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AT&T-Time Warner merger draws tough questions from lawmakers

FILE - In this March 30, 2011 file photo, Randall Stephenson, CEO of AT&T, speaks at the Council on Foreign Relations, in New York. The CEOs of AT&T and Time Warner are heading to Capitol Hill in a bid to convince senators that a merger of their two companies will mean innovative new experiences for consumers. The CEOs, Stephenson of AT&T and Jeffrey Bewkes of Time Warner, are due to appear Wednesday, Dec. 7, 2016, before a Senate antitrust panel whose Republican chairman and senior Democrat have said the proposed $85.4 billion merger of the communications giants would potentially raise significant antitrust issues. (AP Photo/Mark Lennihan, File)

FILE – In this March 30, 2011 file photo, Randall Stephenson, CEO of AT&T, speaks at the Council on Foreign Relations, in New York.  (AP Photo/Mark Lennihan, File)

U.S. lawmakers grilled chief executives of AT&T Inc. and Time Warner Inc. about whether their proposed tie-up would benefit consumers and called for antitrust officials to closely scrutinize potential competitive harm from the deal.

Republicans and Democrats questioned at a hearing Wednesday whether the merger will give AT&T the incentive to harm rival distributors of content that competes with its DirecTV business as well as entertainment producers that compete with Time Warner, which owns HBO and CNN.

“We have seen this plot before,” Senator  Amy Klobuchar, a Minnesota Democrat, said. “Like a tired movie franchise, we can predict the ending before it begins. The promise of thriving competition collapses, replaced by dominant firms with monopoly power.”

Lawmakers are scrutinizing the $85.4 billion deal that would create a telecommunications and media empire that will own much of the programming it provides to subscribers of its wireless, internet and pay-TV services. AT&T serves 133 million U.S. wireless customers and 25 million video subscribers. While Congress doesn’t decide whether the merger proceeds, it has oversight of the regulators that do.

Because AT&T is a distributor and Time Warner is a supplier to content, the deal doesn’t raise the traditional competitive problems that come with combining direct competitors. Still, there are risks AT&T will have an incentive to raise prices for Time Warner’s content or restrict access to make DirecTV more attractive to consumers, lawmakers said.

‘Bully Tactics’

“There’s concern about the merged company’s ability to employ bully tactics to dictate rates and terms to other networks,” said Senator Chuck Grassley, an Iowa Republican. “There’s concerns that this acquisition will concentrate too much power into one conglomerate resulting in higher prices and fewer programming options.”

AT&T’s Chief Executive Officer Randall Stephenson said the purchase of Time Warner would raise a challenge to cable companies. The deal also may hasten AT&T’s development of faster 5G wireless service to deliver its newly acquired video content, Stephenson said. Time Warner CEO Jeffrey Bewkes said in his submitted testimony that the combination will allow faster moves toward new channel packages delivered over the internet.

The transaction will be reviewed by the Justice Department and possibly by the Federal Communications Commission. President-elect Donald Trump said he would block the merger, arguing that such media combinations leave too much power concentrated among too few companies.

Wooing Cord-Cutters

Under Bewkes, Time Warner has spent billions to create original programming and acquire sports rights to attract viewers and command higher fees from distributors to keep his media company afloat in a declining pay-TV industry. At the same time, he’s trying to win over the growing legions of cord-cutters who don’t pay for cable.

AT&T’s plunge into media with the Time Warner deal is in part to relieve pressure facing its maturing wireless business and customer erosion in video. The Dallas-based company acquired satellite-TV operator DirecTV for $48.5 billion last year, and so far in 2016 it’s lost more than 106,000 TV customers.

Bewkes and Stephenson said it would make no business sense to restrict Time Warner content to competitors or favor that content on its own platforms. If consumers want certain content, AT&T wants to provide it to them, Stephenson said.

Senator Al Franken, a Minnesota Democrat, rejected the argument that AT&T will want the widest distribution possible for Time Warner content. HBO is a success because it makes the content exclusive and charges consumers for it, Franken said.

Game of Thrones

“Nothing is preventing the combined AT&T-Time Warner from going to any of its competitors in the pay-TV market and charging double for access to Game of Thrones and Veep,” Franken said. “Or the combined company could simply restrict access to the programming entirely and wait for competitors’ customers to flock to DirecTV or HBO streaming services. I don’t think these hypotheticals are outlandish at all. You have every reason to do this if you could.”

The deal needs to be carefully reviewed and possibly blocked because it poses a danger of harming competition, leading to higher costs and fewer choices for video services, said Gene Kimmelman, a former antitrust regulator who is president of the policy group Public Knowledge, in an interview before the hearing.

The hearing could be a “tea leaf for other mergers” as Washington asks whether the Trump administration could be receptive to mergers among wireless, cable and content companies, Paul Gallant, a Washington-based analyst with Cowen & Co., said in a note Tuesday.

The session “could provide clues about Congress’s attitude toward telecom/media consolidation more generally,” Gallant added.

The tie-up between AT&T and Time Warner deal has similarities to Comcast Corp.’s 2011 acquisition of NBCUniversal, which regulators in Washington cleared with conditions. In both instances, the deal didn’t remove a direct competitor.