More than 2.5 million HBO and Cinemax customers are blacked out after AT&T cut off its biggest satellite rival Dish Networks and streaming provider Sling TV in a dispute the Department of Justice claims confirms its concerns that AT&T’s merger with Time Warner (Entertainment) would be bad for consumers.

It is the first time HBO has faced a contract renewal blackout on any platform in its 46-year history. But some groups feel it was predictable, considering AT&T owns DirecTV, Dish’s biggest rival. AT&T acquired HBO’s parent company, Time Warner (Entertainment) in 2018, changing its name to WarnerMedia. Last summer, Judge Richard J. Leon, senior district judge on the U.S. District Court for the District of Columbia gave AT&T approval of that $85 billion merger deal with no conditions, scoffing at Department of Justice claims that the merger would give AT&T undue market power that could be used to threaten competitors by depriving them access to popular cable networks and content or use of those networks in marketing materials to attract new subscribers.

As the DoJ pursues an appeal of Judge Leon’s decision, this week’s blackout seems to add ammunition to the government’s case against the merger.

“This behavior, unfortunately, is consistent with what the Department of Justice predicted would result from the merger,” a DoJ representative told Reuters. “We are hopeful the Court of Appeals will correct the errors of the District Court.”

A statement from Dish Networks harmoniously echoed the government’s position.

“Plain and simple, the merger created for AT&T immense power over consumers,” said Andy LeCuyer, senior vice president of programming at Dish, in a statement. “It seems AT&T is implementing a new strategy to shut off its recently acquired content from other distributors.”

Consumer groups like Public Knowledge also agree.

“In opposing the AT&T/Time Warner deal, opponents — including the Department of Justice — predicted that the newly combined company would have the incentive to withhold content, and would gain stronger leverage in negotiations like this one, ” said John Bergmayer, senior counsel at Public Knowledge. “AT&T stands to benefit if customers, frustrated by missing their favorite HBO shows, leave DISH to switch to DirecTV. Time Warner, as an independent company, did not have the incentive to hold out on HBO content in these situations before the merger. Now, consumers are the ones paying the price.”

Dish is accusing AT&T of demanding the satellite service pay for a guaranteed number of subscribers, regardless of how many consumers actually want to subscribe to HBO.

“AT&T is stacking the deck with free-for-life offerings to wireless customers and slashed prices on streaming services, effectively trying to force Dish to subsidize HBO on AT&T’s platforms,” said LeCuyer. “This is the exact anticompetitive behavior that critics of the AT&T-Time Warner merger warned us about. Every pay-TV company should be concerned. Rather than trying to force consumers onto their platforms, we suggest that AT&T try to achieve its financial goals through simple economics: if consumers want your product, they’ll pay for it. We hope AT&T will reconsider its demands and help us reach a swift, fair resolution.”

On its face, the nationwide blackout of HBO and Cinemax on America’s second largest satellite TV provider could be a public relations disaster for AT&T, depriving customers from accessing premium movie networks for the first time. But AT&T is fighting back in a coordinated media pushback.

In its defense, HBO is claiming Dish was not negotiating in good faith. Simon Sutton, HBO’s president and chief revenue officer: “Dish’s proposals and actions made it clear they never intended to seriously negotiate an agreement.”

“Past behavior shows that removing services from their customers is becoming all too common a negotiating tactic for them,” echoed AT&T.

“The Department of Justice collaborated closely with Dish in its unsuccessful lawsuit to block our merger,” a WarnerMedia spokesman said in a statement. “That collaboration continues to this day with Dish’s tactical decision to drop HBO – not the other way around. DoJ failed to prove its claims about HBO at trial and then abandoned them on appeal.”

As always, customers are caught in the middle. For now. AT&T and HBO are telling consumers to drop their Dish subscriptions and stream HBO and Cinemax online directly from their respective streaming platforms, or find another provider. Dish has told its satellite and Sling TV customers they will be credited on their bill for time they do not receive HBO or Cinemax. Dish is also offering customers a free preview of HDNET Movies.

Oral arguments for the DoJ’s appeal are scheduled to begin Dec. 6. Court documents revealed today the judges that will hear the appeal are: Judith W. Rogers, Robert L. Wilkins, and David B. Sentelle.

Gov. Brown

Within hours of California’s Gov. Jerry Brown signing the state’s sweeping new net neutrality protection law, Attorney General Jeff Sessions filed a federal lawsuit to block the law, calling it an illegal attempt to bypass the Federal Communications Commission and its chairman Ajit Pai, which the Trump Administration argues has the sole authority over the nation’s internet service providers.

“States do not regulate interstate commerce — the federal government does,” Sessions said in a statement. “Once again the California legislature has enacted an extreme and illegal state law attempting to frustrate federal policy. The Justice Department should not have to spend valuable time and resources to file this suit today, but we have a duty to defend the prerogatives of the federal government and protect our Constitutional order. We will do so with vigor. We are confident that we will prevail in this case—because the facts are on our side.”

The Department of Justice claimed in its lawsuit that California’s open internet protection legislation was blatantly against the public interest because it imposes a host of rules on the conduct of companies like AT&T, Verizon, Comcast, and Charter that are contrary to the administration’s deregulation principles.

“[This new law] unlawfully imposes burdens on the federal government’s deregulatory approach to the internet,” the lawsuit stated. “The United States concluded that California, through Senate Bill 822, is attempting to subvert the federal government’s deregulatory approach by imposing burdensome state regulations on the free internet, which is unlawful and anti-consumer.”

FCC Chairman Ajit Pai wholeheartedly supports the lawsuit, releasing his written comments praising it as part of the Justice Department’s media release.

“I’m pleased the Department of Justice has filed this suit,” Pai wrote. “The internet is inherently an interstate information service. As such, only the federal government can set policy in this area. And the U.S. Court of Appeals for the Eighth Circuit recently reaffirmed that state regulation of information services is preempted by federal law.”

“Not only is California’s internet regulation law illegal, it also hurts consumers,” added Pai. “The law prohibits many free-data plans, which allow consumers to stream video, music, and the like exempt from any data limits. They have proven enormously popular in the marketplace, especially among lower-income Americans. But notwithstanding the consumer benefits, this state law bans them.”

The Trump Administration fears the new California law will set a de facto standard of net neutrality protection across all 50 states, because California’s market size makes it difficult for telecommunications companies to apply one standard in California, while maintaining different standards everywhere else.

Sessions

The California net neutrality law restores most of the rules ISPs followed during the Obama Administration, including bans on blocking or throttling internet content and outlawing paid prioritization schemes, which would allow ISPs to charge content providers extra to guarantee their internet traffic was prioritized over other traffic. The new law also covers interconnection agreements between ISPs, which are cited as largely responsible for traffic slowdowns on websites like Netflix and YouTube. Some ISPs have used these traffic exchanging agreements as leverage to seek compensation from internet content companies in return for higher capacity, less congested connections between a content provider and the ISP’s customers. The FCC did not address this issue in its own, now repealed, net neutrality rules.

California’s attorney general promised to defend the new law in court and oppose the Justice Department lawsuit.

“We will not allow a handful of power brokers to dictate sources for information or the speed at which websites load,” said Xavier Becerra. “We remain deeply committed to protecting freedom of expression, innovation and fairness.”

Tribune Media walked away from its $3.9 billion dollar merger agreement with Sinclair Broadcast Group this morning, and announced it would sue Sinclair for $1 billion for its conduct trying to get the deal approved, including withholding information and deceiving regulators.

The merger deal was controversial from the moment it was announced, pairing up Sinclair’s 192 stations with Tribune’s 42 TV stations in 33 markets, including well-known stations like WGN in Chicago and WPIX in New York. Sinclair was already the nation’s top TV station owner, and to acquire more stations, Sinclair would have to get TV ownership limits eased, something coincidentally provided by FCC Chairman Ajit Pai, who suddenly announced an interest in bringing back a “discount” on ownership caps for stations broadcasting on the UHF band. That policy was dropped after the country moved to digital over-the-air broadcasting, which negated the perception that UHF channels were less desirable and held lower value than lower VHF channels because of reception quality.

Sinclair’s Long History of Partisan Politics

Sinclair, unlike other TV station owners, also has a long history of being active in partisan politics, airing programming in favor of conservatives and openly advocating for the agendas of the Bush and Trump Administrations. Its long-standing policy to require its stations to air corporate-produced news segments and commentaries during local newscasts has irritated local newsrooms for years, but as the number of Sinclair-owned stations has grown, the practice was eventually exposed with a viral video depicting an uncomfortable collection of anchors from dozens of Sinclair stations decrying “fake news.”

In 2016, Sinclair aired 1,723 stories about the Huntsman Cancer Institute in Utah on 64 of its stations. Most were designed to look like one or two minute news stories, although Sinclair also produced a 30-minute show about the facility. What viewers were never told is that the stories were paid for by the Huntsman Cancer Foundation. In December, the FCC fined Sinclair a record-breaking $13.3 million for failing to disclose the story’s sponsor. The Democratic minority on the Commission called that a slap on the wrist and wanted the maximum fine of $82 million levied on Sinclair for its egregious and flagrant violation of FCC rules.

Sinclair’s past run-ins and controversies guaranteed its merger deal with Tribune would receive special scrutiny. The documents attached to the lawsuit filed this morning reveal Tribune got quickly upset with Sinclair’s hardball lobbying, accusing Sinclair of brazenly flouting the FCC’s rules and setting up the merger for failure.

In the end, even Sinclair’s apparent ally Ajit Pai distanced himself from the TV station owner in July, suddenly advocating the merger deal be forwarded to an administrative law judge for review, a sure sign the merger was in serious trouble with regulators.

How America’s largest local TV owner turned its news anchors into soldiers in Trump’s war on the media: https://t.co/iLVtKRQycL pic.twitter.com/dMdSGellH3

— Deadspin (@Deadspin) March 31, 2018

Tribune Takes Sinclair to Court

This morning, Tribune officially pulled the plug on the merger.

“Our merger cannot be completed within an acceptable time frame, if ever,” Tribune Media chief executive Peter Kern said in a statement. “This uncertainty and delay would be detrimental to our company and our shareholders. Accordingly, we have exercised our right to terminate the merger agreement, and, by way of our lawsuit, intend to hold Sinclair accountable.”

That accountability will come in the form of its lawsuit that includes revealing documents about Sinclair’s behavior during the merger process, which includes allegations Sinclair recklessly withheld information and deceived the FCC and Justice Department about the transaction. If true, that could threaten Sinclair’s fitness to hold FCC licenses for its TV stations.

“From virtually the moment the Merger Agreement was signed, Sinclair repeatedly and willfully breached its contractual obligations in spectacular fashion,” Tribune said in its lawsuit. “In an effort to maintain control over stations it was obligated to sell if advisable to obtain regulatory clearance, Sinclair engaged in belligerent and unnecessarily protracted negotiations with DOJ and the FCC over regulatory requirements, refused to sell stations in the ten specified markets required to obtain approval, and proposed aggressive divestment structures and related-party sales that were either rejected outright or posed a high risk of rejection and delay – all in the service of Sinclair’s self-interest and in derogation of its contractual obligations.”

Tribune claims Sinclair only favored its own financial interests, not the obligations it had to Tribune to get the merger deal approved as quickly as possible. Tribune also accused Sinclair of threatening, insulting, and misleading regulators to keep control over stations it was obligated to sell.

The Sinclair Broadcast Group has come under fire following the spread of a video showing anchors at its stations across the United States reading a script criticizing “fake” news stories. (8:03)

“Sue me.”

Tribune’s executives gradually became more alarmed the more Sinclair negotiated with regulators, claiming Sinclair antagonized officials at the Justice Department. Tribune notes the assistant attorney general of the antitrust division got an earful from Sinclair, lecturing the official that he “completely misunderstand[ood]” the broadcast industry and was “more regulatory” than any recent predecessor.

When Sinclair was cornered by the Department of Justice over demands for station divestitures, the company summarized its position in two words: “sue me.”

Tribune pointed out the Justice Department was prepared to accept the merger with the appropriate stations being sold to new owners, but Sinclair balked. After a series of schemes were suggested to partly divest the stations, Tribune saw the protracted negotiations as unnecessary and imprudent. The agendas of both companies were radically different. Tribune wanted Sinclair to do whatever the FCC and Justice Department insisted be done, to get the deal done quickly. Sinclair wanted the deal and a way to maintain control, even indirectly, over almost every station involved in the deal. Tribune began threatening to sue Sinclair if it did not agree to the Justice Department’s terms.

Tribune’s growing unease with Sinclair’s behavior culminated in this email exchange between Tribune and Sinclair executives in late December, 2017.

Sinclair finally relented in February, 2018, but only partially. Exasperated Tribune executives were stunned as Sinclair now proposed to sell stations to third parties that maintained “significant ties to Sinclair’s executive chairman,” David Smith, or his family.

“Sinclair would effectively control all aspects of station operations, including advertising sales and negotiation of retransmission agreements with cable and satellite operators,” Tribune said in its lawsuit. “Under these proposed arrangements, Sinclair would continue to reap the lion’s share of the economic benefits of the stations it was purportedly ‘divesting’ and would have an option to repurchase the stations in the future.”

“Sinclair fought, threatened, insulted, and misled regulators in a misguided and ultimately unsuccessful attempt to retain control over stations that it was obligated to sell,” the lawsuit concludes.

The country’s largest owner of local TV stations, the Sinclair Broadcast Group, which reaches over a third of homes across the nation, wanted to get even bigger by merging with the Tribune Media Company. Sinclair is raising concerns among media watchers because of its practice of combining news with partisan political opinion. William Brangham reports for PBS Newshour. (8:58)

AT&T has won its $85 billion bid to acquire Time Warner, Inc., overturning Justice Department opposition in a court case and completely rejecting allegations the merger was anti-consumer and would raise prices by suppressing competition. The favorable decision is expected to signal the business community the time is right for several more multi-billion dollar media mergers.

U.S. District Court Judge Richard Leon ruled the deal can proceed without any consumer-protecting deal conditions, and warned Department of Justice lawyers not to appeal if the purpose was to stymie the deal from closing before the companies’ agreed on deal expiration date runs out, saying it would be “manifestly unjust” and damaging to the faith of America’s shareholders and business community.

Leon read his decision to a packed courtroom, telling the government’s lawyers they had failed to prove their case the merger would harm consumers. Observers called it one of the worst antitrust court losses the Justice Department has faced in its history.

“Today is a bad day for all internet users and media consumers,” said Free Press policy director Matt Wood. “The Justice Department’s failure to bring a winnable case will now set off a wave of communications and media consolidation that was unthinkable even a few years ago. All of us, regardless of our broadband carrier and no matter what we watch, are about to see higher bills, fewer choices, worse quality for competing options and a further erosion of our privacy rights.”

During a six-week trial held this spring, the government argued AT&T’s combination of DirecTV’s 20 million subscribers with its own U-verse TV customers, and its ownership of Time Warner’s pay television networks including HBO and Cinemax and Turner Broadcasting’s news, entertainment, and sports networks, would give the phone company too much power, allowing AT&T to unfairly raise prices for competing cable, satellite, and online streaming companies. AT&T acquired DirecTV in 2015, but regulators were already concerned about AT&T’s size, only approving the transaction with deal conditions.

AT&T argued it was willing to offer arbitration to make sure its competitors received fair deals, and volunteered to not cut off TV networks from customers during arbitration proceedings to resolve contract renewal disputes.

The decision has dramatic implications far beyond the merger at hand. Waiting in the wings are other media companies, Wall Street bankers, and advisers waiting to begin a frenzy of other blockbuster merger deals. Had the court blocked the merger, it would send a strong signal that the Justice Department’s case against vertical integration mergers — when companies buy other companies they do business with — has standing. The total defeat of the Justice Department in today’s decision may make government lawyers hesitant to challenge future vertical integration deals.

Comcast’s all-cash offer for a large part of 21st Century Fox is likely to proceed now that the AT&T-Time Warner merger was approved. More telecom industry deals are expected to emerge later this year.

The Trump Administration’s choice to oversee antitrust cases — Makan Delrahim, sent signals to Wall Street that he is still inclined to be pro-business on merger transactions, telling reporters most proposed transactions were either good for consumers or neutral — a view consumer advocates generally oppose.

“I understand that some journalists and observers have recently expressed concern that the antitrust division no longer believes that vertical mergers can be efficient and beneficial to competition and consumers,” Delrahim said. “Rest assured these concerns are misplaced.”

If the merger is completed, AT&T will now be the country’s largest pay-TV distributor, controlling more than a dozen “must-have” TV networks that competitors cannot afford to be without. The deal will even affect the wireless industry’s competitive landscape. AT&T’s unlimited wireless customers are expected to be given exclusive free access to a bundle of channels filled with Time Warner-owned content.

Sen. Lee

Several key Republicans are backing a corporate-friendly measure that would hurry the Federal Trade Commission, the Department of Justice, and the Federal Communications Commission through merger reviews, likely leading to less scrutiny of multi-billion dollar merger and acquisition deals that could ultimately cost consumers billions.

Retiring Sen. Orrin Hatch (R-Utah), Mike Lee (R-Utah), Thom Tillis (R-N.C.) and Chuck Grassley (R-Iowa) are the key backers of the “Standard Merger and Acquisition Reviews Through Equal Rules (SMARTER) Act,” a bill that would amend the Clayton Act and Federal Trade Commission Act to align the standards and processes for the Federal Trade Commission’s (FTC) and Department of Justice’s (DOJ) review of proposed mergers and acquisitions.  The SMARTER Act claims it will eliminate bottlenecks that sometimes hold up merger reviews at the DOJ and FTC, and require agencies like the FCC to speed up merger reviews.

Sen. Hatch

Republicans claim corporations are being unfairly treated by excessive regulator scrutiny and delays of merger and acquisition transactions. Because different agencies have their own procedures about reviewing such deals, and federal agencies like the FCC are likely to put deals on hold when companies stonewall the Commission over document requests, Republicans are complaining about bureaucratic holdups. Supporters also claim that current delays associated with merger reviews “fuel politicization” of deals by politicians, consumer groups and media personalities, giving them time to organize public opposition and mount coordinated challenges.

Without a fully enforced shot clock, the FCC “creates uncertainty for transacting parties and effectively enables the FCC to evade judicial review,” bill supporters add.

The FCC already has a limit on open-ended merger reviews — its 180-day “shot clock” that requires mergers be approved or denied within six months. The FCC’s shot clock carried some built-in protection for its integrity, however, by including the power to pause the clock if companies attempted to “run out the clock” by slow-walking requested documents or stonewalling the Commission on other requests. The SMARTER Act would make it easier for companies facing a difficult review to wear down regulators by stripping away the agency’s power to put its shot clock on hold. Instead officials at the FCC would be required to make frequent trips to court to win permission from a judge to stop the clock while waiting for receipt of documents or reviewing merger objections. If the merger is ultimately turned down, the Republican bill also offers corporations the opportunity to streamline any court challenge by eliminating the step of first holding a FCC administrative law judge hearing.

Republicans have overwhelmingly favored The SMARTER Act, with Democrats almost universally opposed. In the previous Congress, House Republicans voted nearly unanimously for the bill. But the bill died after facing opposition in the then Democratic-held Senate. This term, Republicans control all branches of the federal government, giving the bill a better chance of becoming law.

Sen. Tillis

The SMARTER Act is heavily favored by the country’s top telecommunications companies, many that would directly benefit from its passage. No company would stand to benefit more than AT&T, which has seen several high-profile merger and acquisition cases fall apart before regulators. The bill strips away several layers of antitrust protection for consumers that were used to stop several multi-billion dollar telecom company mergers, and scared off others from trying.

The DOJ was instrumental in stopping AT&T’s acquisition of T-Mobile, and combined skepticism by the FCC and the DOJ forced Comcast to withdraw its proposed acquisition of Time Warner Cable. If the SMARTER Act becomes law, internal agency reviews of challenges to a merger will be eliminated. Merger opponents will have to file challenges to mergers in federal court instead. Such a law would have offered AT&T a dramatically better chance that its merger with Time Warner, Inc., would have been approved months ago without a court proceeding.

Two of the Republican FCC commissioners issued statements applauding the proposed legislation.

“Among other improvements, the bill includes two key reforms to the FCC’s merger review process that I have longed championed: setting a non-aspirational, 180-day shot clock for agency review of license transfers and addressing the abusive practice of designating an application for hearing to the Administrative Law Judge (ALJ), which effectively serves to kill a transaction,” wrote Commissioner Michael O’Rielly. “Applicants deserve a timely, complete, fact-based, and straightforward answer from the Commission – not one built on interminable delays or shady denials.”

“I applaud Senator Lee for working to ensure that good government is the law of the land,” said FCC Commissioner Brendan Carr. “With the SMARTER Act, Senator Lee would put the Federal Communications Commission on a shot clock and thus codify the agency’s commitment to open, transparent, and timely decision making.”

Although supporters of the measure claim it will eliminate disparate treatment of mergers and speed their review, critics contend the bill is a “solution in search of a problem.”

The American Antitrust Institute slammed the bill as lacking any foundation to prove its case. AAI conducted an exhaustive review of merger deals that came before the DOJ or FTC and found very few companies ever ran into opposition of their merger deals in the first place. From 2001-2014, businesses enjoyed a 97.5% chance their deals would be approved without challenge and a 96.7% chance their mergers or acquisitions would be approved without a second request.

Sen. Grassley

“The enforcement data suggest many things, but one of them is definitely not what the SMARTER Act purports to cure: an ‘unfairness’ caused by differences in standards and procedures at the FTC and DOJ,” wrote Diana Moss, president of AAI. “On the contrary, the SMARTER Act would create uncertainty and new litigation to solve a problem that, empirically, does not exist.”

Critics of the measure suspect the Republicans have a larger agenda in mind – curtailing government and regulatory oversight of public interest antitrust enforcement. AAI summarized their concerns:

First, the FTC’s use of administrative powers should be carefully safeguarded, because it has contributed critically to the effective shaping of U.S. merger policy without detracting from the speed or effectiveness of merger review.

Second, any difference in the preliminary injunction standard is more theoretical than real, and if a uniform standard is to be adopted, it should be the FTC’s standard, which allows the agency to obtain a preliminary injunction “[u]pon a proper showing that, weighing the equities and considering the Commission’s likelihood of ultimate success, such action would be in the public interest.”

Third, any change in the law may have harmful unintended consequences, including unnecessarily burdening the federal judiciary with new litigation over the meaning and value of the body of legal precedent involving merger cases brought by the FTC in federal court under the existing standard.

SMARTER Act by Senator Mike Lee on Scribd