Despite concerns, analysts expect an OK for AT&T-Time Warner deal

Since the Comcast-NBC Universal merger was approved, why not this one?

Prominent U.S. politicians quickly raised concerns about the proposed $85.4 billion merger of AT&T and Time Warner, but some analysts expect it to pass regulatory muster after a lengthy review.

"The big question is how a new presidential administration will try to make a mark with its handling of the deal, but I expect whoever is elected will essentially wave [in approval] as it goes by," said Bill Menezes, an analyst at Gartner.

Republican presidential nominee Donald Trump and his Democratic rival, Hillary Clinton, both voiced concerns about the deal, while a Senate Judiciary subcommittee has already vowed to hold a hearing on the matter in November.

The U.S. Department of Justice and possibly the Federal Communications Commission (FCC) will also conduct thorough reviews, which should last well into 2017, with the deal finalized by the end of next year, AT&T General Counsel David McAtee said in a conference call Monday morning. The FCC would have to regulate any transfer of FCC licenses from Time Warner to AT&T, but it isn't yet clear any licenses would need to be transferred.

AT&T CEO Randall Stephenson said during the call when asked how AT&T will charge competitors for the use of its video content from Time Warner: "We don't know, but we'll put it out for the regulators. The sausage will come out the way the sausage comes out."

He said when Net Neutrality reforms were considered in the last two years that the FCC and President Obama expressed no intention to regulate prices. "Hopefully that will be true with this deal," Stephenson said.

Both companies believe that regulators will eventually agree that the deal won't eliminate competition and will yield more mobile video choices for consumers. Instead of both AT&T and Time Warner being engaged in similar businesses, AT&T is a distributor of content while Time Warner is a creator of content, they explained. That makes it a vertical merger that regulators have consistently approved, as opposed to a horizontal merger that has often been questioned.

"The structure of the industry will not change" with the deal, McAtee said. "There will no loss of competition or competitors. The structure is similar and the distribution model doesn't change.... What will change? We bring together a wireless provider and content for the first time and you create a company to innovate in important ways with wide distribution of Time Warner content, especially in the mobile world. You can't innovate through arms' length regulations. Regulators will be most interested in the positive story with the market structure. This innovation spurs more innovation."

That argument brought agreement from several analysts.

"I'm not sure how to you can approve a Comcast-NBC Universal deal and not this one," said Menezes. "AT&T will toss regulators a few bones to address concerns that it fairly offers Time Warner content to its competitors, but it should go through."

The Comcast/NBC deal was approved in 2011 after conditions were applied. Comcast's bid to buy Time Warner Cable was blocked last year, however, but that was because both companies were in the distribution business, analysts said.

Gartner analyst Akshay Sharma added that with regard to AT&T and Time Warner, "both companies don't compete directly.... I get that this is truly a vertical story and meets Net Neutrality..., where all data packets are treated equally and you can't be preferential for your customers."

Still, Sharma expects that regulators will examine the nuances of how AT&T will make its video content more desirable to consumers through various networking technology approaches.

Some politicians who object to the deal might be mistaking Time Warner with Time Warner Cable, which is a cable company and in roughly in the same business of AT&T, said Roger Entner, an analyst at Recon Analytics.

"Time Warner is a content owner and therefore this is a vertical integration," he added. "AT&T is entering a new business sector and all the market concentration concerns are just not there. There might be concerns about AT&T withholding content from other TV competitors but there can be safeguards so that won't happen. Comcast/NBC is committed to just those safeguards.

"There really aren't any laws against vertical mergers," Entner said. "I think this merger should get approved despite the populist uproar."

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Matt Hamblen

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