President Trump’s Department of Justice is going to trial this week to try to stop a blockbuster merger, the biggest antitrust case to go to trial in decades. The planned AT&T/Time Warner would create a $225 billion dollar media giant, with Time Warner producing media content and AT&T distributing the content through DirectTV and other avenues. This trial presents a historical oddity: Republican administrations have usually been pro-business and have taken a hands-off attitude toward business mergers.
The case has important ramifications for the entertainment and media industry, where consolidation and acquisitions have been rampant and show no signs of slowing. A victory for AT&T/Time Warner would likely open the floodgates for a wave of media consolidation. A victory for the government would call into question a number of pending mergers, including Disney’s planned purchase of 21st Century Fox.
The Justice Department’s approach to mergers over the last few decades has been to scrutinize horizontal mergers (mergers between competitors), and to greenlight vertical mergers (acquisitions by large companies of suppliers in its supply chain). Usually, these issues are settled by the Justice Department without trial, either by extracting divestiture of certain business arms or obtaining promises from the merging companies concerning the operation of the business (behavioral conditions). This case is unusual, in that there has been no settlement and the matter is instead going to trial.
AT&T has several good arguments as to why the merger should be allowed. AT&T is the world's largest telecommunications company, but it doesn't make content. Its partner, Time Warner, produces blockbuster films and hit TV shows, but doesn’t directly distribute television to consumers. The merger won't create a monopoly on either content (there are myriads of other content providers) or distribution (there are several well-known distribution channels for movies and television). The merger is only anti-competitive if AT&T gains enough leverage in the market to unfairly harm consumers or rivals. Would AT&T limit its content to its own subscribers? Would it give up licensing fees for HBO and other sought after content just to attract a few more customers from Comcast and Dish network to DirectTV?
A key issue in analyzing a merger is whether the combination is considered "horizontal" or "vertical." Here's the difference between the two:
Imagine that there are only two computer manufacturers in the country. Antitrust law would condemn a merger between the two companies, because the combined company would wield too much power and would have the ability to set prices for consumers. This is a horizontal merger, the kind typically reviewed by government regulators. If there are more than two computer makers, a merger between some of them would lead regulators to look at the size and market share of the new entity. Defining the relevant “market” is critical in these cases. That is often a difficult (and hotly litigated) undertaking: do tablets count? Smart phones? Cloud based computers like Chromebook? Or just desktop devices?
Now let’s look at a vertical merger. Let’s say that there are ten computer makers in the country, but only one chip manufacturer (such as Intel). If one of the computer makers attempted to buy Intel, the key antitrust question would be whether the other nine computer makers could be denied a key component of their computers, namely the computer chip. In antitrust lingo, this is known as “market foreclosure”. Since this scenario rarely exists, consider that there are four chip makers. Don’t the other nine computer makers still have market access to computer chips? And can’t the companies argue that the merger and integration of the companies is beneficial, because the savings from acquiring the computer chip supplier (i.e., eliminating markups on the chips) could be passed on to consumers, resulting in a price benefit to consumers? Or is the risk of market foreclosure and higher prices to consumers too great? What if instead of passing the savings on to consumers, the new entity kept the profits from both products for itself?
For its case, the government has taken the latter stance: that the vertical integration of a content producer like Time Warner and a distributor like AT&T is bad for consumers, because of the risk that AT&T might deny some of the content to other distributors to try and siphon off customers from Comcast and Dish TV, other distributors. The government has had trouble articulating a reason that this risk is real and poses a threat to the consumer media landscape.
There is some legal irony in the fact that this proposed merger fight involves AT&T and Time Warner. AT&T was involved in the breakup of the long distance carrier’s monopoly, and Time Warner was the subject of one of the worst mergers in history (Time Warner was purchased by AOL online services – known today as “AOL who?”). And the unknowable future of the AOL/Time Warner merger is expected to be a key argument by the companies: that future technological advances cannot be accurately predicted, and that technology frequently changes both the content producers and methods of distributing that content.
Whatever the outcome of this case, the business world will be watching it closely, and it will have a major impact on business mergers over the next several years.