AT&T-Time Warner ruling: The media industry hangs in the balance

CNN/ Newswire | 6/12/2018, 10:15 a.m.
The trial over the Justice Department's lawsuit to block AT&T's purchase of Time Warner, which will reach its conclusion when ...

Hadas Gold

(CNN Money) -- The trial over the Justice Department's lawsuit to block AT&T's purchase of Time Warner, which will reach its conclusion when a judge announces his ruling Tuesday afternoon, is not just about the combination of two massive companies.

It is about tectonic shifts in the media and technology industries. It's about how and where we consume content and it's about the data that companies like Netflix, Facebook and Amazon collect on viewing habits and consumer behavior that gives them a leg up over companies like Time Warner and AT&T.

The trial is also a landmark for the entire industry, as companies like Disney, Fox and Comcast wait to see how the judge rules before moving ahead with their own mega deals. If AT&T and Time Warner win, it will likely be full steam ahead. But if the ruling falls in the Justice Department's favor, a new era of government scrutiny over these types of mergers could freeze further consolidation in the industry.

The lawsuit landed like a bomb when it was filed on Nov. 20, 2017, more than a year after the two companies announced the deal.

Government suits of this kind are rare, especially in so-called "vertical" mergers -- that is, the combination of two companies that do not directly compete with one another. Time Warner is a content producer while AT&T is a content distributor via its DirecTV satellite services and mobile phone business. It's like a pipe producer buying the company that creates the material that flows through the pipes. The last time the government sued to stop a "vertical" merger was in the 1970s.

The final decision rests entirely on Judge Richard Leon. Leon's ruling will depend on whether he finds that the purchase would violate antitrust laws, which prohibit mergers or acquisitions that within "reasonable probability" are likely to lessen competition.

Leon has repeatedly noted the magnitude of the case and its importance "to the future of the industry," and said that he expects his written opinion to be hundreds of pages long.

Leon is not limited to ruling "yes" or "no." He can also essentially force a third option, in which he tells AT&T and Time Warner he'd allow the deal to proceed, but only if the companies make certain changes to the transaction.

That could involve so-called "behavioral remedies," like requiring AT&T and Time Warner agree to certain conditions that will help determine how they negotiate contracts with distributors.

Leon could also impose "structural remedies," like declaring that in order to complete the deal, AT&T could not be a majority owner of Turner, the Time Warner subsidiary that owns CNN. The Justice Department has suggested that Leon force the companies to divest a part of the newly merged entity -- either AT&T's DirecTV satellite subsidiary or the Turner networks -- to ameliorate the antitrust concerns. But the Justice Department offered this option to AT&T and Time Warner before the lawsuit was filed and the companies rejected the idea, saying it would defeat the purpose of the acquisition.