meet its burden of proof," AT&T said.

"This is not a vertical combination of two firms with an imposing market share or anything near it. To the contrary, the relevant distribution markets in which AT&T operates are highly competitive—and becoming more so by the day—and by no conceivable measure does Time Warner have anything but insignificant market shares in a rapidly-expanding content marketplace with low barriers to entry and new participation by several of the most well-funded companies in the world," the company added.

As proof of Time Warner’s "insignificant" role, AT&T said, "Google’s ‘YouTube TV’ service is a powerful and recent example that disproves the Government’s central thesis. When Google launched ‘YouTube TV’ as an alternative to traditional pay-TV services, it did not include any Time Warner networks. Instead, it chose to carry the Big Four broadcast channels (ABC, CBS, NBC, and Fox) and their affiliated cable networks, including ESPN, Showtime, USA, E!, and Disney Channel. The fact that Google, one of the most sophisticated and well-funded companies in the world, launched its video platform without any Time Warner channels confirms not only that the television ecosystem is awash in content, but that Time Warner’s networks are not, in any antitrust sense of the word, essential to attracting and retaining subscribers."

"Finally, as the Court knows, the Government elected in 2011 not to litigate the vertical merger between Comcast and NBCUniversal, even though Comcast is typically the clear pay-TV leader in its local service areas and NBCUniversal owns one of the Big Four broadcast networks. Instead, despite the strength of both parties in their respective markets, the Government concluded that a seven-year regime of binding arbitration would be sufficient to address its competitive concerns, and it agreed to clear the transaction with several conditions. In filings to this Court in support of its conclusion, the Government stated that ‘arbitration has been successfully employed as a vertical merger remedy pursuant to numerous FCC orders and there is no evidence that it would not be an effective remedy in this case.’ Based on that precedent — as well as the Government’s own guidelines to consider ‘tailored conduct remedies designed to prevent conduct that might harm consumers while still allowing the efficiencies that may come from [a vertical] merger to be realized.’ — AT&T and Time Warner fully expected to resolve the Government’s review of this merger by agreement, rather than litigation," it said.

"While the merging parties cannot explain the Government’s abrupt departure from precedent, Time Warner has now extended to third-party distributors the same sort of arbitration protections that the Government embraced in Comcast/NBCUniversal," it said.

Meanwhile, in a filing with the Securities and Exchange Commission today, AT&T said that it "intends to vigorously contest the DOJ's allegations and is confident that the Court will reject the DOJ's challenge to the merger" and that it and Time Warner have "elected to further extend the ‘Termination Date’ of the Merger Agreement to April 22, 2018." The original termination date was Oct. 22, but the companies previously announced an agreement to extend the termination date "for a short period of time to facilitate obtaining final regulatory approval required to close the merger."

Attorneys: Craig William Conrath, U.S. Department of Justice, for the United States. Katrina M. Robson (O'Melveny & Myers LLP) for AT&T Inc., DirecTV Group Holdings, LLC and Time Warner Inc.

Companies: AT&T Inc.; DirecTV Group Holdings, LLC; Time Warner Inc.

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