By Jeffrey May, J.D.
Despite an admonition from the federal district court in Washington, D.C. to resist the temptation to view its decision from yesterday, rejecting a Department of Justice request to enjoin the combination of AT&T Inc. and Time Warner Inc., "as something more than a resolution of this specific case," pundits immediately predicted that the ruling would open the flood gates for a series of deals in the media and entertainment industry that might threaten competition. With scant vertical merger challenges, the decision will likely stand as precedent for some time, but the ruling is limited by the unique facts of the case. Going forward the Justice Department still has the ability to continue to seek to specific structural relief or outright injunctions to block deals in other merger challenges, whether vertical and horizontal. The government’s pursuit of this case through trial serves as a reminder to future merging parties that deals that raise competition concerns are not going to get a pass. The Justice Department is willing to take a merger challenge to court. In a 170-plus-page decision peppered with exclamation points, the court explained why the Justice Department, in this case, failed to meet its burden that the combination of AT&T and Time Warner was likely to lessen competition substantially (U.S. v. AT&T Inc., June 12, 2018, Leon, R.).
AT&T is a leading provider of communications and digital entertainment services with two traditional multi-channel video distributor (MVPD) products that purchase and distribute video content. Entertainment giant Time Warner operates cable networks and a movie studio creating and supplying video content. The government unsuccessfully attempted to establish that the acquisition would likely result in a substantial lessening of competition in three ways: (1) by enabling Time Warner’s Turner Broadcasting cable network to charge AT&T’s rival distributors—and ultimately consumers—higher prices for its content; (2) by creating an increased risk that merged firm would act, either unilaterally or in coordination with a competitor, to thwart the rise of low-cost virtual MVPDs that were threatening the pay TV model; and (3) by preventing AT&T’s rival distributors from using the Home Box Office cable network as a promotional tool to attract and retain customers.
Vertical merger. The court noted the lack of modern judicial precedent involving vertical merger challenges, adding that such lack of precedent was not surprising because the Antitrust Division had not brought a vertical merger case to decision in four decades. Because the transaction was a vertical merger, there was no presumption of harm, the court explained. Thus, there was no short-cut way to establish anticompetitive effects, as there was with horizontal merger challenges. The government was required to make a "fact-specific" showing that the effect of the proposed merger was likely to be anticompetitive. While the court acknowledged that vertical mergers can harm competition in certain circumstances, it ruled that the government did not meet its burden in this case.
Increased-leverage theory. Most of the court’s discussion focused on the government’s failure to establish that the merger was likely to increase Turner’s bargaining leverage with distributors in affiliate negotiations.
Because the government failed to show that the merger was likely to increase Turner's bargaining leverage with distributors, it was not necessary for the court to consider the separate legal question of whether any effects associated with the government's "increased-leverage" theory would result in a substantial lessening of competition. While Turner had popular content, the court noted that Turner's content was not literally "must have" content in the sense that distributors could not effectively compete without it, as the government alleged.
Further, the defendants’ own statements and documents provided little support for the contention that Turner would gain increased leverage due to the proposed merger, the court noted. Among other documents, the government pointed to regulatory filings and executive statements. "[T]his is not a case containing direct, probative evidence of anticompetitive intent on the part of high-level executives within the merging company," the court explained.
Testimony of third-party competitor witnesses also failed to provide meaningful, reliable support for the government's increased-leverage theory. "[T]he bulk of the third-party testimony proffered by the Government was speculative, based on unproven assumptions, or unsupported—or even contradicted—by the Government’s own evidence."
The government’s main theory also failed because its experts did not support the argument. The court was unconvinced by the testimony of the government's economic expert, Professor Carl Shapiro, who had served as deputy assistant attorney general for economics at the Antitrust Division during the Obama Administration. "[N]either Professor Shapiro's model, nor his testimony based on it, provides me with an adequate basis to conclude that the challenged merger will lead to any raised costs on the part of distributors or consumers—much less consumer harms that outweigh the conceded $350 million in annual cost savings to AT&T's customers," the court said.
Harm to virtual MVPDs through ownership of Turner content. The government also alleged that the merger would give AT&T the ability to slow the growth of emerging, innovative online distributors. The court held that the merger was not likely to substantially lessen competition by allowing AT&T to harm these virtual MVPDs, such as Hulu Live and Dish Network's Sling TV, through its ownership of Time Warner content.
The government argued that the combined firm would be able to harm virtual MVPDs either through unilateral action or in coordination with Comcast-NBC Universal, the only other vertically integrated traditional MVPD.
With respect to the unilateral theory, the government failed to establish that AT&T would be able to "break the ‘skinny bundle’ models of virtual MVPDs by forcing those distributors to take too many Turner networks." The virtual MVPDs’ skinny bundles contain fewer networks than do the larger bundles offered by traditional MVPDs. The court pointed out that the combined firm would continue to have incentives to license Turner content to virtual MVPDs. In addition to benefitting Turner, the licensing of content to virtual MVPDs would increase video consumption, which was lucrative for AT&T’s wireless business, in the court’s view.
As for the coordination theory, the government did not put forward any persuasive reason why AT&T and Comcast would engage in such conduct. "The fundamental difference in incentives between AT&T and Comcast vis-a-vis virtual MVPDs, the barrier to coordination in the form of long-term contracts, coupled with the fact that the Government has provided no evidence to show how the benefits of a coordinated blackout would outweigh the companies' resulting losses of affiliate fee and advertising revenues, leave me completely unable to accept the Government's coordinated effects theory," the court said.
Promotion-withholding theory. Calling the government’s third theory a "gossamer thin claim," the court rejected outright a contention that the combined firm would restrict the ability of rival distributors to HBO content in marketing efforts. The court acknowledged that the promotion-withholding theory made only a very brief appearance at trial and found that the government came to court without any economic evidence on this point.
Relevant market. No decision in a merger challenge case would be complete without a discussion of the relevant market. According to the court, the relevant market was not as critical in this vertical merger case at it would be in a horizontal merger challenge. The court accepted the government's proposed product and geographic market definitions, noting that they were not meaningfully challenged by the defendants. The government defined the product market as the "Multichannel Video Distribution" market and the relevant geographic markets as the approximately 1,200 local markets in which residents have access to video offerings from the same set of MVPDs.
Stay, appeal. In closing, the court advised the government not to seek a stay of the court’s order pending appeal to the U.S. Court of Appeals in Washington, D.C. The court said it would not grant such a stay. A stay pending appeal would be manifestly unjust with the deadline for consummating the deal fast approaching, in the court’s view.
The government still has the option of appealing. Early calls for the government to consider appealing the decision came from the American Antitrust Institute and Senator Amy Klobuchar, Ranking Member of the Senate Judiciary Committee’s antitrust subcommittee.
The case is No. 1:17-cv-02511-RJL.
Attorneys: Alexis K. Brown-Reilly, U.S. Department of Justice, for the United States. Aaron Martin Panner (Kellogg Hansen Todd Figel & Frederick PLLC) and Katrina M. Robson (O'Melveny & Myers LLP) for AT&T Inc. and DIRECTV Group Holdings, LLC. Christine Anne Varney (Cravath, Swaine & Moore LLP) for Time Warner Inc.
Companies: AT&T Inc.; DIRECTV Group Holdings, LLC; Time Warner Inc.
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