DOJ breaks with well-established economics in AT&T/Time Warner merger challenge


November 20, 2017

The following statement is attributable to Geoffrey A. Manne, Executive Director, ICLE:

PORTLAND, OR — Today the US Department of Justice filed suit to stop the proposed AT&T/Time Warner merger.

Under current antitrust law the DOJ’s challenge is likely to fail; the courts haven’t rejected a so-called “vertical merger” for decades. But the weakness of the DOJ’s case is also a matter of well-established economics.

According to the DOJ’s complaint:

“AT&T/DirecTV would hinder its rivals by forcing them to pay hundreds of millions of dollars more per year for Time Warner’s networks, and it would use its increased power to slow the industry’s transition to new and exciting video distribution models that provide greater choice for consumers. The proposed merger would result in fewer innovative offerings and higher bills for American families.”

None of these claims holds water.

The bulk of Time Warner’s revenue comes from distributing its programming via every feasible means. Withholding content from competitors simply makes no financial sense — especially when AT&T is shelling out some $85 billion for the privilege.

A price hike isn’t in the cards, either. Under US antitrust law, any conceivable harm must be “merger-specific.” But there is nothing about AT&T owning HBO, CNN, or any other Time Warner content that suddenly makes that content more valuable. If a price increase did make sense, Time Warner would already have done it.

And even if AT&T were to withhold certain content from competitors, exclusive or preferential arrangements between input providers and distributors are virtually always beneficial for consumers. As one group of former FTC economists (including, oddly enough, the DOJ’s current chief economist) put it: “there is a paucity of support for the proposition that vertical restraints/vertical integration are likely to harm consumers.”

In the case of film and tv content, such arrangements lead to more content creation and more innovative means of distributing it. And as users are ever-more rapidly cord-cutting and unbundling their viewing, multiple distribution models — each with increasingly different collections of content — ably compete for viewers’ attention.

Of course, certain competitors are bound to complain — but US antitrust laws don’t protect competitors at the expense of consumers.

Finally, the government already has a mechanism for policing the distribution of content by cable networks. Under Section 628 of the Communications Act, the FCC prohibits cable companies from “unfairly” refusing to make their own content available to competitors.

Post merger, if AT&T were to offer HBO or other Time Warner content exclusively on DirecTV, competing cable operators could challenge that conduct under the FCC rules. And if the exclusion were found to have the “purpose or effect” of “significantly hindering or preventing” a rival from providing competitive service, the exclusive deal would be prohibited.

It is disingenuous for the DOJ to act as if there is no viable way for the government to ensure that Time Warner content is widely available to consumers absent merger enforcement. And there is certainly no valid economic rationale to prohibit or condition the merger.