The $85 Billion Question: Will the FCC Review the AT&T-Time Warner Deal?
AT&T and Time Warner want to avoid FCC scrutiny. That’s unlikely.
Randall Stephenson and Jeff Bewkes, the CEOs of AT&T and Time Warner, speaking on Oct. 25, 2016. Image: Steve Jurvetson/Flickr
It's the $85 billion question.
Will the Federal Communications Commission have jurisdiction over AT&T's blockbuster $85 billion buyout of entertainment giant Time Warner?
The reason why this is important is that the FCC is likely to take a more skeptical view of the deal than the Justice Dept. In mergers like these, the Justice Dept.'s job is to ensure that the deal doesn't run afoul of antitrust laws. The FCC, by contrast, has a more rigorous responsibility: To ensure that the deal serves the public interest.
That's why AT&T wants to avoid FCC scrutiny in this case.
Numerous politicians, including Hillary Clinton, Donald Trump and Bernie Sanders, have either called for the proposed deal to be blocked, or urged tough federal scrutiny. Public interest groups, meanwhile, have blasted the tie-up because it could concentrate too much power over media content and distribution in one company.
Now, what would trigger FCC oversight? Answer: Any deal that involves the transfer of broadcast licenses from one company to another.
Does Time Warner have any broadcast licenses? Answer: Yes, most notably the license to operate WPCH-TV in Atlanta, aka "Peachtree TV." This is not just any random local TV station. This is an historic station that Ted Turner used to launch Turner Broadcasting System, which would ultimately pave the way for CNN, and Time Warner as we know it today.
The merger would combine AT&T's vast communications network and recently acquired DirecTV satellite business with Time Warner's rich stable of entertainment properties, including HBO, CNN, and the Hollywood studio Warner Bros. AT&T's customer base includes 100 million consumers across the telecom giant's TV, mobile, and broadband businesses.
Since AT&T announced its intention to buy Time Warner last weekend, the conventional wisdom has been that WPCH is the only major broadcast license asset involved in this case, and hence the only rationale for the FCC to review the deal. Many experts believe that AT&T will seek to jettison this station in order to avoid a FCC review, which again, would apply the more rigorous public interest standard than the Justice Dept.'s antitrust test.
"We know at this point, of course, the DOJ will be reviewing the transaction; at this point, we are determining which FCC licenses of Time Warner, if any, would transfer to the new company," David McAtee, AT&T general counsel, told Wall Street analysts earlier this week. "And obviously, if there are licenses to be transferred, the FCC would review those."
It turns out that Time Warner holds many other broadcast licenses under FCC jurisdiction. There are so-called "Earth station licenses" that CNN uses to connect its correspondents around the country with the mothership in Atlanta. Think satellite uplink trucks that the news organization's reporters use to file their reports back to satellite receivers on the roof of the Atlanta newsroom.
"The only way AT&T could avoid FCC scrutiny is if they deliberately structure this deal in a convoluted way to avoid a transfer of these licenses and thus FCC review."
CNN and HBO also hold licenses to facilitate the distribution of signals to pay-TV systems around the world, as Ars Technica's Jon Brodkin and Fortune's Jeff John Roberts have reported. It's these licenses that could provide the FCC with oversight jurisdiction in this case.
As a technical matter, it would be very difficult for AT&T to absorb CNN and HBO without the broadcast functionality that these licenses provide, according to John Gasparini, policy fellow at DC-based consumer advocacy group Public Knowledge.
"It appears that AT&T and DirecTV do not currently have sufficient satellite licenses to forgo acquiring the Time Warner licenses without impacting the operations of big-name properties like CNN and HBO," Gasparini told Motherboard. "As a result, it's more than likely that AT&T and Time Warner will need to secure FCC approval before the deal goes through."
"The only way AT&T could avoid FCC scrutiny is if they deliberately structure this deal in a convoluted way to avoid a transfer of these licenses and thus FCC review," Gasparini added.
BTIG tech analyst Rich Greenfield pointed out that because these license transfers essentially involve "back-office" technical operations, as opposed to major broadcast station functionality, they could be subject to a so-called "pro-forma" review by the FCC on an expedited basis, as opposed to a full-blown competition review.
"I don't think that AT&T will try to proactively divest these license assets in order to avoid FCC scrutiny," Greenfield told Motherboard. "But if this starts heading down a path where the FCC wants to launch a competition review, at that point I think it's highly likely that an intelligent company would seek to divest these assets."
Greenfield added that it's important to note that the FCC "doesn't block deals per se, they block license transfers." And if they prevent these license transfers, it's at least theoretically possible for AT&T to come up with a work-around solution to make the transaction work, including by filing for temporary licenses, he said.
At Thursday's open meeting, FCC Chairman Tom Wheeler declined to comment on whether his agency would review the case. Indeed, the FCC has not even received a license transfer application involving the deal, and probably won't until late November or December.