Archives For AT&T/Time Warner Merger

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AT&T’s $102 billion acquisition of Time Warner in 2019 will go down in M&A history as an exceptionally ill-advised transaction, resulting in the loss of tens of billions of dollars of shareholder value. It should also go down in history as an exceptional ill-chosen target of antitrust intervention.  The U.S. Department of Justice, with support from many academic and policy commentators, asserted with confidence that the vertical combination of these content and distribution powerhouses would result in an entity that could exercise market power to the detriment of competitors and consumers.

The chorus of condemnation continued with vigor even after the DOJ’s loss in court and AT&T’s consummation of the transaction. With AT&T’s May 17 announcement that it will unwind the two-year-old acquisition and therefore abandon its strategy to integrate content and distribution, it is clear these predictions of impending market dominance were unfounded. 

This widely shared overstatement of antitrust risk derives from a simple but fundamental error: regulators and commentators were looking at the wrong market.  

The DOJ’s Antitrust Case against the Transaction

The business case for the AT&T/Time Warner transaction was straightforward: it promised to generate synergies by combining a leading provider of wireless, broadband, and satellite television services with a leading supplier of video content. The DOJ’s antitrust case against the transaction was similarly straightforward: the combined entity would have the ability to foreclose “must have” content from other “pay TV” (cable and satellite television) distributors, resulting in adverse competitive effects. 

This foreclosure strategy was expected to take two principal forms. First, AT&T could temporarily withhold (or threaten to withhold) content from rival distributors absent payment of a higher carriage fee, which would then translate into higher fees for subscribers. Second, AT&T could permanently withhold content from rival distributors, who would then lose subscribers to AT&T’s DirectTV satellite television service, further enhancing AT&T’s market power. 

Many commentators, both in the trade press and significant portions of the scholarly community, characterized the transaction as posing a high-risk threat to competitive conditions in the pay TV market. These assertions reflected the view that the new entity would exercise a bottleneck position over video-content distribution in the pay TV market and would exercise that power to impose one-sided terms to the detriment of content distributors and consumers. 

Notwithstanding this bevy of endorsements, the DOJ’s case was rejected by the district court and the decision was upheld by the D.C. appellate court. The district judge concluded that the DOJ had failed to show that the combined entity would exercise any credible threat to withhold “must have” content from distributors. A key reason: the lost carriage fees AT&T would incur if it did withhold content were so high, and the migration of subscribers from rival pay TV services so speculative, that it would represent an obviously irrational business strategy. In short: no sophisticated business party would ever take AT&T’s foreclosure threat seriously, in which case the DOJ’s predictions of market power were insufficiently compelling to justify the use of government power to block the transaction.

The Fundamental Flaws in the DOJ’s Antitrust Case

The logical and factual infirmities of the DOJ’s foreclosure hypothesis have been extensively and ably covered elsewhere and I will not repeat that analysis. Following up on my previous TOTM commentary on the transaction, I would like to emphasize the point that the DOJ’s case against the transaction was flawed from the outset for two more fundamental reasons. 

False Assumption #1

The assumption that the combined entity could withhold so-called “must have” content to cause significant and lasting competitive injury to rival distributors flies in the face of market realities.  Content is an abundant, renewable, and mobile resource. There are few entry barriers to the content industry: a commercially promising idea will likely attract capital, which will in turn secure the necessary equipment and personnel for production purposes. Any rival distributor can access a rich menu of valuable content from a plethora of sources, both domestically and worldwide, each of which can provide new content, as required. Even if the combined entity held a license to distribute purportedly “must have” content, that content would be up for sale (more precisely, re-licensing) to the highest bidder as soon as the applicable contract term expired. This is not mere theorizing: it is a widely recognized feature of the entertainment industry.

False Assumption #2

Even assuming the combined entity could wield a portfolio of “must have” content to secure a dominant position in the pay TV market and raise content acquisition costs for rival pay TV services, it still would lack any meaningful pricing power in the relevant consumer market. The reason: significant portions of the viewing population do not want any pay TV or only want dramatically “slimmed-down” packages. Instead, viewers increasingly consume content primarily through video-streaming services—a market in which platforms such as Amazon and Netflix already enjoyed leading positions at the time of the transaction. Hence, even accepting the DOJ’s theory that the combined entity could somehow monopolize the pay TV market consisting of cable and satellite television services, the theory still fails to show any reasonable expectation of anticompetitive effects in the broader and economically relevant market comprising pay TV and streaming services.  Any attempt to exercise pricing power in the pay TV market would be economically self-defeating, since it would likely prompt a significant portion of consumers to switch to (or start to only use) streaming services.

The Antitrust Case for the Transaction

When properly situated within the market that was actually being targeted in the AT&T/Time Warner acquisition, the combined entity posed little credible threat of exercising pricing power. To the contrary, the combined entity was best understood as an entrant that sought to challenge the two pioneer entities—Amazon and Netflix—in the “over the top” content market.

Each of these incumbent platforms individually had (and have) multi-billion-dollar content production budgets that rival or exceed the budgets of major Hollywood studios and enjoy worldwide subscriber bases numbering in the hundreds of millions. If that’s not enough, AT&T was not the only entity that observed the displacement of pay TV by streaming services, as illustrated by the roughly concurrent entry of Disney’s Disney+ service, Apple’s Apple TV+ service, Comcast NBCUniversal’s Peacock service, and others. Both the existing and new competitors are formidable entities operating in a market with formidable capital requirements. In 2019, Netflix, Amazon, and Apple TV expended approximately $15 billion, $6 billion, and again, $6 billion, respectively, on content; by contrast, HBO Max, AT&T’s streaming service, expended approximately $3.5 billion. 

In short, the combined entity faced stiff competition from existing and reasonably anticipated competitors, requiring several billions of dollars on “content spend” to even stay in the running. Far from being able to exercise pricing power in an imaginary market defined by DOJ litigators for strategic purposes, the AT&T/Time Warner entity faced the challenge of merely surviving in a real-world market populated by several exceptionally well-financed competitors. At best, the combined entity “threatened” to deliver incremental competitive benefits by adding a robust new platform to the video-streaming market; at worst, it would fail in this objective and cause no incremental competitive harm. As it turns out, the latter appears to be the case.

The Enduring Virtues of Antitrust Prudence

AT&T’s M&A fiasco has important lessons for broader antitrust debates about the evidentiary standards that should be applied by courts and agencies when assessing alleged antitrust violations, in general, and vertical restraints, in particular.  

Among some scholars, regulators, and legislators, it has become increasingly received wisdom that prevailing evidentiary standards, as reflected in federal case law and agency guidelines, are excessively demanding, and have purportedly induced chronic underenforcement. It has been widely asserted that the courts’ and regulators’ focus on avoiding “false positives” and the associated costs of disrupting innocuous or beneficial business practices has resulted in an overly cautious enforcement posture, especially with respect to mergers and vertical restraints.

In fact, these views were expressed by some commentators in endorsing the antitrust case against the AT&T/Time-Warner transaction. Some legislators have gone further and argued for substantial amendments to the antitrust law to provide enforcers and courts with greater latitude to block or re-engineer combinations that would not pose sufficiently demonstrated competitive risks under current statutory or case law.

The swift downfall of the AT&T/Time-Warner transaction casts great doubt on this critique and accompanying policy proposals. It was precisely the district court’s rigorous application of those “overly” demanding evidentiary standards that avoided what would have been a clear false-positive error. The failure of the “blockbuster” combination to achieve not only market dominance, but even reasonably successful entry, validates the wisdom of retaining those standards.

The fundamental mismatch between the widely supported antitrust case against the transaction and the widely overlooked business realities of the economically relevant consumer market illustrates the ease with which largely theoretical and decontextualized economic models of competitive harm can lead to enforcement actions that lack any reasonable basis in fact.   

This guest post is by Jonathan M. Barnett, Torrey H. Webb Professor Law, University of Southern California Gould School of Law.

It has become virtual received wisdom that antitrust law has been subdued by economic analysis into a state of chronic underenforcement. Following this line of thinking, many commentators applauded the Antitrust Division’s unsuccessful campaign to oppose the acquisition of Time-Warner by AT&T and some (unsuccessfully) urged the Division to take stronger action against the acquisition of most of Fox by Disney. The arguments in both cases followed a similar “big is bad” logic. Consolidating control of a large portfolio of creative properties (Fox plus Disney) or integrating content production and distribution capacities (Time-Warner plus AT&T) would exacerbate market concentration, leading to reduced competition and some combination of higher prices and reduced product for consumers. 

Less than 18 months after the closing of both transactions, those concerns seem to have been largely unwarranted. 

Far from precipitating any decline in product output or variety, both transactions have been followed by a vigorous burst of competition in the digital streaming market. In place of the Amazon plus Netflix bottleneck (with Hulu trailing behind), consumers now, or in 2020 will, have a choice of at least four new streaming services with original content, Disney+, AT&T’s “HBO Max”, Apple’s “Apple TV+” and Comcast’s NBCUniversal “Peacock” services. Critically, each service relies on a formidable combination of creative, financing and technological capacities that can only be delivered by a firm of sufficiently large size and scale.  As modern antitrust law has long recognized, it turns out that “big” is sometimes not bad.

Where’s the Harm?

At present, it is hard to see any net consumer harm arising from the concurrence of increased size and increased competition. 

On the supply side, this is just the next episode in the ongoing “Golden Age of Television” in which content producers have enjoyed access to exceptional funding to support high-value productions.  It has been reported that Apple TV+’s new “Morning Show” series will cost $15 million per episode while similar estimates are reported for hit shows such as HBO’s “Game of Thrones” and Netflix’s “The Crown.”  Each of those services is locked in a fierce competition to gain and retain sufficient subscribers to earn a return on those investments, which leads directly to the next happy development.

On the demand side, consumers enjoy a proliferating array of streaming services, ranging from free ad-supported services to subscription ad-free services. Consumers can now easily “cut the cord” and assemble a customized bundle of preferred content from multiple services, each of which is less costly than a traditional cable package and can generally be cancelled at any time.  Current market performance does not plausibly conform to the declining output, limited variety or increasing prices that are the telltale symptoms of a less than competitive market.

Real-World v. Theoretical Markets

The market’s favorable trajectory following these two controversial transactions should not be surprising. When scrutinized against the actual characteristics of real-world digital content markets, rather than stylized theoretical models or antiquated pre-digital content markets, the arguments leveled against these transactions never made much sense. There were two fundamental and related errors. 

Error #1: Content is Scarce

Advocates for antitrust intervention assumed that entry barriers into the content market were high, in which case it followed that the owner of an especially valuable creative portfolio could exert pricing power to consumers’ detriment. Yet, in reality, funding for content production is plentiful and even a service that has an especially popular show is unlikely to have sustained pricing power in the face of a continuous flow of high-value productions being released by formidable competitors. The amounts being spent on content in 2019 by leading streaming services are unprecedented, ranging from a reported $15 billion for Netflix to an estimated $6 billion for Amazon and Apple TV+ to an estimated $3.9 billion for AT&T’s HBO Max. It is also important to note that a hit show is often a mobile asset that a streaming or other video distribution service has licensed from independent production companies and other rights holders. Once the existing deal expires, those rights are available for purchase by the highest bidder. For example, in 2019, Netflix purchased the streaming rights to “Seinfeld”, Viacom purchased the cable rights to “Seinfeld”, and HBO Max purchased the streaming rights to “South Park.” Similarly, the producers behind a hit show are always free to take their talents to competitors once any existing agreement terminates.

Error #2: Home Pay-TV is a “Monopoly”

Advocates of antitrust action were looking at the wrong market—or more precisely, the market as it existed about a decade ago. The theory that AT&T’s acquisition of Time-Warner’s creative portfolio would translate into pricing power in the home pay-TV market mighthave been plausible when consumers had no reasonable alternative to the local cable provider. But this argument makes little sense today when consumers are fleeing bulky home pay-TV bundles for cheaper cord-cutting options that deliver more targeted content packages to a mobile device.  In 2019, a “home” pay-TV market is fast becoming an anachronism and hence a home pay-TV “monopoly” largely reduces to a formalism that, with the possible exception of certain live programming, is unlikely to translate into meaningful pricing power. 

Wait a Second! What About the HBO Blackout?

A skeptical reader might reasonably object that this mostly rosy account of the post-merger home video market is unpersuasive since it does not address the ongoing blackout of HBO (now an AT&T property) on the Dish satellite TV service. Post-merger commentary that remains skeptical of the AT&T/Time-Warner merger has focused on this dispute, arguing that it “proves” that the government was right since AT&T is purportedly leveraging its new ownership of HBO to disadvantage one of its competitors in the pay-TV market. This interpretation tends to miss the forest for the trees (or more precisely, a tree).  

The AT&T/Dish dispute over HBO is only one of over 200 “carriage” disputes resulting in blackouts that have occurred this year, which continues an upward trend since approximately 2011. Some of those include Dish’s dispute with Univision (settled in March 2019 after a nine-month blackout) and AT&T’s dispute (as pay-TV provider) with Nexstar (settled in August 2019 after a nearly two-month blackout). These disputes reflect the fact that the flood of subscriber defections from traditional pay-TV to mobile streaming has made it difficult for pay-TV providers to pass on the fees sought by content owners. As a result, some pay-TV providers adopt the negotiating tactic of choosing to drop certain content until the terms improve, just as AT&T, in its capacity as a pay-TV provider, dropped CBS for three weeks in July and August 2019 pending renegotiation of licensing terms. It is the outward shift in the boundaries of the economically relevant market (from home to home-plus-mobile video delivery), rather than market power concerns, that best accounts for periodic breakdowns in licensing negotiations.  This might even be viewed positively from an antitrust perspective since it suggests that the “over the top” market is putting pressure on the fees that content owners can extract from providers in the traditional pay-TV market.

Concluding Thoughts

It is common to argue today that antitrust law has become excessively concerned about “false positives”– that is, the possibility of blocking a transaction or enjoining a practice that would have benefited consumers. Pending future developments, this early post-mortem on the regulatory and judicial treatment of these two landmark media transactions suggests that there are sometimes good reasons to stay the hand of the court or regulator. This is especially the case when a generational market shift is in progress and any regulator’s or judge’s foresight is likely to be guesswork. Antitrust law’s “failure” to stop these transactions may turn out to have been a ringing success.