Blocking the AT&T-Time Warner merger is good antitrust economics and law
By: Steve Salop, Professor of Economics & Law at Georgetown University Law Center
When news broke that the Justice Department is considering antitrust litigation to block a merger between AT&T Inc. and Time Warner Inc., critics suggested the move was purely political.
Such vertical mergers, they argue, don’t pose a risk to competition. And it’s no secret that President Donald Trump dislikes CNN, which is owned by Time Warner.
But this explanation has two flaws: First, a number of Democratic senators, including Elizabeth Warren of Massachusetts, Al Franken of Minnesota and Richard Blumenthal of Connecticut, have attacked the $85 billion deal. Second, and more important, there are solid antitrust concerns about this merger that call for a significant divestiture, if not a full injunction from the courts.
If AT&T acquires Time Warner, there are myriad ways for the vertical merger to result in reduced competition. Joining with AT&T, which owns DirecTV, could give Time Warner the power to demand higher prices from competing video distributors. Time Warner could also raise prices on its video content for AT&T’s broadband or wireless competitors, or withhold content altogether. Facing weaker or higher-cost competitors, AT&T might raise its prices to subscribers.
The merged company could also demand higher prices from Time Warner’s competitors to gain access to faster delivery of DirecTV, AT&T broadband, and AT&T wireless. Or DirecTV could move programming that competes with Time Warner to a worse programming tier or channel position. Or AT&T could withhold aggregated viewer information from Time Warner’s competitors so that Time Warner can raise advertising prices. Any of these possibilities would hurt consumers.
This wouldn’t be the first merger between a telecommunications company and media content producer. The Justice Department allowed Comcast Corp. to buy NBCUniversal Media LLC, imposing some behavioral conditions on the deal to try to prevent Comcast from engaging in anticompetitive behaviors. So why wouldn’t similar conditions work for the AT&T-Time Warner merger?
For one thing, enforcers have learned that behavioral remedies are riddled with loopholes and impossible to enforce effectively, as Assistant Attorney General Delrahim has said. Antitrust agencies are not regulators, and even regulators can be outwitted. They cannot catch all violations or predict all the strategies a company might use to reduce competition. Enforcement is also harder this time because the Federal Communications Commission is not reviewing this transaction.
Concerns are not reduced because this is the second vertical merger after Comcast/NBCU. To the contrary. If this deal goes through, AT&T and Comcast together would have considerable power to coordinate prices by selling content to each other at inflated wholesale prices, which would mean higher subscription prices for video and wireless services. Allowing this merger would also inevitably lead to further vertical consolidation, further improving coordination that would increase prices and profits, but leave consumers worse off.
The best example of the limitations of behavioral regulation is probably AT&T itself. The company has a long history of anticompetitive behavior, even despite regulations. In the end, AT&T consented to being broken up into eight companies to settle a Justice Department antitrust case in 1982.
So what should the Justice Department do now? The obvious answer is to just say no and block the merger. But it at least could minimize the potential for bad behavior from AT&T by requiring the company to divest significant assets, including Turner Broadcasting System Inc. (which operates CNN, TBS, TNT and others). Another option is divesting DirecTV. The Justice Department has reportedly suggested that AT&T divest one or the other. Divesting only CNN would not be enough.
AT&T is prepared to fight in court and believes the law is on its side. But it is wrong. The last vertical merger case to reach the U.S. Supreme Court was in 1972, and the government won that fight. The last FTC case litigated to conclusion was in 1979, and the FTC lost — but it lost because it was unable to prove that the effects would be anticompetitive.
The Justice Department has an excellent chance of convincing a court that this merger is anticompetitive.
Litigation skill matters, and AT&T will have a chance to convince the court that there are competitive benefits to buying Time Warner. But the Justice Department and the FCC have already rejected a key benefits story in the Comcast-NBCUniversal merger, and antitrust law wisely puts a thumb on the scale for the government, especially when there is a trend toward greater consolidation.
Only time can tell the outcome. But in the meantime, attacking this case as purely political is bad antitrust law and bad economics. The merger would likely stifle competition.
Steve Salop is a professor of economics and law at Georgetown University Law Center who has written numerous articles on antitrust and vertical mergers. He has consulted with a competitor about this transaction.
