AT&T's $85 billion deal for Time Warner is a humiliating black eye for DOJ officials, but the real worry is if it taught them the wrong lesson

• The big danger of the Justice Department's loss in its attempt to block AT&T's merger with Time Warner is that it will discourage the DOJ from pursuing other antitrust cases.
• That would be an unfortunate outcome, because the case was unusual and doesn't necessarily portend similar outcomes in other cases.
• Indeed, the DOJ has good reason both to block some other outstanding mergers and to believe it could win those cases.

---

The US Justice Department lost its effort to block AT&T's merger with Time Warner. But the biggest losers could be the rest of us, depending on how federal antitrust regulators react to the decision.

If the lesson the DOJ (and the FTC which oversees mergers), take away is that they should avoid making a fuss about big mergers and acquisitions, we're going to see a wave of consolidation that's inevitably going to lead to higher prices, consumer unfriendly practices, and a stifling of innovation.

Here's hoping that's not what happens. Because the truth is that this merger is distinct from others that are pending or likely to come down the pike in the near future. This merger was always going to be difficult to block. Legally speaking, the case to bar Disney from acquiring Fox's assets or to prohibit T-Mobile from merging with Sprint, is much easier to make.

The problem with the AT&T-Time Warner merger for the DOJ was that this was a so-called vertical merger. The two companies generally don't compete with one another. Their businesses, instead, are synergistic; AT&T will be able to stack Time Warner's movies and TV shows on top its existing telecommunications networks, creating a powerful service to distribute and market a wealth of content to its customers.

Vertical mergers can pose competitive concerns

That's not to say there aren't potential antitrust problems with vertical mergers. There are. And the DOJ tried to highlight some of them in its court case. Post-merger, AT&T would have the economic incentive to withhold Time Warner's content from its rivals in the pay TV business. Imagine being able to get CNN or TNT from AT&T's DirecTV Now, for example, but not from Dish's Sling TV, say.

Alternatively, AT&T could force pay TV service rivals such as Comcast or Charter higher than normal rates for Time Warner's content. Or it could give Time Warner's networks advantages that it doesn't offer to rivals. In fact, it's already doing that; AT&T mobile phone customers can get a subscription to HBO service included with their monthly wireless bills - but not Netflix or Showtime.

You have to assume the merged companies will use their combined assets to maximize their profits, Carl Shapiro, a professor at the University of California at Berkeley who served as a government witness, said at the trial.

But the DOJ faced some major obstacles, many of its own making. This country has a long history of being relatively lax when it comes to vertical mergers. They just haven't been seen as quite the same competitive threat as horizontal mergers, which is where two direct competitors combine (for example, two hospitals, or two grocery store chains). Indeed, according to one study, before this case, the DOJ hadn't challenged a vertical merger in court in more than 40 years.

The DOJ faced an uphill battle fighting the AT&T-Time Warner merger

What's more, since the time of the Reagan administration, antitrust enforcement and cases have largely focused on the narrow issue of the impact mergers and acquisitions have on consumer prices. Prior to the early 1980s, tie-ups could be blocked out of concern about the size of the resulting company. After that, size didn't matter and might even be beneficial if it resulted in lower prices for consumers.

It's possible that the AT&T-Time Warner merger could result in higher consumer prices. But it likely won't. In fact, even the DOJ acknowledged that AT&T customers are likely to benefit from it. Because AT&T will no longer have to pay to license Time Warner's networks, it'll see lower costs and will likely pass those on to consumers, Shapiro said.

That left the department arguing that the merger would harm competition, that AT&T would use Time Warner as a cudgel against its pay TV competitors. But Federal District Court Judge Richard Leon didn't buy the arguments. And it's not hard to understand why. Much of the case was speculative.

While it's possible AT&T will use Time Warner's networks and content to get a leg up on rivals, it's also possible that the market just won't be affected that much. Time Warner gets a lot of money from Comcast and other pay TV operators. By cutting them off to boost its own pay TV services, AT&T might do itself more harm than good.

Its approval of the Comcast-NBC deal was a bad precedent for the DOJ

And the DOJ had another big problem to contend with. Just seven years ago, it approved a nearly identical vertical merger of a telecommunications company with a cable network operator and content company - Comcast's acquisition of NBC-Universal.

That approval put the DOJ in a weak position to block the AT&T-Time Warner deal. And it allowed AT&T and Time Warner to argued that they needed to combine in order to better compete against Comcast.

What's more AT&T and Time Warner were able to use the results of that deal as evidence in their case. While many worried about the impacts of the Comcast-NBC tie-up at the time, few of the worries have been realized - as AT&T and Time Warner's attorneys pointed out at the trial.

There are good reasons to reconsider the lax treatment of vertical mergers and to be more concerned about consolidation in general. Studies indicate that the trend toward consolidation is thwarting not just competition, but economic growth, wages, and innovation.

But the DOJ needs to lay the groundwork for that reconsideration. It can't just do it in a one-off case that seemed more inspired by Donald Trump's antipathy for CNN than for any concern about competition.

How the DOJ responds to the decision is crucial

So it's no surprise the judge ruled against the DOJ and is permitting the AT&T-Time Warner merger to go ahead. But what comes next is really important.

This decision could seen as an outlier, an unusual case that has little to do with other potential antitrust actions. But the danger is that it will have a broader effect. Some are already speculating that the setback will mean that the DOJ will back off on antitrust enforcement as a result.

That would be a bad outcome. The decision may be a political and public relations black eye for the DOJ. But it says nothing about the legal merits of other cases, particularly those that involve horizontal mergers in already consolidated markets. When they've had the gumption to intervene in such mergers, federal antitrust officials have a track record of success in stopping them.

For example, there's already ample evidence that the wireless phone market can't consolidate anymore without an impact on competition. During the Obama administration, the Federal Communications Commission used that evidence to block AT&T's attempted takeover of T-Mobile and to scuttle the initial merger talks between T-Mobile and Sprint. The argument was simple: with so little competition already, the removal of one more firm would inevitably lead to higher prices and lack of consumer choice.

That business hasn't changed that much since then. It's still dominated by two jumbo firms - AT&T and Verizon - with two large secondary players - T-Mobile and Sprint - accounting for most of the rest of the market. On its face, a case against the now-formal merger agreement between T-Mobile and Sprint should be a fairly easy one to make.

The Hollywood content business is similarly dominated by a handful of big companies. Blocking the biggest - Disney - from getting even bigger by buying up one of its major rivals - Fox - should be a no-brainer for the DOJ. So should be stopping a potential rival bid from Comcast, which thanks to the NBC deal, is also among Hollywood's top players.

Here's hoping the DOJ sees it the same way. Because as bad a defeat as it was just handed in the AT&T-Time Warner case, that result doesn't have to be its Waterloo.

Visit Markets Insider for constantly updated market quotes for individual stocks, ETFs, indices, commodities and currencies traded around the world. Go Now!