AT&T’s merger with Time Warner has lead to one of the most important, but least interesting, antitrust trials in recent history.

The merger itself is somewhat unimportant to consumers. It’s about a close to a “pure” vertical merger as we can get in today’s world and would not lead to a measurable increase in prices paid by consumers. At the same time, Richard J. Leon’s decision to approve the merger may have sent a signal regarding how the anticipated Fox-Disney (or Comcast), CVS-Aetna, and Cigna-Express Scripts mergers might proceed.

Judge Leon of the United States District Court in Washington, said the U.S. Department of Justice had not proved that AT&T’s acquisition of Time Warner would lead to fewer choices for consumers and higher prices for television and internet services.

As shown in the figure below, there is virtually no overlap in services provided by Time Warner (content creation and broadcasting) and AT&T (content distribution). We say “virtually” because, through it’s ownership of DirecTV, AT&T has an ownership stake in several channels such as the Game Show Network, the MLB Network, and Root Sports. So, not a “pure” vertical merger, but pretty close. Besides no one seems to really care about GSN, MLB, or Root.

Infographic: What's at Stake in the Proposed AT&T - Time Warner Merger | Statista

The merger trial was one of the least interesting because the government’s case opposing the merger was so weak.

The Justice Department’s economic expert, University of California, Berkeley, professor Carl Shapiro, argued the merger would harm consumers and competition in three ways:

  1. AT&T would raise the price of content to other cable companies, driving up their costs which would be passed on consumers.
  2. Across more than 1,000 subscription television markets, AT&T could benefit by drawing customers away from rival content distributors in the event of a “blackout,” in which the distributor chooses not to carry Time Warner content over a pricing dispute. In addition, AT&T could also use its control over Time Warner content to retain customers by discouraging consumers from switching to providers that don’t carry the Time Warner content. Those two factors, according to Shapiro, could cause rival cable companies to lose between 9 and 14 percent of their subscribers over the long term.
  3. AT&T and competitor Comcast could coordinate to restrict access to popular Time Warner and NBC content in ways that could stifle competition from online cable alternatives such as Dish Network’s Sling TV or Sony’s PlayStation Vue. Even tacit coordination of this type would impair consumer choices, Shapiro opined.

Price increases and blackouts

Shapiro initially indicated the merger would cause consumers to pay an additional $436 million year, which amounts to an average of 45 cents a month per customer, or a 0.4 percent increase. At trial, he testified the amount might be closer to 27 cents a month and conceded it could be a low as 13 cents a month.

The government’s “blackout” arguments seemed to get lost in the shifting sands of shifting survey results. Blackouts mattered, according to Shapiro, because “Even though they don’t happen very much, that’s the key to leverage.” His testimony on the potential for price hikes relied heavily on a study commissioned by Charter Communications Inc., which opposes the merger. Stefan Bewley, a director at consulting firm Altman Vilandrie & Co., which produced the study, testified the report predicted Charter would lose 9 percent of its subscribers if it lost access to Turner programming.

Under cross-examination by AT&T’s lawyer, Bewley acknowledged what was described as a “final” version of the study presented to Charter in April last year put the subscriber loss estimate at 5 percent. When confronted with his own emails about the change to 9 percent, Bewley said he agreed to the update after meeting with Charter. At the time of the change from 5 percent to 9 percent, Charter was discussing its opposition to the merger with the Justice Department.

Bewley noted that the change occurred because he saw that some of the figures his team had gathered about Turner networks were outliers, with a range of subcriber losses of 5 percent on the low end and 14 percent on the high end. He indicated his team came up with a “weighted average” of 9 percent.

This 5/9/14 percent distinction seems to be critical to the government’s claim the merger would raise consumer prices. Referring to Shapiro’s analysis, AT&T-Time Warner’s lead counsel, Daniel Petrocelli, asked Bewley: “Are you aware that if he’d used 5 percent there would have been a price increase of zero?” Bewley said he was not aware.

At trial, AT&T and Turner executives testified that they couldn’t credibly threaten to withhold Turner programming from rivals because the networks’ profitability depends on wide distribution. In addition, one of AT&T’s expert witnesses, University of California, Berkeley business and economics professor Michael Katz, testified about what he said were the benefits of AT&T’s offer to use “baseball style” arbitration with rival pay TV distributors if the two sides couldn’t agree on what fees to pay for Time Warner’s Turner networks. With baseball style arbitration, both sides submit their final offer to an arbitrator, who determines which of the two offers is most appropriate.

Under the terms of the arbitration offer, AT&T has agreed not to black out its networks for the duration of negotiations with distributors. Dennis Carlton, an economics professor at the University of Chicago, said Shapiro’s model was unreliable because he didn’t account for that. Shapiro conceded he did not factor that into his study, saying that he would need to use an entirely different model to study how the arbitration agreement would affect the merger.

Coordination with Comcast/NBCUniversal

The government’s contention that, after the merger, AT&T and rival Comcast could coordinate to restrict access to popular Time Warner and NBC content to harm emerging competitors was always a weak argument.

At trial, the Justice Department seemed to abandon any claim that the merged company would unilaterally restrict access to online “virtual MVPDs.” The government’s case, made by its expert Shapiro, ended up being there would be a “risk” and “danger” that AT&T and Comcast would “coordinate” to withhold programming in a way to harm emerging online multichannel distributors. However, under cross examination, he conceded that his opinions were not based on a “quantifiable model.” Shapiro testified that he had no opinion whether the odds of such coordination would be greater than 1 percent.

Doing no favors to its case, the government turned to a seemingly contradictory argument that AT&T and Comcast would coordinate to demand virtual providers take too much content. Emerging online multichannel distributors pitch their offerings as “skinny bundles” with a limited selection of the more popular channels. By forcing these providers to take more channels, the government argued, the skinny bundle business model is undermined in a version of raising rivals costs. This theory did not get much play at trial, but seems to suggest the government was trying to have its cake and eat it, too.

Except in this case, as with much of the government’s case in this matter, the cake was not completely baked.

 

A few weeks ago I posted a preliminary assessment of the relative antitrust risk of a Comcast vs Disney purchase of 21st Century Fox assets. (Also available in pdf as an ICLE Issue brief, here). On the eve of Judge Leon’s decision in the AT&T/Time Warner merger case, it seems worthwhile to supplement that assessment by calling attention to Assistant Attorney General Makan Delrahim’s remarks at The Deal’s Corporate Governance Conference last week. Somehow these remarks seem to have passed with little notice, but, given their timing, they deserve quite a bit more attention.

In brief, Delrahim spent virtually the entirety of his short remarks making and remaking the fundamental point at the center of my own assessment of the antitrust risk of a possible Comcast/Fox deal: The DOJ’s challenge of the AT&T/Time Warner merger tells you nothing about the likelihood that the agency would challenge a Comcast/Fox merger.

To begin, in my earlier assessment I pointed out that most vertical mergers are approved by antitrust enforcers, and I quoted Bruce Hoffman, Director of the FTC’s Bureau of Competition, who noted that:

[V]ertical merger enforcement is still a small part of our merger workload….

* * *

Where horizontal mergers reduce competition on their face — though that reduction could be minimal or more than offset by benefits — vertical mergers do not…. [T]here are plenty of theories of anticompetitive harm from vertical mergers. But the problem is that those theories don’t generally predict harm from vertical mergers; they simply show that harm is possible under certain conditions.

I may not have made it very clear in that post, but, of course, most horizontal mergers are approved by enforcers, as well.

Well, now we have the head of the DOJ Antitrust Division making the same point:

I’d say 95 or 96 percent of mergers — horizontal or vertical — are cleared — routinely…. Most mergers — horizontal or vertical — are procompetitive, or have no adverse effect.

Delrahim reinforced the point in an interview with The Street in advance of his remarks. Asked by a reporter, “what are your concerns with vertical mergers?,” Delrahim quickly corrected the questioner: “Well, I don’t have any concerns with most vertical mergers….”

But Delrahim went even further, noting that nothing about the Division’s approach to vertical mergers has changed since the AT&T/Time Warner case was brought — despite the efforts of some reporters to push a different narrative:

I understand that some journalists and observers have recently expressed concern that the Antitrust Division no longer believes that vertical mergers can be efficient and beneficial to competition and consumers. Some point to our recent decision to challenge some aspects of the AT&T/Time Warner merger as a supposed bellwether for a new vertical approach. Rest assured: These concerns are misplaced…. We have long recognized that vertical integration can and does generate efficiencies that benefit consumers. Indeed, most vertical mergers are procompetitive or competitively neutral. The same is of course true in horizontal transactions. To the extent that any recent action points to a closer review of vertical mergers, it’s not new…. [But,] to reiterate, our approach to vertical mergers has not changed, and our recent enforcement efforts are consistent with the Division’s long-standing, bipartisan approach to analyzing such mergers. We’ll continue to recognize that vertical mergers, in general, can yield significant economic efficiencies and benefit to competition.

Delrahim concluded his remarks by criticizing those who assume that the agency’s future enforcement decisions can be inferred from past cases with different facts, stressing that the agency employs an evidence-based, case-by-case approach to merger review:

Lumping all vertical transactions under the same umbrella, by comparison, obscures the reality that we conduct a vigorous investigation, aided by over 50 PhD economists in these markets, to make sure that we as lawyers don’t steer too far without the benefits of their views in each of these instances.

Arguably this was a rebuke directed at those, like Disney and Fox’s board, who are quick to ascribe increased regulatory risk to a Comcast/Fox tie-up because the DOJ challenged the AT&T/Time Warner merger. Recall that, in its proxy statement, the Fox board explained that it rejected Comcast’s earlier bid in favor of Disney’s in part because of “the regulatory risks presented by the DOJ’s unanticipated opposition to the proposed vertical integration of the AT&T / Time Warner transaction.”

I’ll likely have more to add once the AT&T/Time Warner decision is out. But in the meantime (and with apologies to Mark Twain), the takeaway is clear: Reports of the death of vertical mergers have been greatly exaggerated.

In an ideal world, it would not be necessary to block websites in order to combat piracy. But we do not live in an ideal world. We live in a world in which enormous amounts of content—from books and software to movies and music—is being distributed illegally. As a result, content creators and owners are being deprived of their rights and of the revenue that would flow from legitimate consumption of that content.

In this real world, site blocking may be both a legitimate and a necessary means of reducing piracy and protecting the rights and interests of rightsholders.

Of course, site blocking may not be perfectly effective, given that pirates will “domain hop” (moving their content from one website/IP address to another). As such, it may become a game of whack-a-mole. However, relative to other enforcement options, such as issuing millions of takedown notices, it is likely a much simpler, easier and more cost-effective strategy.

And site blocking could be abused or misapplied, just as any other legal remedy can be abused or misapplied. It is a fair concern to keep in mind with any enforcement program, and it is important to ensure that there are protections against such abuse and misapplication.

Thus, a Canadian coalition of telecom operators and rightsholders, called FairPlay Canada, have proposed a non-litigation alternative solution to piracy that employs site blocking but is designed to avoid the problems that critics have attributed to other private ordering solutions.

The FairPlay Proposal

FairPlay has sent a proposal to the CRTC (the Canadian telecom regulator) asking that it develop a process by which it can adjudicate disputes over web sites that are “blatantly, overwhelmingly, or structurally engaged in piracy.”  The proposal asks for the creation of an Independent Piracy Review Agency (“IPRA”) that would hear complaints of widespread piracy, perform investigations, and ultimately issue a report to the CRTC with a recommendation either to block or not to block sites in question. The CRTC would retain ultimate authority regarding whether to add an offending site to a list of known pirates. Once on that list, a pirate site would have its domain blocked by ISPs.

The upside seems fairly obvious: it would be a more cost-effective and efficient process for investigating allegations of piracy and removing offenders. The current regime is cumbersome and enormously costly, and the evidence suggests that site blocking is highly effective.

Under Canadian law—the so-called “Notice and Notice” regime—rightsholders send notices to ISPs, who in turn forward those notices to their own users. Once those notices have been sent, rightsholders can then move before a court to require ISPs to expose the identities of users that upload infringing content. In just one relatively large case, it was estimated that the cost of complying with these requests was 8.25M CAD.

The failure of the American equivalent of the “Notice and Notice” regime provides evidence supporting the FairPlay proposal. The graduated response system was set up in 2012 as a means of sending a series of escalating warnings to users who downloaded illegal content, much as the “Notice and Notice” regime does. But the American program has since been discontinued because it did not effectively target the real source of piracy: repeat offenders who share a large amount of material.

This, on the other hand, demonstrates one of the greatest points commending the FairPlay proposal. The focus of enforcement shifts away from casually infringing users and directly onto the  operators of sites that engage in widespread infringement. Therefore, one of the criticisms of Canada’s current “notice and notice” regime — that the notice passthrough system is misused to send abusive settlement demands — is completely bypassed.

And whichever side of the notice regime bears the burden of paying the associated research costs under “Notice and Notice”—whether ISPs eat them as a cost of doing business, or rightsholders pay ISPs for their work—the net effect is a deadweight loss. Therefore, whatever can be done to reduce these costs, while also complying with Canada’s other commitments to protecting its citizens’ property interests and civil rights, is going to be a net benefit to Canadian society.

Of course it won’t be all upside — no policy, private or public, ever is. IP and property generally represent a set of tradeoffs intended to net the greatest social welfare gains. As Richard Epstein has observed

No one can defend any system of property rights, whether for tangible or intangible objects, on the naïve view that it produces all gain and no pain. Every system of property rights necessarily creates some winners and some losers. Recognize property rights in land, and the law makes trespassers out of people who were once free to roam. We choose to bear these costs not because we believe in the divine rights of private property. Rather, we bear them because we make the strong empirical judgment that any loss of liberty is more than offset by the gains from manufacturing, agriculture and commerce that exclusive property rights foster. These gains, moreover, are not confined to some lucky few who first get to occupy land. No, the private holdings in various assets create the markets that use voluntary exchange to spread these gains across the entire population. Our defense of IP takes the same lines because the inconveniences it generates are fully justified by the greater prosperity and well-being for the population at large.

So too is the justification — and tempering principle — behind any measure meant to enforce copyrights. The relevant question when thinking about a particular enforcement regime is not whether some harms may occur because some harm will always occur. The proper questions are: (1) Does the measure to be implemented stand a chance of better giving effect to the property rights we have agreed to protect and (2) when harms do occur, is there a sufficiently open and accessible process available whereby affected parties (and interested third parties) can rightly criticize and improve the system.

On both accounts the FairPlay proposal appears to hit the mark.

FairPlay’s proposal can reduce piracy while respecting users’ rights

Although I am generally skeptical of calls for state intervention, this case seems to present a real opportunity for the CRTC to do some good. If Canada adopts this proposal it is is establishing a reasonable and effective remedy to address violations of individuals’ property, the ownership of which is considered broadly legitimate.

And, as a public institution subject to input from many different stakeholder groups — FairPlay describes the stakeholders  as comprised of “ISPs, rightsholders, consumer advocacy and citizen groups” — the CRTC can theoretically provide a fairly open process. This is distinct from, for example, the Donuts trusted notifier program that some criticized (in my view, mistakenly) as potentially leading to an unaccountable, private ordering of the DNS.

FairPlay’s proposal outlines its plan to provide affected parties with due process protections:

The system proposed seeks to maximize transparency and incorporates extensive safeguards and checks and balances, including notice and an opportunity for the website, ISPs, and other interested parties to review any application submitted to and provide evidence and argument and participate in a hearing before the IPRA; review of all IPRA decisions in a transparent Commission process; the potential for further review of all Commission decisions through the established review and vary procedure; and oversight of the entire system by the Federal Court of Appeal, including potential appeals on questions of law or jurisdiction including constitutional questions, and the right to seek judicial review of the process and merits of the decision.

In terms of its efficacy, according to even the critics of the FairPlay proposal, site blocking provides a measurably positive reduction on piracy. In its formal response to critics, FairPlay Canada noted that one of the studies the critics relied upon actually showed that previous blocks of the PirateBay domains had reduced piracy by nearly 25%:

The Poort study shows that when a single illegal peer-to-peer piracy site (The Pirate Bay) was blocked, between 8% and 9.3% of consumers who were engaged in illegal downloading (from any site, not just The Pirate Bay) at the time the block was implemented reported that they stopped their illegal downloading entirely.  A further 14.5% to 15.3% reported that they reduced their illegal downloading. This shows the power of the regime the coalition is proposing.

The proposal stands to reduce the costs of combating piracy, as well. As noted above, the costs of litigating a large case can reach well into the millions just to initiate proceedings. In its reply comments, FairPlay Canada noted the costs for even run-of-the-mill suits essentially price enforcement of copyrights out of the reach of smaller rightsholders:

[T]he existing process can be inefficient and inaccessible for rightsholders. In response to this argument raised by interveners and to ensure the Commission benefits from a complete record on the point, the coalition engaged IP and technology law firm Hayes eLaw to explain the process that would likely have to be followed to potentially obtain such an order under existing legal rules…. [T]he process involves first completing litigation against each egregious piracy site, and could take up to 765 days and cost up to $338,000 to address a single site.

Moreover, these cost estimates assume that the really bad pirates can even be served with process — which is untrue for many infringers. Unlike physical distributors of counterfeit material (e.g. CDs and DVDs), online pirates do not need to operate within Canada to affect Canadian artists — which leaves a remedy like site blocking as one of the only viable enforcement mechanisms.

Don’t we want to reduce piracy?

More generally, much of the criticism of this proposal is hard to understand. Piracy is clearly a large problem to any observer who even casually peruses the lumen database. Even defenders of the status quo  are forced to acknowledge that “the notice and takedown provisions have been used by rightsholders countless—but likely billions—of times” — a reality that shows that efforts to control piracy to date have been insufficient.

So why not try this experiment? Why not try using a neutral multistakeholder body to see if rightsholders, ISPs, and application providers can create an online environment both free from massive, obviously infringing piracy, and also free for individuals to express themselves and service providers to operate?

In its response comments, the FairPlay coalition noted that some objectors have “insisted that the Commission should reject the proposal… because it might lead… the Commission to use a similar mechanism to address other forms of illegal content online.”

This is the same weak argument that is easily deployable against any form of collective action at all. Of course the state can be used for bad ends — anyone with even a superficial knowledge of history knows this  — but that surely can’t be an indictment against lawmaking as a whole. If allowing a form of prohibition for category A is appropriate, but the same kind of prohibition is inappropriate for category B, then either we assume lawmakers are capable of differentiating between category A and category B, or else we believe that prohibition itself is per se inappropriate. If site blocking is wrong in every circumstance, the objectors need to convincingly  make that case (which, to date, they have not).

Regardless of these criticisms, it seems unlikely that such a public process could be easily subverted for mass censorship. And any incipient censorship should be readily apparent and addressable in the IPRA process. Further, at least twenty-five countries have been experimenting with site blocking for IP infringement in different ways, and, at least so far, there haven’t been widespread allegations of massive censorship.

Maybe there is a perfect way to control piracy and protect user rights at the same time. But until we discover the perfect, I’m all for trying the good. The FairPlay coalition has a good idea, and I look forward to seeing how it progresses in Canada.

Even if institutional investors’ common ownership of small stakes in competing firms did cause some softening of market competition—a claim that is both suspect as a theoretical matter and empirically shaky—the policy solutions common ownership critics have proposed would do more harm than good.

Einer Elhauge has called for public and private lawsuits against institutional investors under Clayton Act Section 7, which is primarily used to police anticompetitive mergers but which literally forbids any stock acquisition that substantially lessens competition in a market. Eric Posner, Fiona Scott Morton, and Glen Weyl have called on the federal antitrust enforcement agencies (FTC and DOJ) to promulgate an enforcement policy that would discourage institutional investors from investing and voting shares in multiple firms within any oligopolistic industry.

As Mike Sykuta and I explain in our recent paper on common ownership, both approaches would create tremendous decision costs for business planners and adjudicators and would likely entail massive error costs as institutional investors eliminated welfare-enhancing product offerings and curtailed activities that reduce agency costs.

Decision Costs

The touchstone for liability under Elhauge’s Section 7 approach would be a pattern of common ownership that caused, or likely would cause, market prices to rise. Elhauge would identify suspect patterns of common ownership using MHHI∆, a measure that assesses incentives to reduce competition based on, among other things, the extent to which investors own stock in multiple firms within a market and the market shares of the commonly owned firms. (Mike described MHHI∆ here.) Specifically, Elhauge says, liability would result from “any horizontal stock acquisitions that have created, or would create, a ∆MHHI of over 200 in a market with an MHHI over 2500,” if “those horizontal stock acquisitions raised prices or are likely to do so.”

The administrative burden this approach would place on business planners would be tremendous. Because an institutional investor can’t directly control market prices, the only way it could avoid liability would be to ensure either that the markets in which it was invested did not have an MHHI greater than 2500 or that its acquisitions’ own contribution to MHHI∆ in those markets was less than 200. MHHI and MHHI∆, though, are largely determined by others’ investments and by commonly owned firms’ market shares, both of which change constantly. This implies that business planners could ensure against liability only by continually monitoring others’ activities and general market developments.

Adjudicators would also face high decision costs under Elhauge’s Section 7 approach. First, they would have to assess complicated econometric studies to determine whether adverse price effects were actually caused by patterns of common ownership. Then, if they decided common ownership had caused a rise in prices, they would have to answer a nearly intractable question: How should the economic harm from common ownership be allocated among the investors holding stakes in multiple firms in the industry? As Posner et al. have observed, “MHHI∆ is a collective responsibility of the holding pattern” in markets in which there are multiple intra-industry diversified investors. It would not work to assign liability only to those diversified investors who could substantially reduce MHHI∆ by divesting, for oftentimes the unilateral divestment of each institutional investor from the market would occasion only a small reduction in MHHI∆. An aggressive court might impose joint liability on all intra-industry diversified investors, but the investor(s) from whom plaintiffs collected would likely seek contribution from the other intra-industry diversified investors. Denying contribution seems intolerably inequitable, but how would a court apportion damages?

In light of these administrative difficulties, Posner et al. advocate a more determinate, rule-based approach. They would have the federal antitrust enforcement agencies compile annual lists of oligopolistic industries and then threaten enforcement action against any institutional investor holding more than one percent of the stock in such an industry if the investor (1) held stock in more than one firm within the industry, and (2) either voted its shares or engaged firm managers.

On first glance, this enforcement policy approach might appear to reduce decision costs: Business planners would have to do less investigation to avoid liability if they could rely on trustworthy, easily identifiable safe harbors; adjudicators’ decision costs would fall if the enforcement policy made it easier to identify illicit investment patterns. But the approach saddles antitrust enforcers with the herculean task of compiling, and annually updating, lists of oligopolistic industries. Given that the antitrust agencies frequently struggle with the far more modest task of defining markets in the small number of merger challenges they file each year, there is little reason to believe enforcers could perform their oligopoly-designating duties at a reasonable cost.

Error Costs

Even greater than the proposed policy solutions’ administrative costs are their likely error costs—i.e., the welfare losses that would stem from wrongly deterring welfare-enhancing arrangements. Such costs would result if, as is likely, institutional investors were to respond to the policy solutions by making one of the two changes proponents of the solutions appear to prefer: either refraining from intra-industry diversification or remaining fully passive in the industries in which they hold stock of multiple competitors.

If institutional investors were to seek to avoid liability by investing in only one firm per concentrated industry, retail investors would lose access to a number of attractive investment opportunities. Passive index funds, which offer retail investors instant diversification with extremely low fees (due to the lack of active management), would virtually disappear, as most major stock indices include multiple firms per industry.

Moreover, because critics of common ownership maintain that intra-industry diversification at the institutional investor level is sufficient to induce competition-softening in concentrated markets, each institutional investor would have to settle on one firm per concentrated industry for all its funds. That requirement would impede institutional investors’ ability to offer a variety of actively managed funds organized around distinct investment strategies—e.g., growth, value, income etc. If, for example, Southwest Airlines were a growth stock and United Airlines a value stock, an institutional investor could not offer both a growth fund including Southwest and a value fund including United.

Finally, institutional investors could not offer funds designed to bet on an industry while limiting exposure to company-specific risks within that industry. Suppose, for example, that a financial crisis led to a precipitous drop in the stock prices of all commercial banks. A retail investor might reasonably conclude that the market had overreacted with respect to the industry as a whole, that the industry would likely rebound, but that some commercial banks would probably fail. Such an investor would wish to invest in the commercial banking sector but to hold a diversified portfolio within that sector. A legal regime that drove fund families to avoid intra-industry diversification would prevent them from offering the sort of fund this investor would prefer.

Of course, if institutional investors were to continue intra-industry diversification and seek to avoid liability by remaining passive in industries in which they were diversified, the funds described above could still be offered to investors. In that case, though, another set of significant error costs would arise: increased agency costs in the form of managerial misfeasance.

Unlike most individual shareholders, institutional investors often hold significant stakes in public companies and have the resources to become informed on corporate matters. They have a stronger motive and more opportunity to monitor firm managers and are thus particularly well-poised to keep managers on their toes. Institutional investors with long-term investor horizons—including all index funds, which cannot divest from their portfolio companies if firm performance suffers—have proven particularly beneficial to firm performance.

Indeed, a recent study by Jarrad Harford, Ambrus Kecskés, & Sattar Mansi found that investment by long-term institutional investors enhanced the quality of corporate managers, reduced measurable instances of managerial misbehavior, boosted innovation, decreased debt maturity (causing firms to become more exposed to financial market discipline), and increased shareholder returns. It strains credulity to suppose that this laundry list of benefits could similarly be achieved by long-term institutional investors that had no ability to influence managerial decision-making by voting their shares or engaging managers. Opting for passivity to avoid antitrust risk, then, would prevent institutional investors from achieving their agency cost-reducing potential.

In the end, proponents of additional antitrust intervention to police common ownership have not made their case. Their theory as to why current levels of intra-industry diversification would cause consumer harm is implausible, and the empirical evidence they say demonstrates such harm is both scant and methodologically suspect. The policy solutions they have proposed for dealing with the purported problem would radically rework an industry that has provided substantial benefits to investors, raising the costs of portfolio diversification and enhancing agency costs at public companies. Courts and antitrust enforcers should reject their calls for additional antitrust intervention to police common ownership.

Weekend Reads

Eric Fruits —  8 June 2018

Innovation dies in darkness. Well, actually, it thrives in the light, according to this new research:

We find that after a patent library opens, local patenting increases by 17% relative to control regions that have Federal Depository Libraries. … [T]]he library boost ceases to be present after the introduction of the Internet. We find that library opening is also associated with an increase in local business formation and job creation [especially for small business -ed.], which suggests that the impact of libraries is not limited to patenting outcomes.

Patent-Libraries

Don’t drink the Kool-Aid of bad data. Have a SPRITE. From the article published by self-described “data thugs“.

Scientific publications have not traditionally been accompanied by data, either during the peer review process or when published. Concern has arisen that the literature in many fields may contain inaccuracies or errors that cannot be detected without inspecting the original data. Here, we introduce SPRITE (Sample Parameter Reconstruction via Interative TEchniques), a heuristic method for reconstructing plausible samples from descriptive statistics of granular data, allowing reviewers, editors, readers, and future researchers to gain insights into the possible distributions of item values in the original data set.

Gig economy, it’s a good thing: 6.9% of all workers are independent contractors; 79% of them prefer their arrangement over a traditional job.

Gig economy, it’s a bad thing. Maybe.

[C]ensus divisions with relatively weak wage inflation also tend to have more “low-wage” informal FTE—that is, more hours of informal work performed at a wage that is less than formal pay.

Broetry. It’s a LinkedIn thing. I don’t get it.

 

 

A recent exchange between Chris Walker and Philip Hamburger about Walker’s ongoing empirical work on the Chevron doctrine (the idea that judges must defer to reasonable agency interpretations of ambiguous statutes) gives me a long-sought opportunity to discuss what I view as the greatest practical problem with the Chevron doctrine: it increases both politicization and polarization of law and policy. In the interest of being provocative, I will frame the discussion below by saying that both Walker & Hamburger are wrong (though actually I believe both are quite correct in their respective critiques). In particular, I argue that Walker is wrong that Chevron decreases politicization (it actually increases it, vice his empirics); and I argue Hamburger is wrong that judicial independence is, on its own, a virtue that demands preservation. Rather, I argue, Chevron increases overall politicization across the government; and judicial independence can and should play an important role in checking legislative abdication of its role as a politically-accountable legislature in a way that would moderate that overall politicization.

Walker, along with co-authors Kent Barnett and Christina Boyd, has done some of the most important and interesting work on Chevron in recent years, empirically studying how the Chevron doctrine has affected judicial behavior (see here and here) as well as that of agencies (and, I would argue, through them the Executive) (see here). But the more important question, in my mind, is how it affects the behavior of Congress. (Walker has explored this somewhat in his own work, albeit focusing less on Chevron than on how the role agencies play in the legislative process implicitly transfers Congress’s legislative functions to the Executive).

My intuition is that Chevron dramatically exacerbates Congress’s worst tendencies, encouraging Congress to push its legislative functions to the executive and to do so in a way that increases the politicization and polarization of American law and policy. I fear that Chevron effectively allows, and indeed encourages, Congress to abdicate its role as the most politically-accountable branch by deferring politically difficult questions to agencies in ambiguous terms.

One of, and possibly the, best ways to remedy this situation is to reestablish the role of judge as independent decisionmaker, as Hamburger argues. But the virtue of judicial independence is not endogenous to the judiciary. Rather, judicial independence has an instrumental virtue, at least in the context of Chevron. Where Congress has problematically abdicated its role as a politically-accountable decisionmaker by deferring important political decisions to the executive, judicial refusal to defer to executive and agency interpretations of ambiguous statutes can force Congress to remedy problematic ambiguities. This, in turn, can return the responsibility for making politically-important decisions to the most politically-accountable branch, as envisioned by the Constitution’s framers.

A refresher on the Chevron debate

Chevron is one of the defining doctrines of administrative law, both as a central concept and focal debate. It stands generally for the proposition that when Congress gives agencies ambiguous statutory instructions, it falls to the agencies, not the courts, to resolve those ambiguities. Thus, if a statute is ambiguous (the question at “step one” of the standard Chevron analysis) and the agency offers a reasonable interpretation of that ambiguity (“step two”), courts are to defer to the agency’s interpretation of the statute instead of supplying their own.

This judicially-crafted doctrine of deference is typically justified on several grounds. For instance, agencies generally have greater subject-matter expertise than courts so are more likely to offer substantively better constructions of ambiguous statutes. They have more resources that they can dedicate to evaluating alternative constructions. They generally have a longer history of implementing relevant Congressional instructions so are more likely attuned to Congressional intent – both of the statute’s enacting and present Congresses. And they are subject to more direct Congressional oversight in their day-to-day operations and exercise of statutory authority than the courts so are more likely concerned with and responsive to Congressional direction.

Chief among the justifications for Chevron deference is, as Walker says, “the need to reserve political (or policy) judgments for the more politically accountable agencies.” This is at core a separation-of-powers justification: the legislative process is fundamentally a political process, so the Constitution assigns responsibility for it to the most politically-accountable branch (the legislature) instead of the least politically-accountable branch (the judiciary). In turn, the act of interpreting statutory ambiguity is an inherently legislative process – the underlying theory being that Congress intended to leave such ambiguity in the statute in order to empower the agency to interpret it in a quasi-legislative manner. Thus, under this view, courts should defer both to this Congressional intent that the agency be empowered to interpret its statute (and, should this prove problematic, it is up to Congress to change the statute or to face political ramifications), and the courts should defer to the agency interpretation of that statute because agencies, like Congress, are more politically accountable than the courts.

Chevron has always been an intensively studied and debated doctrine. This debate has grown more heated in recent years, to the point that there is regularly scholarly discussion about whether Chevron should be repealed or narrowed and what would replace it if it were somehow curtailed – and discussion of the ongoing vitality of Chevron has entered into Supreme Court opinions and the appointments process with increasing frequency. These debates generally focus on a few issues. A first issue is that Chevron amounts to a transfer of the legislature’s Constitutional powers and responsibilities over creating the law to the executive, where the law ordinarily is only meant to be carried out. This has, the underlying concern is, contributed to the increase in the power of the executive compared to the legislature. A second, related, issue is that Chevron contributes to the (over)empowerment of independent agencies – agencies that are already out of favor with many of Chevron’s critics as Constitutionally-infirm entities whose already-specious power is dramatically increased when Chevron limits the judiciary’s ability to check their use of already-broad Congressionally-delegated authority.

A third concern about Chevron, following on these first two, is that it strips the judiciary of its role as independent arbiter of judicial questions. That is, it has historically been the purview of judges to answer statutory ambiguities and fill in legislative interstices.

Chevron is also a focal point for more generalized concerns about the power of the modern administrative state. In this context, Chevron stands as a representative of a broader class of cases – State Farm, Auer, Seminole Rock, Fox v. FCC, and the like – that have been criticized as centralizing legislative, executive, and judicial powers in agencies, allowing Congress to abdicate its role as politically-accountable legislator, abdicating the judiciary’s role in interpreting the law, as well as raising due process concerns for those subject to rules promulgated by federal agencies..

Walker and his co-authors have empirically explored the effects of Chevron in recent years, using robust surveys of federal agencies and judicial decisions to understand how the doctrine has affected the work of agencies and the courts. His most recent work (with Kent Barnett and Christina Boyd) has explored how Chevron affects judicial decisionmaking. Framing the question by explaining that “Chevron deference strives to remove politics from judicial decisionmaking,” they ask whether “Chevron deference achieve[s] this goal of removing politics from judicial decisionmaking?” They find that, empirically speaking, “the Chevron Court’s objective to reduce partisan judicial decision-making has been quite effective.” By instructing judges to defer to the political judgments (or just statutory interpretations) of agencies, judges are less political in their own decisionmaking.

Hamburger responds to this finding somewhat dismissively – and, indeed, the finding is almost tautological: “of course, judges disagree less when the Supreme Court bars them from exercising their independent judgment about what the law is.” (While a fair critique, I would temper it by arguing that it is nonetheless an important empirical finding – empirics that confirm important theory are as important as empirics that refute it, and are too often dismissed.)

Rather than focus on concerns about politicized decisionmaking by judges, Hamburger focuses instead on the importance of judicial independence – on it being “emphatically the duty of the Judicial Department to say what the law is” (quoting Marbury v. Madison). He reframes Walker’s results, arguing that “deference” to agencies is really “bias” in favor of the executive. “Rather than reveal diminished politicization, Walker’s numbers provide strong evidence of diminished judicial independence and even of institutionalized judicial bias.”

So which is it? Does Chevron reduce bias by de-politicizing judicial decisionmaking? Or does it introduce new bias in favor of the (inherently political) executive? The answer is probably that it does both. The more important answer, however, is that neither is the right question to ask.

What’s the correct measure of politicization? (or, You get what you measure)

Walker frames his study of the effects of Chevron on judicial decisionmaking by explaining that “Chevron deference strives to remove politics from judicial decisionmaking. Such deference to the political branches has long been a bedrock principle for at least some judicial conservatives.” Based on this understanding, his project is to ask whether “Chevron deference achieve[s] this goal of removing politics from judicial decisionmaking?”

This framing, that one of Chevron’s goals is to remove politics from judicial decisionmaking, is not wrong. But this goal may be more accurately stated as being to prevent the judiciary from encroaching upon the political purposes assigned to the executive and legislative branches. This restatement offers an important change in focus. It emphasizes the concern about politicizing judicial decisionmaking as a separation of powers issue. This is in apposition to concern that, on consequentialist grounds, judges should not make politicized decisions – that is, judges should avoid political decisions because it leads to substantively worse outcomes.

It is of course true that, as unelected officials with lifetime appointments, judges are the least politically accountable to the polity of any government officials. Judges’ decisions, therefore, can reasonably be expected to be less representative of, or responsive to, the concerns of the voting public than decisions of other government officials. But not all political decisions need to be directly politically accountable in order to be effectively politically accountable. A judicial interpretation of an ambiguous law, for instance, can be interpreted as a request, or even a demand, that Congress be held to political account. And where Congress is failing to perform its constitutionally-defined role as a politically-accountable decisionmaker, it may do less harm to the separation of powers for the judiciary to make political decisions that force politically-accountable responses by Congress than for the judiciary to respect its constitutional role while the Congress ignores its role.

Before going too far down this road, I should pause to label the reframing of the debate that I have impliedly proposed. To my mind, the question isn’t whether Chevron reduces political decisionmaking by judges; the question is how Chevron affects the politicization of, and ultimately accountability to the people for, the law. Critically, there is no “conservation of politicization” principle. Institutional design matters. One could imagine a model of government where Congress exercises very direct oversight over what the law is and how it is implemented, with frequent elections and a Constitutional prohibition on all but the most express and limited forms of delegation. One can also imagine a more complicated form of government in which responsibilities for making law, executing law, and interpreting law, are spread across multiple branches (possibly including myriad agencies governed by rules that even many members of those agencies do not understand). And one can reasonably expect greater politicization of decisions in the latter compared to the former – because there are more opportunities for saying that the responsibility for any decision lies with someone else (and therefore for politicization) in the latter than in the “the buck stops here” model of the former.

In the common-law tradition, judges exercised an important degree of independence because their job was, necessarily and largely, to “say what the law is.” For better or worse, we no longer live in a world where judges are expected to routinely exercise that level of discretion, and therefore to have that level of independence. Nor do I believe that “independence” is necessarily or inherently a criteria for the judiciary, at least in principle. I therefore somewhat disagree with Hamburger’s assertion that Chevron necessarily amounts to a problematic diminution in judicial independence.

Again, I return to a consequentialist understanding of the purposes of judicial independence. In my mind, we should consider the need for judicial independence in terms of whether “independent” judicial decisionmaking tends to lead to better or worse social outcomes. And here I do find myself sympathetic to Hamburger’s concerns about judicial independence. The judiciary is intended to serve as a check on the other branches. Hamburger’s concern about judicial independence is, in my mind, driven by an overwhelmingly correct intuition that the structure envisioned by the Constitution is one in which the independence of judges is an important check on the other branches. With respect to the Congress, this means, in part, ensuring that Congress is held to political account when it does legislative tasks poorly or fails to do them at all.

The courts abdicate this role when they allow agencies to save poorly drafted statutes through interpretation of ambiguity.

Judicial independence moderates politicization

Hamburger tells us that “Judges (and academics) need to wrestle with the realities of how Chevron bias and other administrative power is rapidly delegitimizing our government and creating a profound alienation.” Huzzah. Amen. I couldn’t agree more. Preach! Hear-hear!

Allow me to present my personal theory of how Chevron affects our political discourse. In the vernacular, I call this Chevron Step Three. At Step Three, Congress corrects any mistakes made by the executive or independent agencies in implementing the law or made by the courts in interpreting it. The subtle thing about Step Three is that it doesn’t exist – and, knowing this, Congress never bothers with the politically costly and practically difficult process of clarifying legislation.

To the contrary, Chevron encourages the legislature expressly not to legislate. The more expedient approach for a legislator who disagrees with a Chevron-backed agency action is to campaign on the disagreement – that is, to politicize it. If the EPA interprets the Clean Air Act too broadly, we need to retake the White House to get a new administrator in there to straighten out the EPA’s interpretation of the law. If the FCC interprets the Communications Act too narrowly, we need to retake the White House to change the chair so that we can straighten out that mess! And on the other side, we need to keep the White House so that we can protect these right-thinking agency interpretations from reversal by the loons on the other side that want to throw out all of our accomplishments. The campaign slogans write themselves.

So long as most agencies’ governing statutes are broad enough that those agencies can keep the ship of state afloat, even if drifting rudderless, legislators have little incentive to turn inward to engage in the business of government with their legislative peers. Rather, they are freed to turn outward towards their next campaign, vilifying or deifying the administrative decisions of the current government as best suits their electoral prospects.

The sharp-eyed observer will note that I’ve added a piece to the Chevron puzzle: the process described above assumes that a new administration can come in after an election and simply rewrite all of the rules adopted by the previous administration. Not to put too fine a point on the matter, but this is exactly what administrative law allows (see Fox v. FCC and State Farm). The underlying logic, which is really nothing more than an expansion of Chevron, is that statutory ambiguity delegates to agencies a “policy space” within which they are free to operate. So long as agency action stays within that space – which often allows for diametrically-opposed substantive interpretations – the courts say that it is up to Congress, not the Judiciary, to provide course corrections. Anything else would amount to politically unaccountable judges substituting their policy judgments (this is, acting independently) for those of politically-accountable legislators and administrators.

In other words, the politicization of law seen in our current political moment is largely a function of deference and a lack of stare decisis combined. A virtue of stare decisis is that it forces Congress to act to directly address politically undesirable opinions. Because agencies are not bound by stare decisis, an alternative, and politically preferable, way for Congress to remedy problematic agency decisions is to politicize the issue – instead of addressing the substantive policy issue through legislation, individual members of Congress can campaign on it. (Regular readers of this blog will be familiar with one contemporary example of this: the recent net neutrality CRA vote, which is widely recognized as having very little chance of ultimate success but is being championed by its proponents as a way to influence the 2018 elections.) This is more directly aligned with the individual member of Congress’s own incentives, because, by keeping and placing more members of her party in Congress, her party will be able to control the leadership of the agency which will thus control the shape of that agency’s policy. In other words, instead of channeling the attention of individual Congressional actors inwards to work together to develop law and policy, it channels it outwards towards campaigning on the ills and evils of the opposing administration and party vice the virtues of their own party.

The virtue of judicial independence, of judges saying what they think the law is – or even what they think the law should be – is that it forces a politically-accountable decision. Congress can either agree, or disagree; but Congress must do something. Merely waiting for the next administration to come along will not be sufficient to alter the course set by the judicial interpretation of the law. Where Congress has abdicated its responsibility to make politically-accountable decisions by deferring those decisions to the executive or agencies, the political-accountability justification for Chevron deference fails. In such cases, the better course for the courts may well be to enforce Congress’s role under the separation of powers by refusing deference and returning the question to Congress.

 

Mike Sykuta and I have been blogging about our new paper responding to scholars who contend that institutional investors’ common ownership of small stakes in competing firms significantly reduces market competition and should be restricted.  (FTC Commissioner Noah Phillips cited the paper yesterday in his excellent prepared remarks on common ownership.)  Mike first described the purported competitive problem.  I then set forth some problems with the anticompetitive theory common ownership critics have asserted.

When confronted with criticisms of their theory, common ownership critics have pointed to the empirical evidence Mike mentioned. In the most high-profile study, researchers correlated changes in commercial air fares with changes in “MHHI∆”, an index designed to measure the degree to which common ownership has reduced the incentive to compete. They concluded that common ownership has increased airfares by three to seven percent. A similar study of the commercial banking industry correlated banking fees and interest on deposit accounts with “GHHI”, a metric similar to MHHI∆. That study concluded that common ownership has led to higher fees and lower interest rates for depositors.

Common ownership critics have treated these studies as a trump card. The authors of the airline study, for example, brushed off a criticism of their anticompetitive theory with the following retort: “This argument falls short of explaining why, empirically, taking into account shareholders’ economic interests does help to explain firms’ product market behavior.”

Of course, to demonstrate “empirically” that institutional investors’ “economic interests” influence their portfolio companies’ “product market behavior” (i.e., cause the companies to charge higher prices, etc.), researchers would need to (1) correctly identify institutional investors’ economic interests with respect to their portfolio firms’ product market behavior, and (2) establish that those interests cause firms to act as they do. On those crucial tasks, the airline and banking studies fall short.

In assessing institutional investors’ economic interests, the studies have assumed that if an institutional investor reports holding a similar percentage of each firm in a market—say, five percent of the stock of each major airline—then it must have an “economic interest” in maximizing industry rather than own-firm profits. Such an assumption is unwarranted. That is because each institutional investor’s reported holdings, set forth on forms it must submit under Section 13(f) of the Securities Exchange Act, aggregate its holdings across all its funds. Such aggregation paints a misleading picture of the institutional investor’s actual economic interest.

For example, while Vanguard’s Section 13(f) filing reports ownership of a similar percentage of American, Delta, Southwest, and United Airlines—suggesting an economic interest in industry profit maximization—the picture looks very different at the individual fund level:

  • Vanguard’s Value Index Fund (VIVAX) holds significant stakes in American, Delta, and United (0.46%, 0.45%, and 0.42%, respectively) but holds no Southwest stock. VIVAX does best if United, American, and Delta usurp business from Southwest.
  • Vanguard’s Growth Index Fund (VIGRX) holds a significant stake in Southwest (0.59%) but holds no stake in American, Delta, or United. Investors in VIGRX would prefer that Southwest win business from American, Delta, and United.
  • Vanguard’s Mid-Cap Index Fund (VIMSX) and Mid-Cap Value Index Fund (VMVIX) hold significant stakes in United (1.00% and 0.321%, respectively) but hold no stock in American, Delta, or Southwest. Investors in VIMSX and VMVIX would prefer that United win business from American, Delta, and Southwest.
  • Vanguard’s PRIMECAP Core Fund (VPCCX) holds stakes in all four major airlines, but its share of Southwest (1.49%) is twice its share of American (0.72%), nearly four times its share of United (0.38%), and seven-and-a-half times its share of Delta (0.198%). Investors in VPCCX would prefer that Southwest grow at the expense of American, United, and Delta. They would also prefer that American win business from United and Delta, and that United win business from Delta.

We could go on, but the point should be clear: Because returns to retail investors in the funds of Vanguard and similar institutions turn on fund performance, the competitive outcome that maximizes retail investors’ profits will differ among funds.

Proponents of restrictions on common ownership might respond that even if an institutional investor’s individual funds have conflicting preferences, the institutional investor as an entity must have some preference about whether to maximize industry profits or the profits of a particular company. Because it cannot honor all its individual funds’ conflicting preferences with respect to competitive outcomes, the institutional investor will settle on the compromise strategy that maximizes its individual funds’ aggregate returns: industry profit maximization.  Such a strategy would be the first choice of the institution’s funds holding relatively equal shares of all firms within a market.  And, while the first choice of the institution’s funds that are disproportionately invested in one firm would be to maximize that firm’s profits, those funds would do better with industry profit maximization than with the first-choice strategy of other of the institution’s funds, i.e., those that are disproportionately invested in a different firm.

But even if maximization of industry profits leads to the greatest aggregate returns for an institutional investor’s funds, such a strategy may not be the best outcome for the institutional investor itself. An institutional investor typically wants to maximize its profits, which will grow as it attracts retail investors into its funds versus those of its competitors and steers those investors toward the funds that earn it the greatest profits (fees less costs). To assess an institutional investor’s preferences with regard to the returns of its different funds, then, one must know (1) the degree to which each fund’s attractiveness vis-à-vis rivals’ similar funds turns on portfolio returns, and (2) the profit margin each fund delivers to the institutional investor.

For funds tracking popular stock indices, portfolio returns play little role in winning business from rival fund sponsors.  (For example, higher returns on the stocks in the S&P 500 are unlikely to attract investors to BlackRock’s S&P 500 index fund over Fidelity’s or Vanguard’s.) Moreover, the fees charged on such funds, and thus the institutional investor’s potential profit margins, are extraordinarily low. For actively managed funds, portfolio returns are far more significant in attracting investors, and management fees are higher. The upshot is that an institutional investor, in determining what competitive outcome it prefers, will attach little weight to the competitive preferences of passive index funds and more weight to the preferences of actively managed funds, with that weight growing as the funds provide the institutional investor with higher profit margins.

It is quite possible, then, for an intra-industry diversified institutional investor to prefer a competitive outcome other than the maximization of industry profits, even if industry profit maximization would maximize the aggregate returns of its individual funds. Consider, for example, an institutional investor that offers funds similar to the following Vanguard funds:

  • Vanguard’s 500 Index Fund (VFIAX) holds near equivalent interests in American, Delta, Southwest, and United and would thus do best with a strategy of industry profit maximization. Its expense ratio (annual fees divided by total fund amount) is 0.04 percent.
  • Vanguard’s Value Index Fund (VIVAX) holds similar stakes in American, Delta, and United but does not hold Southwest stock. Its expense ratio is 0.18 percent.
  • Vanguard’s PRIMECAP Core Fund (VPCCX) holds a much higher stake in Southwest than in the other airlines and has an expense ratio of 0.46 percent, 2.5 times as great as the no-Southwest VIVAX fund and 11.5 times as high as the fully diversified VFIAX fund.
  • Vanguard’s Capital Opportunity Fund (VHCAX) holds significantly higher shares of Southwest and United (1.74% and 1.55%, respectively) than of Delta and American (0.65% and 1.16%, respectively). Its expense ratio is 0.38, more than twice as great as the no-Southwest VIVAX fund and 9.5 times the fully diversified VFIAX fund.

This institutional investor’s Southwest-heavy funds (those resembling Vanguard’s VPCCX and VHCAX funds) charge much higher fees than its fully diversified index fund (the one resembling VFIAX, for which fund returns are unimportant) and significantly higher fees than its funds that are more heavily invested in airlines besides Southwest (those resembling VIVAX).  Thus, despite being intra-industry diversified at the institutional level, this institutional investor may do best if Southwest maximizes own-firm profits.

The point here is that discerning an institutional investor’s actual economic interest requires drilling down to the level of its individual funds, something the common ownership studies have not done. Thus, contrary to the assertion of the airline study’s authors, the common ownership studies have not shown “empirically” that “taking into account shareholders’ economic interests does help to explain firms’ product market behavior.” Indeed, they have never established what those economic interests are.

Even if institutional investors’ aggregated holdings accurately revealed their economic interests with respect to competitive outcomes, the common ownership studies would still be deficient because they fail to show that those economic interests caused portfolio firms’ “product market behavior.” As explained above, the common ownership studies employ MHHI∆ (or a similar measure) to assess institutional investors’ interests in competition-softening. They then correlate changes in that metric with changes in portfolio firms’ pricing behavior. The problem is that MHHI∆ is itself affected by factors that independently influence market prices. It is thus improper to infer that changes in MHHI∆ caused changes in portfolio firms’ pricing practices; the pricing changes could have resulted from the very factors that changed MHHI∆. In other words, MHHI∆ is an endogenous measure.

To see why this is so, consider the three-step process involved in calculating MHHI∆ (which Mike described). The first step is to assess, for every coupling of competing firms in the market (e.g., Southwest/Delta, United/American, Southwest/United, etc.), the degree to which the controlling investors in each of the firms would prefer that it avoid competing with the other. The second step considers the market shares of the two firms in the coupling to determine the competitive significance of their incentives not to compete with each other. (The idea is that reduced head-to-head competition by bit players matters less for overall market competition than does reduced competition by major players.) The final step is to aggregate the effect of common ownership-induced competition-softening throughout the overall market by summing the softened competition metrics for each coupling of competitors within the market.

Given this process for calculating MHHI∆, there are at least two sources of endogeneity in the metric. One arises because of the second step. To assess the significance to market competition of any two firms’ incentives to reduce competition between themselves, the market shares of those two firms must be incorporated into the metric. But factors that influence market shares may also influence market prices apart from any common ownership effect.

Suppose, for example, that five institutional investors hold significant and equal stakes (say, 3%) in each of the four airlines servicing a particular air route and that none of the airlines has another significant shareholder. The air route at issue is subject to seasonal demand fluctuations. In the low season, the market is divided among the four airlines so that one has 40% of the business and the other three have 20% each. The MHHI∆ for this market would be 7200. When the high season rolls around, demand for flights along the route increases, but the leading airline is capacity constrained, so additional ticket sales go to the other airlines.  The market shares of the airlines in the high season are equal: 25% each.

On these facts, the increase in demand causes MHHI∆ to rise from 7200 to 7500.  But the increase in demand is also likely to raise ticket prices. We thus see an increase in MHHI∆ that correlates with an increase in ticket prices, but the price change is not caused by the change in MHHI∆. Instead, the two changes have a common, independent cause.

Endogeneity also creeps in during the third step in calculating MHHI∆.  In that step, the “cross MHHI∆s” of all the couplings in the market—the metrics assessing for each coupling the extent to which common ownership will cause the two firms to compete less vigorously—are summed. Thus, as the number of firms participating in the market (and thus the number of couplings) increases, the MHHI∆ will tend to rise. While HHI (the market concentration measure) will decrease as the number of competing firms rises, MHHI∆ (the measure of common ownership pricing incentives) will increase.

For example, suppose again that five institutional investors hold equal stakes (say, 3%) of each airline servicing a market and that the airlines have no other significant shareholders. If there are two airlines servicing the market and their market shares are equivalent, HHI will be 5000, MHHI∆ will be 5000, and MHHI (HHI + MHHI∆) will be 10000. If a third airline enters and grows so that the three airlines have equal market shares, HHI will drop to 3333, MHHI∆ will rise to 6667, and MHHI will remain constant at 10000. If a fourth airline enters and the airlines split the market evenly, HHI will fall to 2500, MHHI∆ will rise further to 7500, and MHHI will again total 10000.

This is problematic, because the number of participants in the market is affected by consumer demand, which also affects market prices. In the market described above, for example, the third or fourth airline might enter the market in response to an increase in demand, and that increase might simultaneously cause market price to rise. We would see, then, a price increase that is correlated with, but not caused by, an increase in MHHI∆; increased demand would be the cause of both the higher prices and the increase in MHHI∆.

In the end, then, the empirical evidence of competition-softening from common ownership is not the trump card proponents of common ownership restrictions proclaim it to be.

Weekend reads

Eric Fruits —  1 June 2018

Good government dies in the darkness. This article is getting a lot of attention on Wonk Twitter and what’s left of the blogosphere. From the abstract:

We examine the effect of local newspaper closures on public finance for local governments. Following a newspaper closure, we find municipal borrowing costs increase by 5 to 11 basis points in the long run …. [T]hese results are not being driven by deteriorating local economic conditions. The loss of monitoring that results from newspaper closures is associated with increased government inefficiencies, including higher likelihoods of costly advance refundings and negotiated issues, and higher government wages, employees, and tax revenues.

What the hell happened at GE? This guy blames Jeff Immelt’s buy-high/sell-low strategy. I blame Jack Welch.

Academic writing is terrible. Science journalist Anna Clemens wants to change that. (Plus she quotes one of my grad school professors, Paul Zak Here’s what Clemens says about turning your research into a story:

But – just as with any Hollywood success in the box office – your paper will not become a page-turner, if you don’t introduce an element of tension now. Your readers want to know what problem you are solving here. So, tell them what gap in the literature needs to be filled, why method X isn’t good enough to solve Y, or what still isn’t known about mechanism Z. To introduce the tension, words such as “however”, “despite”, “nevertheless”, “but”, “although” are your best friends. But don’t fool your readers with general statements, phrase the problem precisely.

Write for the busy reader. While you’re writing your next book, paper, or op-ed, check out what the readability robots think of your writing.

They tell me I’ll get more hits if I mention Bitcoin and blockchain. Um, OK. Here goes. The Seattle Times reports on the mind-blowing amount of power cryptocurrency miners are trying to buy in the electricity-rich Pacific Northwest:

In one case this winter, miners from China landed their private jet at the local airport, drove a rental car to the visitor center at the Rocky Reach Dam, just north of Wenatchee, and, according to Chelan County PUD officials, politely asked to see the “dam master because we want to buy some electricity.”

You will never find a more wretched hive of scum and villainy. The Wild West of regulating cryptocurrencies:

The government must show that the trader intended to artificially affect the price. The Federal District Court in Manhattan once explained that “entering into a legitimate transaction knowing that it will distort the market is not manipulation — only intent, not knowledge, can transform a legitimate transaction into manipulation.”

Tyler Cowen on what’s wrong with the Internet. Hint: It’s you.

And if you hate Twitter, it is your fault for following the wrong people (try hating yourself instead!).  Follow experts and people of substance, not people who seek to lower the status of others.

If that fails, “mute words” is your friend. Muting a few terms made my Twitter experience significantly more enjoyable and informative.

 

mute

Mike Sykuta and I have been blogging about our recent paper on so-called “common ownership” by institutional investors like Vanguard, BlackRock, Fidelity, and State Street. Following my initial post, Mike described the purported problem with institutional investors’ common ownership of small stakes in competing firms.

As Mike explained, the theory of anticompetitive harm holds that small-stakes common ownership causes firms in concentrated industries to compete less vigorously, since each firm’s top shareholders are also invested in that firm’s rivals.  Proponents of restrictions on common ownership (e.g., Einer Elhauge and Eric Posner, et al.) say that empirical studies from the airline and commercial banking industries support this theory of anticompetitive harm. The cited studies correlate price changes with changes in “MHHI∆,” a complicated index designed to measure the degree to which common ownership encourages competition-softening.

We’ll soon have more to say about MHHI∆ (admirably described by Mike!) and the shortcomings of the airline and banking studies.  (Look for a “Problems With the Evidence” post.)  First, though, a few words on why the theory of anticompetitive harm from small-stakes common ownership is implausible.

Common ownership critics’ theoretical argument proceeds as follows:

  • Premise 1:    Because institutional investors are intra-industry diversified, they benefit if their portfolio firms seek to maximize industry, rather than own-firm, profits.
  • Premise 2:    Corporate managers seek to maximize the returns of their corporations’ largest shareholders—intra-industry diversified institutional investors—and will thus pursue maximization of industry profits.
  • Premise 3:    Industry profits, unlike own-firm profits, are maximized when producers refrain from underpricing their rivals to win business.

Ergo:

  • Conclusion:  Intra-industry diversification by institutional investors reduces price competition and should be restricted.

The first two premises of this argument are, at best, questionable.

With respect to Premise 1, it is unlikely that intra-industry diversified institutional investors benefit from, and thus prefer, maximization of industry rather than own-firm profits. That is because intra-industry diversified mutual funds tend also to be inter-industry diversified. Maximizing one industry’s profits requires supracompetitive pricing that tends to reduce the profits of firms in complementary industries.

Vanguard’s Value Index Fund, for example, holds around 2% of each major airline (1.85% of United, 2.07% of American, 2.15% of Southwest, and 1.99% of Delta) but also holds:

  • 1.88% of Expedia Inc. (a major retailer of airline tickets),
  • 2.20% of Boeing Co. (a manufacturer of commercial jets),
  • 2.02% of United Technologies Corp. (a jet engine producer),
  • 3.14% of AAR Corp. (the largest domestic provider of commercial aircraft maintenance and repair),
  • 1.43% of Hertz Global Holdings Inc. (a major automobile rental company), and
  • 2.17% of Accenture (a consulting firm for which air travel is a significant cost component).

Each of those companies—and many others—perform worse when airlines engage in the sort of supracompetitive pricing (and corresponding reduction in output) that maximizes profits in the airline industry. The very logic suggesting that intra-industry diversification causes investors to prefer less competition necessarily suggests that inter-industry diversification would counteract that incentive.

Of course, whether any particular investment fund will experience enhanced returns from reduced price competition in the industries in which it is intra-industry diversified ultimately depends on the composition of its portfolio. For widely diversified funds, however, it is unlikely that fund returns will be maximized by rampant competition-softening. As the well-known monopoly pricing model depicts, every instance of supracompetitive pricing entails a deadweight loss—i.e., an allocative inefficiency stemming from the failure to produce units that create greater value than they cost to produce. To the extent an index fund is designed to reflect gains in the economy generally, it will perform best if such allocative inefficiencies are minimized. It seems, then, that Premise 1—the claim that intra-industry diversified institutional investors prefer competition-softening so as to maximize industry profits—is dubious.

So is Premise 2, the claim that corporate managers will pursue industry rather than own-firm profits when their largest shareholders prefer that outcome. For nearly all companies in which intra-industry diversified institutional investors collectively hold a significant proportion of outstanding shares, a majority of the stock is still held by shareholders who are not intra-industry diversified. Those shareholders would prefer that managers seek to maximize own-firm profits, an objective that would encourage the sort of aggressive competition that grows market share.

There are several reasons to doubt that corporate managers would routinely disregard the interests of shareholders owning the bulk of the company’s stock. For one thing, favoring intra-industry diversified investors holding a minority interest could subject managers to legal liability. The fiduciary duties of corporate managers require that they attempt to maximize firm profits for the benefit of shareholders as a whole; favoring even a controlling shareholder (much less a minority shareholder) at the expense of other shareholders can result in liability.

More importantly, managers’ personal interests usually align with those of the majority when it comes to the question of whether to maximize own-firm or industry profits. As sellers in the market for managerial talent, corporate managers benefit from reputations for business success, and they can best burnish such reputations by beating—i.e., winning business from—their industry rivals. In addition, most corporate managers receive some compensation in the form of company stock. They maximize the value of that stock by maximizing own-firm, not industry, profits. It thus seems unlikely that corporate managers would ignore the interests of stockholders owning a majority of shares and cause their corporations to refrain from business-usurping competition.

In the end, then, two key premises of common ownership critics’ theoretical argument are suspect.  And if either is false, the argument is unsound.

When confronted with criticisms of their theory of anticompetitive harm, proponents of common ownership restrictions generally point to the empirical evidence described above. We’ll soon have some thoughts on that.  Stay tuned!

As has been rumored in the press for a few weeks, today Comcast announced it is considering making a renewed bid for a large chunk of Twenty-First Century Fox’s (Fox) assets. Fox is in the process of a significant reorganization, entailing primarily the sale of its international and non-television assets. Fox itself will continue, but with a focus on its US television business.

In December of last year, Fox agreed to sell these assets to Disney, in the process rejecting a bid from Comcast. Comcast’s initial bid was some 16% higher than Disney’s, although there were other differences in the proposed deals, as well.

In April of this year, Disney and Fox filed a proxy statement with the SEC explaining the basis for the board’s decision, including predominantly the assertion that the Comcast bid (NB: Comcast is identified as “Party B” in that document) presented greater regulatory (antitrust) risk.

As noted, today Comcast announced it is in “advanced stages” of preparing another unsolicited bid. This time,

Any offer for Fox would be all-cash and at a premium to the value of the current all-share offer from Disney. The structure and terms of any offer by Comcast, including with respect to both the spin-off of “New Fox” and the regulatory risk provisions and the related termination fee, would be at least as favorable to Fox shareholders as the Disney offer.

Because, as we now know (since the April proxy filing), Fox’s board rejected Comcast’s earlier offer largely on the basis of the board’s assessment of the antitrust risk it presented, and because that risk assessment (and the difference between an all-cash and all-share offer) would now be the primary distinguishing feature between Comcast’s and Disney’s bids, it is worth evaluating that conclusion as Fox and its shareholders consider Comcast’s new bid.

In short: There is no basis for ascribing a greater antitrust risk to Comcast’s purchase of Fox’s assets than to Disney’s.

Summary of the Proposed Deal

Post-merger, Fox will continue to own Fox News Channel, Fox Business Network, Fox Broadcasting Company, Fox Sports, Fox Television Stations Group, and sports cable networks FS1, FS2, Fox Deportes, and Big Ten Network.

The deal would transfer to Comcast (or Disney) the following:

  • Primarily, international assets, including Fox International (cable channels in Latin America, the EU, and Asia), Star India (the largest cable and broadcast network in India), and Fox’s 39% interest in Sky (Europe’s largest pay TV service).
  • Fox’s film properties, including 20th Century Fox, Fox Searchlight, and Fox Animation. These would bring along with them studios in Sydney and Los Angeles, but would not include the Fox Los Angeles backlot. Like the rest of the US film industry, the majority of Fox’s film revenue is earned overseas.
  • FX cable channels, National Geographic cable channels (of which Fox currently owns 75%), and twenty-two regional sports networks (RSNs). In terms of relative demand for the two cable networks, FX is a popular basic cable channel, but fairly far down the list of most-watched channels, while National Geographic doesn’t even crack the top 50. Among the RSNs, only one geographic overlap exists with Comcast’s current RSNs, and most of the Fox RSNs (at least 14 of the 22) are not in areas where Comcast has a substantial service presence.
  • The deal would also entail a shift in the companies’ ownership interests in Hulu. Hulu is currently owned in equal 30% shares by Disney, Comcast, and Fox, with the remaining, non-voting 10% owned by Time Warner. Either Comcast or Disney would hold a controlling 60% share of Hulu following the deal with Fox.

Analysis of the Antitrust Risk of a Comcast/Fox Merger

According to the joint proxy statement, Fox’s board discounted Comcast’s original $34.36/share offer — but not the $28.00/share offer from Disney — because of “the level of regulatory issues posed and the proposed risk allocation arrangements.” Significantly on this basis, the Fox board determined Disney’s offer to be superior.

The claim that a merger with Comcast poses sufficiently greater antitrust risk than a purchase by Disney to warrant its rejection out of hand is unsupportable, however. From an antitrust perspective, it is even plausible that a Comcast acquisition of the Fox assets would be on more-solid ground than would be a Disney acquisition.

Vertical Mergers Generally Present Less Antitrust Risk

A merger between Comcast and Fox would be predominantly vertical, while a merger between Disney and Fox, in contrast, would be primarily horizontal. Generally speaking, it is easier to get antitrust approval for vertical mergers than it is for horizontal mergers. As Bruce Hoffman, Director of the FTC’s Bureau of Competition, noted earlier this year:

[V]ertical merger enforcement is still a small part of our merger workload….

There is a strong theoretical basis for horizontal enforcement because economic models predict at least nominal potential for anticompetitive effects due to elimination of horizontal competition between substitutes.

Where horizontal mergers reduce competition on their face — though that reduction could be minimal or more than offset by benefits — vertical mergers do not…. [T]here are plenty of theories of anticompetitive harm from vertical mergers. But the problem is that those theories don’t generally predict harm from vertical mergers; they simply show that harm is possible under certain conditions.

On its face, and consistent with the last quarter century of merger enforcement by the DOJ and FTC, the Comcast acquisition would be less likely to trigger antitrust scrutiny, and the Disney acquisition raises more straightforward antitrust issues.

This is true even in light of the fact that the DOJ decided to challenge the AT&T-Time Warner (AT&T/TWX) merger.

The AT&T/TWX merger is a single data point in a long history of successful vertical mergers that attracted little scrutiny, and no litigation, by antitrust enforcers (although several have been approved subject to consent orders).

Just because the DOJ challenged that one merger does not mean that antitrust enforcers generally, nor even the DOJ in particular, have suddenly become more hostile to vertical mergers.

Of particular importance to the conclusion that the AT&T/TWX merger challenge is of minimal relevance to predicting the DOJ’s reception in this case, the theory of harm argued by the DOJ in that case is far from well-accepted, while the potential theory that could underpin a challenge to a Disney/Fox merger is. As Bruce Hoffman further remarks:

I am skeptical of arguments that vertical mergers cause harm due to an increased bargaining skill; this is likely not an anticompetitive effect because it does not flow from a reduction in competition. I would contrast that to the elimination of competition in a horizontal merger that leads to an increase in bargaining leverage that could raise price or reduce output.

The Relatively Lower Risk of a Vertical Merger Challenge Hasn’t Changed Following the DOJ’s AT&T/Time Warner Challenge

Judge Leon is expected to rule on the AT&T/TWX merger in a matter of weeks. The theory underpinning the DOJ’s challenge is problematic (to say the least), and the case it presented was decidedly weak. But no litigated legal outcome is ever certain, and the court could, of course, rule against the merger nevertheless.

Yet even if the court does rule against the AT&T/TWX merger, this hardly suggests that a Comcast/Fox deal would create a greater antitrust risk than would a Disney/Fox merger.

A single successful challenge to a vertical merger — what would be, in fact, the first successful vertical merger challenge in four decades — doesn’t mean that the courts are becoming hostile to vertical mergers any more than the DOJ’s challenge means that vertical mergers suddenly entail heightened enforcement risk. Rather, it would simply mean that that, given the specific facts of the case, the DOJ was able to make out its prima facie case, and that the defendants were unable to rebut it.  

A ruling for the DOJ in the AT&T/TWX merger challenge would be rooted in a highly fact-specific analysis that could have no direct bearing on future cases.

In the AT&T/TWX case, the court’s decision will turn on its assessment of the DOJ’s argument that the merged firm could raise subscriber prices by a few pennies per subscriber. But as AT&T’s attorney aptly pointed out at trial (echoing the testimony of AT&T’s economist, Dennis Carlton):

The government’s modeled price increase is so negligible that, given the inherent uncertainty in that predictive exercise, it is not meaningfully distinguishable from zero.

Even minor deviations from the facts or the assumptions used in the AT&T/TWX case could completely upend the analysis — and there are important differences between the AT&T/TWX merger and a Comcast/Fox merger. True, both would be largely vertical mergers that would bring together programming and distribution assets in the home video market. But the foreclosure effects touted by the DOJ in the AT&T/TWX merger are seemingly either substantially smaller or entirely non-existent in the proposed Comcast/Fox merger.

Most importantly, the content at issue in AT&T/TWX is at least arguably (and, in fact, argued by the DOJ) “must have” programming — Time Warner’s premium HBO channels and its CNN news programming, in particular, were central to the DOJ’s foreclosure argument. By contrast, the programming that Comcast would pick up as a result of the proposed merger with Fox — FX (a popular, but non-essential, basic cable channel) and National Geographic channels (which attract a tiny fraction of cable viewing) — would be extremely unlikely to merit that designation.

Moreover, the DOJ made much of the fact that AT&T, through DirectTV, has a national distribution footprint. As a result, its analysis was dependent upon the company’s potential ability to attract new subscribers decamping from competing providers from whom it withholds access to Time Warner content in every market in the country. Comcast, on the other hand, provides cable service in only about 35% of the country. This significantly limits its ability to credibly threaten competitors because its ability to recoup lost licensing fees by picking up new subscribers is so much more limited.

And while some RSNs may offer some highly prized live sports programming, the mismatch between Comcast’s footprint and the FOX RSNs (only about 8 of the 22 Fox RSNs are in Comcast service areas) severely limits any ability or incentive the company would have to leverage that content for higher fees. Again, to the extent that RSN programming is not “must-have,” and to the extent there is not overlap between the RSN’s geographic area and Comcast’s service area, the situation is manifestly not the same as the one at issue in the AT&T/TWX merger.

In sum, a ruling in favor of the DOJ in the AT&T/TWX case would be far from decisive in predicting how the agency and the courts would assess any potential concerns arising from Comcast’s ownership of Fox’s assets.

A Comcast/Fox Deal May Entail Lower Antitrust Risk than a Disney/Fox Merger

As discussed below, concerns about antitrust enforcement risk from a Comcast/Fox merger are likely overstated. Perhaps more importantly, however, to the extent these concerns are legitimate, they apply at least as much to a Disney/Fox merger. There is, at minimum, no basis for assuming a Comcast deal would present any greater regulatory risk.

The Antitrust Risk of a Comcast/Fox Merger Is Likely Overstated

The primary theory upon which antitrust enforcers could conceivably base a Comcast/Fox merger challenge would be a vertical foreclosure theory. Importantly, such a challenge would have to be based on the incremental effect of adding the Fox assets to Comcast, and not on the basis of its existing assets. Thus, for example, antitrust enforcers would not be able to base a merger challenge on the possibility that Comcast could leverage NBC content it currently owns to extract higher fees from competitors. Rather, only if the combination of NBC programming with additional content from Fox could create a new antitrust risk would a case be tenable.

Enforcers would be unlikely to view the addition of FX and National Geographic to the portfolio of programming content Comcast currently owns as sufficient to raise concerns that the merger would give Comcast anticompetitive bargaining power or the ability to foreclose access to its content.

Although even less likely, enforcers could be concerned with the (horizontal) addition of 20th Century Fox filmed entertainment to Universal’s existing film production and distribution. But the theatrical film market is undeniably competitive, with the largest studio by revenue (Disney) last year holding only 22% of the market. The combination of 20th Century Fox with Universal would still result in a market share only around 25% based on 2017 revenues (and, depending on the year, not even result in the industry’s largest share).

There is also little reason to think that a Comcast controlling interest in Hulu would attract problematic antitrust attention. Comcast has already demonstrated an interest in diversifying its revenue across cable subscriptions and licensing, broadband subscriptions, and licensing to OVDs, as evidenced by its recent deal to offer Netflix as part of its Xfinity packages. Hulu likely presents just one more avenue for pursuing this same diversification strategy. And Universal has a history (see, e.g., this, this, and this) of very broad licensing across cable providers, cable networks, OVDs, and the like.

In the case of Hulu, moreover, the fact that Comcast is vertically integrated in broadband as well as cable service likely reduces the anticompetitive risk because more-attractive OVD content has the potential to increase demand for Comcast’s broadband service. Broadband offers larger margins (and is growing more rapidly) than cable, and it’s quite possible that any loss in Comcast’s cable subscriber revenue from Hulu’s success would be more than offset by gains in its content licensing and broadband subscription revenue. The same, of course, goes for Comcast’s incentives to license content to OVD competitors like Netflix: Comcast plausibly gains broadband subscription revenue from heightened consumer demand for Netflix, and this at least partially offsets any possible harm to Hulu from Netflix’s success.

At the same time, especially relative to Netflix’s vast library of original programming (an expected $8 billion worth in 2018 alone) and content licensed from other sources, the additional content Comcast would gain from a merger with Fox is not likely to appreciably increase its bargaining leverage or its ability to foreclose Netflix’s access to its content.     

Finally, Comcast’s ownership of Fox’s RSNs could, as noted, raise antitrust enforcers’ eyebrows. Enforcers could be concerned that Comcast would condition competitors’ access to RSN programming on higher licensing fees or prioritization of its NBC Sports channels.

While this is indeed a potential risk, it is hardly a foregone conclusion that it would draw an enforcement action. Among other things, NBC is far from the market leader, and improving its competitive position relative to ESPN could be viewed as a benefit of the deal. In any case, potential problems arising from ownership of the RSNs could easily be dealt with through divestiture or behavioral conditions; they are extremely unlikely to lead to an outright merger challenge.

The Antitrust Risk of a Disney Deal May Be Greater than Expected

While a Comcast/Fox deal doesn’t entail no antitrust enforcement risk, it certainly doesn’t entail sufficient risk to deem the deal dead on arrival. Moreover, it may entail less antitrust enforcement risk than would a Disney/Fox tie-up.

Yet, curiously, the joint proxy statement doesn’t mention any antitrust risk from the Disney deal at all and seems to suggest that the Fox board applied no risk discount in evaluating Disney’s bid.

Disney — already the market leader in the filmed entertainment industry — would acquire an even larger share of box office proceeds (and associated licensing revenues) through acquisition of Fox’s film properties. Perhaps even more important, the deal would bring the movie rights to almost all of the Marvel Universe within Disney’s ambit.

While, as suggested above, even that combination probably wouldn’t trigger any sort of market power presumption, it would certainly create an entity with a larger share of the market and stronger control of the industry’s most valuable franchises than would a Comcast/Fox deal.

Another relatively larger complication for a Disney/Fox merger arises from the prospect of combining Fox’s RSNs with ESPN. Whatever ability or incentive either company would have to engage in anticompetitive conduct surrounding sports programming, that risk would seem to be more significant for undisputed market leader, Disney. At the same time, although still powerful, demand for ESPN on cable has been flagging. Disney could well see the ability to bundle ESPN with regional sports content as a way to prop up subscription revenues for ESPN — a practice, in fact, that it has employed successfully in the past.   

Finally, it must be noted that licensing of consumer products is an even bigger driver of revenue from filmed entertainment than is theatrical release. No other company comes close to Disney in this space.

Disney is the world’s largest licensor, earning almost $57 billion in 2016 from licensing properties like Star Wars and Marvel Comics. Universal is in a distant 7th place, with 2016 licensing revenue of about $6 billion. Adding Fox’s (admittedly relatively small) licensing business would enhance Disney’s substantial lead (even the number two global licensor, Meredith, earned less than half of Disney’s licensing revenue in 2016). Again, this is unlikely to be a significant concern for antitrust enforcers, but it is notable that, to the extent it might be an issue, it is one that applies to Disney and not Comcast.

Conclusion

Although I hope to address these issues in greater detail in the future, for now the preliminary assessment is clear: There is no legitimate basis for ascribing a greater antitrust risk to a Comcast/Fox deal than to a Disney/Fox deal.