We continue to believe the AT&T (NYSE:T)/Time Warner (NYSE:TWX) deal is on track for ultimate approval, but opponents and critics of the transaction are escalating their attacks in an effort to gain leverage for conditions and other mandates that could be imposed on the combined entity.
Earlier this week, the sole Democrat on the FCC, Commissioner Mignon Clyburn, suggested the FCC could assert review power over the transaction under the Clayton Act, the primary antitrust enforcement statute governing mergers. In addition, several Democratic senators on Capitol Hill demanded and received AT&T's public interest/consumer benefit justification for the merger.
Deal critics wanted some kind of substitute for the typical public interest filing that would have been made, had the companies submitted the deal to the FCC for approval. Thus far, AT&T (T) has determined it will not seek the transfer of any FCC-regulated licenses from Time Warner (TWX), obviating the need for FCC review and approval.
Regulatory bottom line
We don't believe Clayton Act review is available to the FCC, and it would not make a difference to the final regulatory outcome in any event. Capitol Hill input can, at times, offer insight regarding regulatory momentum for or against a particular transaction, but we do not expect criticism and opposition from Democratic lawmakers will make a material difference in this case.
The key takeaway - greater operational and cost uncertainty for edge players
Edge content providers (DISH Network (DISH), Netflix (NFLX), Amazon (AMZN), Google (GOOG, GOOGL)) are nervous that the shift to Republican control at the White House and the FCC, along with continuing GOP majorities in both houses of Congress, will mean the inevitable retreat from strict net neutrality enforcement and - eventually - the formal abandonment of the current rules.
The recent FCC decision to terminate the prior FCC's investigation into zero rating (exempting certain content from monthly data allowances) underscores that the regulatory trend is to allow broadband providers greater operational flexibility to explore new revenue and business models, including monetizing relationships with upstream content providers.
This is good news for ISPs, but it creates operational and cost uncertainty for unaffiliated bandwidth-intensive services on the network edge. While it's possible that Congress will work out a bipartisan consensus to protect net neutrality concepts without reliance on Title II common carrier regulation (to ensure content is not blocked, throttled or otherwise subject to unreasonable discrimination), the legislative process is a big unknown.
Moreover, recent indications suggest Republicans are less interested in outright bans on paid prioritization, the big policy concern that drove the Obama FCC to adopt rigorous net neutrality restrictions enforced under common carrier rules and doctrines.
The upcoming legislative battle over the next chapter in net neutrality could get nasty. Stay tuned for that drama.
With uncertain prospects on Capitol Hill and a likely FCC reversal of Obama era net neutrality policies, the merger review process offers the best opportunity for edge providers to lock in some level of net neutrality protection. Without the FCC asserting its typical "public interest" review power, the mechanism for winning regulatory concessions is sketchy at best.
It is up to the Justice Department to build a plausible case against the merger and pressure AT&T to accept some conditions to get the deal done within a reasonable time frame.
Against this backdrop, edge players must push sympathetic lawmakers and all other possible allies to raise the temperature level, hoping the FCC could be pressured to intervene (somehow), or DOJ will feel compelled to demand meaningful conduct remedies in a consent decree.
Clayton Act Authority
Generally, Commissioner Clyburn is correct when she says the FCC has merger review authority under the Clayton Act, the primary merger review statute. But it never relies on the Clayton Act when it reviews deals, because the FCC's authority is far more constrained than FCC reviews under the Commission's license transfer power.
Under the Clayton Act, the FCC would have the burden of demonstrating to a federal court that the deal should be rejected under the same antitrust standard applicable to the DOJ's review. Does the merger substantially lessen competition in any relevant market?
We do not expect the FCC to assert Clayton Act review power, ensuring the deal avoids FCC scrutiny. As a substantive matter, duplicating DOJ review - with the same statutory standards and evidentiary burdens of the DOJ - makes little practical sense. It also exposes the FCC to more criticism that it performs redundant functions and should have its authority curtailed, a notion advanced by members of the Trump transition team.
And technically, it is doubtful the Clayton Act applies in this particular case. The statute says the FCC can assert review power under the Clayton Act for acquisitions of common carriers. Time Warner, the content company AT&T is acquiring, is not a common carrier. We think AT&T would have a good case to seek a judicial declaration that the FCC has no power under the Clayton act for this transaction.
We suspect the prior FCC under Democratic Chairman Tom Wheeler was exploring theories for asserting review power over the T/TWX transaction, given AT&T's decision to avoid license transfers that would normally trigger FCC merger review. Perhaps a novel reading of the Clayton Act represented the favored approach. But the current Republican chairman's DNA is not amenable to creative readings of statutory authority to assert power over this deal in a way never before attempted by any FCC.
In its response to Democratic senators, including the usual suspects like Senators Elizabeth Warren, Al Franken and Ed Markey, AT&T asserted that various foreclosure concerns made little economic sense for the company after the deal is done. Withholding TWX content from other distributors, for example, would devalue the subscription/advertising revenues built into the purchase price of these content assets. Essentially, the company repeated the various arguments that the CEOs of AT&T and Time Warner made in a Senate Commerce hearing back in December.
The Justice Department's review will move ahead, including conducting confidential interviews and gathering data from industry participants who have concerns with the deal. AT&T has signaled a willingness to accept reasonable conditions, and its written assertions that it has no interest in violating basic net neutrality protections or withholding TWX content could open the door for conditions that would be embodied in a Justice Department consent decree. But the underlying antitrust case to block this deal is not strong, and we suspect a government overreach would force litigation with doubtful upside for DOJ.
AT&T is acquiring a leading, established set of content assets in the Time Warner deal, but the expanding availability of polished, high-quality scripted content (including from emerging original content players like Netflix and Amazon) may dilute the long-term impact of the purchase.
The next generation of viewers spends more time engaged with social media on smartphones than sitting in front of the TV. These market trends are relevant to the assessment of vertical foreclosure risk, suggesting both a diminished competitive threat from this deal and uncertainty about the sustainable value of the assets being acquired.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.