On November 20, 2017, the U.S. Department of Justice (“DOJ”) filed a civil antitrust lawsuit to block AT&T Inc.’s (“AT&T”) proposed acquisition of Time Warner Inc. (“Time Warner”).
The vertical merger, which combines AT&T’s video distribution platform with Time Warner’s programming, could be the first such deal litigated in almost 40 years.
According to the DOJ’s Antitrust Division, the acquisition would substantially lessen competition by resulting in higher prices for programming, thus harming consumers. The DOJ’s complaint alleges that the merged firm will have the increased ability and incentive to credibly threaten to withhold or raise the price of crucial programming content – such as Time Warner’s HBO, TNT, TBS, and CNN – from AT&T’s multi-channel video programmer distributor (“MVPD”) rivals.
To support its case, the DOJ littered the Complaint with the merging parties’ own words and relied less on market and empirical evidence:
- “As AT&T has expressly recognized … distributors that control popular programming ‘have the incentive and ability to use (and indeed have used whenever and wherever they can) that control as a weapon to hinder competition.’”
- “Specifically, as DirecTV has explained, such vertically integrated programmers ‘can much more credibly threaten to withhold programming from rival [distributors]’ and can ‘use such threats to demand higher prices and more favorable terms.’”
- “Indeed, AT&T/DirecTV describes the traditional pay-TV model as a ‘cash cow’ and ‘the golden goose.’”
- “In sum, as DirecTV itself has explained: ‘[V]ertical integration of programming and distribution can, if left unchecked, give the integrated entity the incentive and ability to gain an unfair advantage over its rivals. This ultimately results in higher prices and lower quality service for consumers.’”
- “AT&T/DirecTV [said it] intends to ‘work to make [online video services] less attractive.’”
- “AT&T itself has previously stated that access to some of the most popular television programming is ‘critical to preserve and promote competition and diversity in the distribution of video programming.’”
- “Following this merger, using a bargaining model similar to the one previously endorsed by DirecTV, the eventual price increases to the merged firm’s competitors for Turner networks due to the merged company’s increased power would likely be at least hundreds of millions of dollars.”
- “[Turner’s] CEO has stated that it has ‘leverage’ over Dish, whose online Sling TV service ‘is shit without Turner.’”
- “In a presentation prepared for a meeting with Time Warner executives related to this merger, AT&T noted that, after the merger, the merged company and just three other companies would control a large portion of all three levels of the industry: television studio revenue, network revenue, and distribution revenue. AT&T went on to explain that—given these high levels of concentration— its ‘Core Belief #1’ is that, notwithstanding the emergence of online video distributors, ‘[t]he economic incentives of major pay-TV players will encourage stability as the ecosystem evolves.’”
There does not appear to be any magic bullet here. These “Hot Docs” appear to be dated, taken out of context, and clearly don’t tell the full story. Nevertheless, the DOJ has historically used merging parties’ own words against them when drafting complaints so this one is no different. Traditionally, hot docs provide an easy way to capture the interest of a judge by saying this case is simple and all you have to do is examine the merging parties’ own words.
Nevertheless, the DOJ still has a lot of hurdles to prove its case as economics plays a huge role in merger cases. The DOJ’s theory demonstrates a lack of understanding of the current and rapidly evolving market for content and distribution. The merged firm will still have a strong financial incentive to license Time Warner’s programming to as many outlets as possible. Because local cable monopolies dominate local markets through the bundling of broadband and MVPD services, AT&T does not have a clear economic incentive to charge higher prices for Time Warner content or to cut off rival video distributors. After all, such a strategy would be risky. In fact, consumers are increasingly willing to cut the cord entirely as they look to virtual MVPDs like Sling TV as well as subscription video on demand services (“SVODs”) such as Amazon Prime (80 million U.S. subscribers) and Netflix (109 million subscribers worldwide), demonstrating that the video distribution and content markets have become ever more dynamic – and competitive.
The DOJ will use merging parties’ past words against them when challenging their deal. The DOJ routinely cites “hot docs” in its complaints because they catch the interest of the media and the judge. The DOJ will focus on supposed “hot docs” to support its case when some market analysis and empirical evidence may be missing. At the end of the day, however, a “smoking gun” document regarding anticompetitive intent, which apparently does not exist in this case, as it was not cited, will be rejected by a judge unless the DOJ provides the foundations of an antitrust cases through market analysis and empirical evidence. The DOJ still has time to put together its case, but the complaint falls short on quantitive data.