A Skeptical Senate Prods AT&T And Time Warner On Their Mega-Merger

The chief executives framed the deal as a boon to cord cutters, HBO super fans, and a step closer to cheaper internet TV.

Joshua Roberts / Reuters

Chairman and CEO of AT&T Randall Stephenson, Chairman and CEO of Time Warner Jeffrey Bewkes, and Chairman of AXS TV and owner of the Dallas Mavericks Mark Cuban are sworn in before a Senate Judiciary Committee Antitrust Subcommittee hearing on the proposed deal between AT&T and Time Warner on December 7, 2016.

The chief executives of AT&T and Time Warner pitched their proposed merger to a skeptical Senate antitrust panel Wednesday, selling the $85 billion deal, which some say will lead to fewer choices and escalating costs, as a boon to customers craving cheap content on the go. Rather than squashing competition, they say the merger will help dislodge the entrenched cable bundle, and lead to innovation in the nascent market for streaming video.

Senators from both sides of the aisle needled the leaders of AT&T and Time Warner over the colossal merger in a nearly 3-hour long session, which also included Dallas Mavericks owner, Shark Tank investor, and media entrepreneur Mark Cuban, who spoke as an expert witness. Lawmakers raised the possibility of the deal leading to unfair price hikes, restrictions on prized content like HBO’s Game of Thrones, and incentives to stifle innovative streaming competitors like Netflix and Amazon.

During the hearing, Sen. Richard Blumenthal reminded the CEOs that President-elect Donald Trump has already vowed to block the deal. “I take him at his word,” Sen. Blumenthal said. AT&T Chairman and CEO Randall Stephenson has not met with Trump’s transition team, but he said he is confident that regulators will approve the deal, “once everyone hears the facts and has the appropriate competitive analysis.”

While many Senators raised pointed questions and offered sustained criticism about the deal, Blumenthal was perhaps the most critical. “I have yet to be convinced that the benefits outweigh the harms to competition and possibly to consumers,” he said.

AT&T’s Stephenson insisted the deal will help liberate unsatisfied cable customers from expensive contracts, cumbersome set-top boxes, and limitations on watching video through phones and tablets. Stephenson touted AT&T’s new service, DirecTV Now, which gives customers dozens of pay-TV streaming channels without the need for a traditional cable subscription, as a sign of innovation to come — so long as the merger is given the green light. “We want consumers to pay for their content once, and then watch it anywhere, anytime,” Stephenson said. He told Senators that the merger would allow AT&T to offer customers cheaper prices and more diverse programming, helping the company compete in the pay-TV market.

But Sens. Mike Lee and Amy Klobuchar expressed concerns that the deal would incentivize AT&T to restrict Time Warner to its own network, or that the network would exploit its ownership of HBO to extract hefty fees from rivals like Comcast.

Both Time Warner Chairman and CEO Jeffrey Bewkes and Stephenson countered that their company’s successes depend on broad distribution. Time Warner’s value would suffer if AT&T chose to restrict its reach to only certain audiences, Stephenson said. “I don't see the economic rationale nor do I see the customer rationale,” he said.

Lawmakers said the antitrust division of the Justice Department, the lead agency reviewing the merger, will need to examine zero rating, the practice in which internet providers exempt certain services from counting against the data limits of their customers. AT&T’s zero rating scheme with DirecTV has already drawn the scrutiny of the Federal Communications Commission, which found in a preliminary analysis that AT&T’s plan is anticompetitive. As the AT&T-Time Warner deal proceeds, regulators will determine if acquiring Time Warner’s library of content may also give AT&T incentives to engage in exclusive dealing and unfair pricing.

Both the FCC and lawmakers who oversee the industry say zero rating itself does not necessarily harm customers. It’s free data, after all. What’s key is whether exempting certain apps favors an internet provider’s in-house service over those offered by rivals. “The notion that a provider would offer to exempt content from monthly data caps strikes me as something consumers should applaud,” Sen. Orrin Hatch told BuzzFeed News. “Of course, we also need to be sure such exemptions are offered on equal terms so they aren’t used as a means to disadvantage competitors.”

AT&T insisted that all content providers who want to participate in the wireless carrier’s zero rating program are charged the same. But Sen. Al Franken challenged Stephenson on that claim. Since AT&T owns DirecTV, Sen. Franken described any cost incurred by DirecTV to get on AT&T’s wireless network as merely shifting money from one pocket to another, a kind of accounting fiction that ultimately conceals AT&T’s gain to the detriment of rival mobile video services. “How do we know you’re not giving DirecTV a deal — because you own it?” he asked. Stephenson said he would make internal data available to the Justice Department, and told the Senate panel AT&T does not discriminate against other services.

A big question left unanswered by AT&T’s chief is whether the two companies will structure the deal to avoid the regulatory of scrutiny of the FCC. Unlike the Justice Department, which can challenge a planned merger if it will harm competition, the FCC has a broader mandate; companies must show that their marriage serves the public interest to earn the FCC’s approval. At least according to this first round of Congressional scrutiny and the reactions of lawmakers, it’s not yet clear if the deal would meet that standard.