The Department of Justice and AT&T-Time Warner have released
their pre-trial briefs regarding the DOJ’s antitrust challenge to the
AT&T/Time Warner merger. The trial briefs lay out the cases each side
expects to present at the upcoming trial, which is set to begin Monday, March 19, 2018. Put simply, for a vertical merger, the Department of
Justice is seeking unprecedented relief in the modern antitrust era, and
proving its case is likely to be very difficult.
The proposed merger is a vertical
merger of Time Warner, a programming content provider that sold off its cable
systems years ago, and AT&T, a programming distributor through its DirecTV,
U-Verse, and Internet-based services. The last time the U.S. government went to court
seeking structural changes to a vertical merger was in 1979, when the Federal
Trade Commission lost its challenge to truck trailer manufacturer Fruehauf’s
acquisition of a brake component supplier.
The DOJ is insisting that behavioral remedies would
not be effective and structural relief is needed, which might mean blocking the
merger entirely or requiring the parties to sell off DirecTV or the Time Warner
channels that are central to the merger transaction. Since 1972, every vertical
merger challenge by the federal government was either unsuccessful or was
settled out of court, usually with behavioral restrictions rather than
structural changes. Thus, the DOJ is facing the additional burden of not only
having to prove that the proposed merger will lead to anticompetitive harm, but
also that these anticompetitive concerns are sufficient to justify the first
court-ordered structural relief in a vertical merger case since 1972.
I previously pointed out how the Complaint filed by the DOJ in November 2017
was light on details about how the DOJ planned to litigate the case, and heavy
on conclusory claims
about anticompetitive outcomes and quotes from mostly unidentified documents
from the merging parties suggesting motive. I
noted that the DOJ will have to provide actual market evidence of how
the anticompetitive harm would occur.
In its pre-trial brief, the DOJ provides much more
information about how it plans to litigate the case. The brief indicates that DOJ
will rely on case studies to show the economic impact of programming that is
removed from cable systems when programming providers and distributors fail to
reach agreements on prices. DOJ intends to argue that AT&T’s power to
withhold Time Warner programming will give it market power over competing
programming distributors who know they will lose customers if they cannot
deliver Time Warner programming.
DOJ’s basic theory is that AT&T will
use its new leverage from the Time Warner programming to harm content providers
who compete with AT&T’s programming distribution services. In short, DOJ
alleges that AT&T after the merger will have an incentive to raise prices
for Time Warner programming, knowing that some or most of the competing content
providers will pay the higher prices. And if content providers don’t pay the
higher prices for Time Warner programming, DOJ claims that AT&T will
recapture some of its lost revenues when a portion of the customers from those
non-paying content providers subscribe instead to DirecTV or U-Verse because
they want the Time Warner programming badly enough to switch.
DOJ’s characterization of the possible anticompetitive
harms may be plausible in theory, but it suffers from many shortcomings. First,
it is possible to describe equally plausible theoretical ways in which the
anticompetitive strategy described by the DOJ would harm the merged parties
more than it would help them, which DOJ will have to disprove in order to make
its case before the court. It seems unlikely that AT&T would spend over
$100 billion (including assumed debt) for the Time Warner channels only to
damage their value by limiting access to these channels in order to increase
the market share of DirecTV and U-Verse.
Second, there are good reasons to believe that changes
in the market, many of which have occurred since some of the case studies cited
in the DOJ brief, make it much less likely that anticompetitive strategies that
may have worked in the past would work today. The DOJ brief mocks these
arguments as the “Star Wars’ defense” because
the merging parties claim, “everything the government is telling the Court is
stale and out of context–it is from a long time ago in a galaxy far, far away.”
Nonetheless, consumers are becoming far more willing to cut the cord and look
to Internet platforms for information and entertainment. By early 2017, Amazon
Prime subscriptions climbed to 80 million and Netflix surpassed 50 million, and
64% of TV households subscribed to Amazon Prime, Hulu, or Netflix. And the 2014
dispute over DirecTV’s carriage of The Weather Channel (TWC), which ended after three months when DirecTV refused to pay TWC’s higher rate and TWC
folded, illustrates how owners of content providers have less leverage than in
the past.
Third, the DOJ brief specifically identifies the HBO
channels as valuable Time Warner content that the combined company could use to
place competing distribution services at a disadvantage. But those channels are
already available in many different ways, including through the online SlingTV and Hulu
services. The HBO Now app is currently pre-loaded on all Apple TV for users of
iPhones and iPads, and similar apps can be uploaded to Android, Amazon Fire,
and Kindle devices. If a competing cable service were to lose access to HBO,
its customers likely could find it elsewhere, and at a similar price to what
their cable service charged. Eliminating access to HBO through all of these distribution
services after the merger would hardly go unnoticed by consumers.
Finally, the AT&T and Time Warner brief asserts certain economic efficiency benefits that will
allow them to better compete in the broader content deliver market with the
much larger Google and Facebook. The merging parties claim: “In total, AT&T
projects merger synergies of more than $2.5 billion in annual synergies by 2020
and more than $25 billion in total synergies on a net present value basis.” DOJ
will have the burden of showing that these efficiency benefits are less than
the cost of any anticompetitive effect DOJ can demonstrate.
For a substantive analysis of the
merger and the context in which it should be reviewed, see my February 8, 2018 Perspectives
from FSF Scholars entitled “The Proper Context for Assessing the
AT&T/Time Warner Merger.” Free State Foundation
President Randy May and I also discussed the challenges faced by the DOJ in
bringing this case shortly before the DOJ filed its challenge here.
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