Following a six-week trial, federal Judge Richard Leon of the U.S. District Court for the District of Columbia recently approved AT&T’s 85-billion-dollar acquisition of Time Warner Inc. AT&T Inc. (along with its subsidiary, DirecTV), is the country’s largest distributor of traditional subscription television. Time Warner owns several television networks, including TNT, TBS, CNN and HBO. These networks showcase certain popular content including the NCAA Tournament, the NBA Playoffs and the television show, “Game of Thrones.”
The U.S. Department of Justice (DOJ) brought suit to enjoin the merger in November 2017 under Section 7 of the Clayton Antitrust Act. The government claimed that allowing the merger to go forward would lessen competition in the video programming and distribution market by enabling AT&T to use Time Warner’s popular television content as leverage to raise its competitors’ video programming costs, or by using “blackouts” of Time Warner’s content to drive competitors’ customers to AT&T’s own subsidiary, DirecTV. The result would be increased prices and fewer innovative offerings for consumers.
The government’s suit was the first time in nearly four decades that the DOJ took a vertical merger case to trial. Vertical mergers involve companies in the same industry but that do not produce competing products in the same market. Horizontal mergers, on the other hand, involve companies that sell similar products in the same market. Because vertical mergers do not result in an increase in market concentration, they typically receive less scrutiny and are more often approved by federal regulators, as compared to horizontal mergers.
Ultimately, the government put forth three theories of competitive harm, each of which was rejected by the court.
1. Increased Leverage Theory. The government’s primary theory of competitive harm was that AT&T would be able to extract extortionate licensing fees from its competitors for access to Time Warner’s content, principally through AT&T’s ownership of DirecTV. Specifically, if competing distributors were unwilling to pay more for access to Time Warner’s content, AT&T/Time Warner could easily withstand a blackout because Time Warner’s content could always be shown on DirecTV. Eventually, distributors would have no choice but to accede to AT&T’s demands for higher prices for access to Time Warner’s content, and those costs would in turn be passed along to consumers.
The court rejected this argument, finding that it was undermined by real world evidence, including history which showed that there had never been long-term blackouts of Time Warner’s content, and that such blackouts were unlikely to occur in the future given the harm to both AT&T’s competitors as well as to AT&T itself, which would stand to lose significant advertising and fee revenues from a blackout.
The court also agreed with the defendants’ arguments focused on the recent changes and disruption in the industry from newer competitors such as Netflix and Hulu (described by the court as vertically integrated companies producing and distributing content), which, according to the defendants, showed that competition, innovation and dynamism in the industry were alive and well. Additionally, the court found that any potential anticompetitive harm would likely be outweighed by efficiencies from the resulting merger, which the government conceded would include approximately $352 million in savings that could be passed along to consumers.
2. Harm to Innovative Competitors/Trends. The government also argued that the merger would result in competitive harm to virtual multichannel video programming distributors (MVPDs), such as Sling TV and YouTube TV, which offer consumers live television programming over the internet in exchange for a subscription fee. Specifically, the government argued that as with its larger distributor competitors, the merger would incentivize AT&T to withhold “must have” content from smaller upstart MVPDs, thereby slowing the growth and innovation of MVPDs. Defendants countered that this theory of anticompetitive harm was also undermined by evidence showing that AT&T had, in fact, embraced the MVPD trend launching its own successful virtual MVPD, DirecTV Now. The court also found that the evidence showed that AT&T stood to gain by having its newly acquired Time Warner content distributed as widely as possible, including through MVPDs.
3. Use of HBO to Harm Competitors. Lastly, the government argued that the merger would allow AT&T to prevent competing distributors from having access to HBO. The court disposed of this claim, finding that there was no incentive for the defendants to foreclose access to HBO because HBO was dependent on promotion by rival distributors and wide access by consumers.
Conclusion: What’s the Impact on Vertical Mergers?
The court’s decision to allow the merger to go forward focused on the fact that the merger at issue was vertical—and not horizontal; the efficiencies resulting from the merger (which were largely undisputed by the government); and the fact that the potential anticompetitive harms put forth by the government were either too speculative or undermined by the evidence in the record. Additionally, the court seemed swayed by recent industry trends, which suggested the presence of dynamic disruptive trends by new competitors, innovation and healthy competition.
Given the absence of recent caselaw analyzing vertical mergers, the court’s decision may potentially open the door for similar vertical mergers to move forward particularly in fast-changing dynamic industries like this one. Indeed, within 24 hours of the decision, Comcast Corporation announced that it would be launching a hostile takeover of 21st Century Fox (Fox), and within a week, a bidding war for the right to acquire Fox had emerged between Comcast and Disney. (Before Comcast announced its bid, Disney had previously reached an agreement to purchase most of Fox’s television and movie assets in December 2017). On June 27, 2018, the DOJ announced a settlement with Disney that would allow Disney to purchase most of Fox’s assets in a 71.3-billion dollar deal. As part of the settlement, Disney will have to sell off 22 of Fox’s regional sports networks. The deal between Disney and Fox is not final: the settlement will still need to be approved by a federal judge as well as Fox’s shareholders. However, in light of both the recent AT&T/Time Warner merger decision and the DOJ’s settlement announcement on June 27, it seems likely that a potential merger between Fox and Disney will face less resistance from federal regulators.