This guest post is by Jonathan M. Barnett, Torrey H. Webb Professor Law, University of Southern California Gould School of Law.
It has become virtual received wisdom that antitrust law has been subdued by economic analysis into a state of chronic underenforcement. Following this line of thinking, many commentators applauded the Antitrust Division’s unsuccessful campaign to oppose the acquisition of Time-Warner by AT&T and some (unsuccessfully) urged the Division to take stronger action against the acquisition of most of Fox by Disney. The arguments in both cases followed a similar “big is bad” logic. Consolidating control of a large portfolio of creative properties (Fox plus Disney) or integrating content production and distribution capacities (Time-Warner plus AT&T) would exacerbate market concentration, leading to reduced competition and some combination of higher prices and reduced product for consumers.
Less than 18 months after the closing of both transactions, those concerns seem to have been largely unwarranted.
Far from precipitating any decline in product output or variety, both transactions have been followed by a vigorous burst of competition in the digital streaming market. In place of the Amazon plus Netflix bottleneck (with Hulu trailing behind), consumers now, or in 2020 will, have a choice of at least four new streaming services with original content, Disney+, AT&T’s “HBO Max”, Apple’s “Apple TV+” and Comcast’s NBCUniversal “Peacock” services. Critically, each service relies on a formidable combination of creative, financing and technological capacities that can only be delivered by a firm of sufficiently large size and scale. As modern antitrust law has long recognized, it turns out that “big” is sometimes not bad.
Where’s the Harm?
At present, it is hard to see any net consumer harm arising from the concurrence of increased size and increased competition.
On the supply side, this is just the next episode in the ongoing “Golden Age of Television” in which content producers have enjoyed access to exceptional funding to support high-value productions. It has been reported that Apple TV+’s new “Morning Show” series will cost $15 million per episode while similar estimates are reported for hit shows such as HBO’s “Game of Thrones” and Netflix’s “The Crown.” Each of those services is locked in a fierce competition to gain and retain sufficient subscribers to earn a return on those investments, which leads directly to the next happy development.
On the demand side, consumers enjoy a proliferating array of streaming services, ranging from free ad-supported services to subscription ad-free services. Consumers can now easily “cut the cord” and assemble a customized bundle of preferred content from multiple services, each of which is less costly than a traditional cable package and can generally be cancelled at any time. Current market performance does not plausibly conform to the declining output, limited variety or increasing prices that are the telltale symptoms of a less than competitive market.
Real-World v. Theoretical Markets
The market’s favorable trajectory following these two controversial transactions should not be surprising. When scrutinized against the actual characteristics of real-world digital content markets, rather than stylized theoretical models or antiquated pre-digital content markets, the arguments leveled against these transactions never made much sense. There were two fundamental and related errors.
Error #1: Content is Scarce
Advocates for antitrust intervention assumed that entry barriers into the content market were high, in which case it followed that the owner of an especially valuable creative portfolio could exert pricing power to consumers’ detriment. Yet, in reality, funding for content production is plentiful and even a service that has an especially popular show is unlikely to have sustained pricing power in the face of a continuous flow of high-value productions being released by formidable competitors. The amounts being spent on content in 2019 by leading streaming services are unprecedented, ranging from a reported $15 billion for Netflix to an estimated $6 billion for Amazon and Apple TV+ to an estimated $3.9 billion for AT&T’s HBO Max. It is also important to note that a hit show is often a mobile asset that a streaming or other video distribution service has licensed from independent production companies and other rights holders. Once the existing deal expires, those rights are available for purchase by the highest bidder. For example, in 2019, Netflix purchased the streaming rights to “Seinfeld”, Viacom purchased the cable rights to “Seinfeld”, and HBO Max purchased the streaming rights to “South Park.” Similarly, the producers behind a hit show are always free to take their talents to competitors once any existing agreement terminates.
Error #2: Home Pay-TV is a “Monopoly”
Advocates of antitrust action were looking at the wrong market—or more precisely, the market as it existed about a decade ago. The theory that AT&T’s acquisition of Time-Warner’s creative portfolio would translate into pricing power in the home pay-TV market mighthave been plausible when consumers had no reasonable alternative to the local cable provider. But this argument makes little sense today when consumers are fleeing bulky home pay-TV bundles for cheaper cord-cutting options that deliver more targeted content packages to a mobile device. In 2019, a “home” pay-TV market is fast becoming an anachronism and hence a home pay-TV “monopoly” largely reduces to a formalism that, with the possible exception of certain live programming, is unlikely to translate into meaningful pricing power.
Wait a Second! What About the HBO Blackout?
A skeptical reader might reasonably object that this mostly rosy account of the post-merger home video market is unpersuasive since it does not address the ongoing blackout of HBO (now an AT&T property) on the Dish satellite TV service. Post-merger commentary that remains skeptical of the AT&T/Time-Warner merger has focused on this dispute, arguing that it “proves” that the government was right since AT&T is purportedly leveraging its new ownership of HBO to disadvantage one of its competitors in the pay-TV market. This interpretation tends to miss the forest for the trees (or more precisely, a tree).
The AT&T/Dish dispute over HBO is only one of over 200 “carriage” disputes resulting in blackouts that have occurred this year, which continues an upward trend since approximately 2011. Some of those include Dish’s dispute with Univision (settled in March 2019 after a nine-month blackout) and AT&T’s dispute (as pay-TV provider) with Nexstar (settled in August 2019 after a nearly two-month blackout). These disputes reflect the fact that the flood of subscriber defections from traditional pay-TV to mobile streaming has made it difficult for pay-TV providers to pass on the fees sought by content owners. As a result, some pay-TV providers adopt the negotiating tactic of choosing to drop certain content until the terms improve, just as AT&T, in its capacity as a pay-TV provider, dropped CBS for three weeks in July and August 2019 pending renegotiation of licensing terms. It is the outward shift in the boundaries of the economically relevant market (from home to home-plus-mobile video delivery), rather than market power concerns, that best accounts for periodic breakdowns in licensing negotiations. This might even be viewed positively from an antitrust perspective since it suggests that the “over the top” market is putting pressure on the fees that content owners can extract from providers in the traditional pay-TV market.
It is common to argue today that antitrust law has become excessively concerned about “false positives”– that is, the possibility of blocking a transaction or enjoining a practice that would have benefited consumers. Pending future developments, this early post-mortem on the regulatory and judicial treatment of these two landmark media transactions suggests that there are sometimes good reasons to stay the hand of the court or regulator. This is especially the case when a generational market shift is in progress and any regulator’s or judge’s foresight is likely to be guesswork. Antitrust law’s “failure” to stop these transactions may turn out to have been a ringing success.