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Yesterday, the U.S. Department of Justice (DOJ) filed a lawsuit against AT&T Inc. (T - Free Report) over its proposed $85.4 billion takeover of media giant Time Warner Inc. (TWX - Free Report) . The agency has stated that the proposed deal will increase prices for rival pay-TV operators as well as subscribers. It will also act as a stumbling block for the development of online video. The telecom and pay-TV behemoth has decided to challenge the DOJ lawsuit in the court within the stipulated 60 day time period.

DOJ’s Arguments

The DOJ in its lawsuit complained that the AT&T-Time Warner merger will be harmful to American consumers. AT&T has a vast pay-TV network. As of Sep 30, 2017, total video connections were 25.083 million. Of the total, DIRECTV satellite connections tallied 20.605 million, fiber-based U-verse connections were 3.691 million and DIRECTV NOW online streaming connections were 0.787 million.

On the other hand, Time Warner's media empire includes HBO and Turner Broadcasting, which has the rights to sports telecasts. It also owns the Warner Bros. film studio and cable networks TNT, TBS and CNN. Moreover, Time Warner owns a 10% stake in Internet video provider Hulu.

Therefore, the merged entity will enjoy control over both high-quality content and distribution medium, which is likely give room to AT&T to raise prices without investing much to offer innovative products. The DOJ has asked AT&T to either divest it DIRECTV division or Turner Broadcasting assets including CNN. However, the company denied the arguments.

AT&T’s Counter Arguments

AT&T has argued that the proposed deal is technically a vertical merger. None of the two companies share any overlapping business. Therefore, the deal is not going to reduce the number of competitors either from media or pay-TV or phone industry. Earlier in 2011, the DOJ permitted Comcast Corp. (CMCSA - Free Report) , the largest cable MSO (multi-service operator) to acquire media giant NBC Universal. Nevertheless, AT&T is looking forward to continue talks with DOJ officials to find a solution to the deal.

Does Politics Matter to AT&T-Time Warner Deal

Beside the policy-related arguments cited by the DOJ against AT&T-Time Warner deal, speculation is rife in the industry that political factors too are related to the agency’s strict decision. President Donald Trump has had an adversarial relationship with CNN. During his election campaign, Trump had said on numerous occasions that CNN reporters covered him unfairly.

 As a candidate, Trump had said that his administration would reject the deal because it put too much power in too few hands. Even after his l inauguration as the president, Trump labelled CNN as "fake news." In his recent trip to Asia, Trump stated that the proposed deal might be challenged in court. However, the White House remains silent on this rumor.

A Question Mark on Telecom-Cable TV-Media Convergence

The DOJ’s decision on the AT&T-Time Warner deal has raised eyebrows on the ongoing telecom-cable TV-media convergence trend. Cable TV and telecom giants are foraying into the media industry with big ticket acquisitions. Comcast became a media mogul after acquiring NBC Universal in 2011. Verizon Communications Inc. (VZ - Free Report) has already acquired AOL and the core businesses of Yahoo.

The DOJ’s decision put a question mark on the Twenty-First Century Fox Inc.'s (FOXA - Free Report) plans of divesting some its core assets, such as its film or TV studios. Major bidders for these businesses are reported to be Comcast, Verizon and The Walt Disney Co. (DIS - Free Report) .

Technologically, we are moving from triple-play (voice-video-data) bundled services offering to quad play (voice-video-data-mobile) bundled offering.  Video-on-demand is the new norm for telecom, cable TV and media industries. Technological advancements have enabled distributors to come up with different ways of bundling and disseminating content, effective content creation methods and creating new business models. The DOJ’s decision is a major concern for this new business model.

Price Performance of AT&T

 

Verizon’s shares have decreased 8.79%, marginally better than the industry’s decline of 8.96% over the past 90 days. The company carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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