Why the DoJ needs to appeal against the AT&T – Time Warner verdict

AT&T’s (T) long-standing dream of acquiring Time Warner (TWX) finally became a reality on Thursday, after the Department of Justice (DoJ) stated that it would not seek a stay on Tuesday’s verdict. However, despite the merger, the Justice Department may still file an appeal against the ruling, which is also the first federal verdict on a vertical merger since 1979. And in all respects, they probably should.

The chances of the merger leading to a monopoly are pretty high as the government had argued. They fell short of convincing the judge primarily because there was no example to cite as a recent precedent that harmed competition. The judge accepted AT&T’s argument that the companies need to combine to stay in business in a sector with more competitive rivals such as Netflix (NFLX) and Amazon (AMZN) and volatile consumer trends.

And the volatile nature of the industry is the exact reason why an appeal is necessary. It has now become difficult to assess the future based on past trends. Telecom and media are no longer heterogeneous as they used to be, and technology companies are invading into almost every other sector at lighting pace through acquisitions. Unless vertical mergers like these are kept at bay, we would end up with a market dominated by a few big blocs. Remember, we are talking of an era where net neutrality no longer exists, and the Federal Communications Commission is powerless to take action against companies that may be found violating market rules.

The telecom giant has vowed that it would not resort to measures that may lead to unfair competition and that it would operate CNN-parent Turner Broadcasting as a separate business unit. However, in a rapidly evolving market, there are no long-run decisions. Given that AT&T now holds a dominant space in the media industry – thanks to CNN and HBO – it may be tempted, not immediately though, to charge telecommunication rivals extra for its highly popular content.

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Cord-cutters may suffer

The primary reason behind the rampant cord-cutting trend was the onset of a wide range of streaming services and flexible television packages. However, DoJ’s decision makes the cord-cutting scenario a little bleak.

AT&T is planning to launch a streaming service called AT&T Watch, which will be free for its own subscribers, but costs $15 per month for others. This further gives the Dallas-based firm an upper hand in the competition against rivals in the streaming space. Naturally, the higher expenses that the rivals have to pay for AT&T’s streaming services will be passed on to the consumers.

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Tuesday’s verdict has doubtless given other major companies in this sphere courage to carry on with their acquisition assaults sans regulatory concerns. Comcast (CMCSA) and Disney (DIS) will actively pursue Hulu, which would offer them plentiful bounty in the form of streaming revenue. Viacom (VIA) and CBS (CBS) may also probably come back for more talks. And as mentioned earlier, what customers would be left with would be huge blocs that offer little flexibility in terms of packages as well as content.

The DoJ may still intervene and make a stronger case against the verdict. But along with that, DoJ also needs to update its guidance for vertical mergers to prevent any anti-competition behavior in the post net neutrality era.

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