The antitrust lawsuit between AT&T Inc. (NYSE:T) and the Department of Justice kicked off on March 21, placing AT&T stock in the spotlight. With that in mind, here are the types of arguments we can expect from both sides.
The thrust of the DOJ’s lawsuit is that a merger between AT&T and Time Warner Inc (NYSE:TWX) is going to be bad for competing programmers and distributors, and bad for consumers.
The DOJ claims that the combined companies would reduce competition in what is known as the “multi channel video distribution” business. Specifically, the DOJ claims that with very popular content like Home Box Office and the Turner suite of networks, AT&T could try to extort money from other distributors in order to carry content which it would now own.
The argument on its face is pretty ridiculous. Yes, AT&T would have more leverage in these kinds of negotiations to try to raise prices, but the distributors are only going to tolerate so much of an increase. That’s because they will try to foist as much of those increases as possible onto consumers.
First of all, consumers are only going to tolerate so much of a price increase, especially in the days of cord-cutting. Second, that would obviously limit what additional income AT&T could try to squeeze out of these other distributors, because whatever cost increase consumers would be unwilling to absorb, the distributors are not going to be willing to absorb. They may be willing to absorb a little bit but not much.
AT&T knows that consumers are far more likely to cut the cord. One look at declining DirecTV subscriptions is proof of that.
But the other point goes to the entire purpose for the merger in the first place. AT&T has repeatedly said that they are trying to develop and enhance a new advertising business model. Advertising means AT&T needs viewers of its content. So the last thing AT&T wants to do is alienate consumers to the point that they cut the cord and they lose not only the value of licensing content to the distributor, but all the advertising revenue that it hopes to earn.
In the recent pretrial brief from the government, the DOJ itself admits that the worst case scenario is that consumers might see a 45-cent-per-month increase in their bill, that’s about up 0.4% increase off of the average consumers payment right now. Even that number is based on what AT&T calls ridiculously hypothetical models.
Quite frankly, this is the only remaining pillar to the government’s case. In its pretrial brief it seemed to walk back the idea that the merged entity would “impede and slow innovation by hindering emerging online competitors and increase the likelihood of oligopolistic coordination.”
Of course, this argument doesn’t hold any water. There is no way that the combined entities would hinder Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN), Apple Inc. (NASDAQ:AAPL) and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) from spending the tens of billions of dollars they have on programming that they plan to produce.
That’s really all there is to the government’s case. Considering that the vertical mergers like this have always been approved, and that a very similar one was approved just a few years ago in the form of Comcast Corporation (NASDAQ:CMCSA) buying NBC Universal, it seems to me that this is a slam-dunk for AT&T stock.
Should AT&T Stock Investors Worry?
Why is the DOJ going through all of this trouble? Either the entire division have lost their collective minds, or this is all politically motivated, which is what I suspect the truth is.
We all know that President Trump hates CNN. One of the original conditions the DOJ placed on AT&T was to sell the network, which we know Trump despises (for good reason). It seems highly suspicious that the new head of the antitrust division originally said that this was not a major antitrust problem and then switched over and filed a lawsuit after he was named head of the division.
The original price of the buyout was for Time Warner stock to be valued at $107.50. That was dependent on the price of AT&T stock to a certain extent, but I think the merger will be approved by the court, and today’s Time Warner price of roughly $95 will prove to be cheap.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.