Here’s Why the Justice Department Doesn’t Have A Case Against AT&T-Time Warner

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Pranjal Drall Policy fellow at TechFreedom
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The Justice Department sued to block AT&T’s $85 billion bid for Time Warner last November and the trial is set to begin in a few days. This case is the most important antitrust battle in decades and will have lasting impact on the future of antitrust legislation. Unfortunately, the Justice Department’s arguments are based on flimsy hypotheticals and ignore basic economic realities. A merged AT&T-TW would actually increase innovation and realize potential efficiencies, not harm consumers.

A vertical merger is a merger between two complementary businesses. Time Warner is mainly a content producer and AT&T is a content distributor. Vertical mergers are rarely challenged by the government because the merging entities aren’t direct competitors since they are engaged in different parts of the supply chain. According to a 2007 Federal Trade Commision (FTC) study, there have been just 23 challenges to vertical mergers since 1984. Twenty of those were settled by the FTC and three of the mergers were abandoned. In other words, the government hasn’t won a single vertical-merger case against in more than three decades.

The Department of Justice’s decision to block this deal came as a big surprise considering that Comcast’s acquisition of NBC — a similar vertical merge — was approved in 2011. The Justice Department could have done the same here and/or required AT&T/TW to divest certain assets, instead, it decided to outright block the deal. Its complaint alleges that AT&T will charge its competitors higher prices for Time Warner’s exclusive programming. And even if the providers fail to meet these demands, AT&T will benefit because customers would be incentivized to switch to AT&T’s distribution services for access to TW’s exclusive content.

However, the Federal Communications Commission already has rules in place to prevent exactly this type of behavior. The Program Carriage rule prevents vertically integrated providers from giving preference to their own programming. The Program Access rule forbids a distributor from engaging in practices that hinder the ability of other distributors to provide any programming to its consumers. For instance, a provider isn’t allowed to anti-competitively withhold its own programming from its competitors.

The FCC reviews complaints from independent providers or TV stations on a case-by-case basis and once a baseline of harm is established, the FCC investigates the conduct. In the past, the agency has sided with the NFL network and Tennis Channel in their complaints against Comcast alleging discrimination. This framework prevents abuse and discrimination by vertically integrated firms while allowing for the positive pro-competitive effects of such arrangements to flourish.

Furthermore, why would AT&T want to withhold Time Warner’s content from other providers? It’s paying $85 billion for Time Warner, which is 22 times TW’s net income of $3.9 billion in 2016. A significant portion of this income comes from licensing fees. And since, AT&T makes up 26 percent of the Pay television market, almost three fourths of Time Warner’s TV related licensing revenue comes from other providers. The idea that the AT&T would readily forgo this revenue in some vain hope of incentivizing people to switch to its own services doesn’t make any economic sense. For the merger to be even close to profitable, AT&T needs to more effectively distribute Time Warner’s content and increase viewership, not restrict it from the current consumer base.

Now, let’s take the DOJ’s word for it and assume AT&T will increase prices for non-Time Warner content. This can prompt other pay TV providers to do the same. This would hurt the popularity of Time Warner’s content in the long run, leading to lower advertising rates and revenues. Moreover, if one applies the DOJ’s earlier logic consistently, the price increases can prompt consumers to switch to other non-AT&T distributors for cheaper rates.

However, if one looks at the empirical literature instead of plainly speculating, this type of conduct by AT&T is very unlikely. A meta-study of empirical studies that look at prices, investment, and profits after vertical mergers, concluded that, “the data appear to be telling us that efficiency considerations overwhelm anti-competitive motives in most contexts.” The study shows that this is especially true in the media industry.

It’s also important to realize that AT&T is not only competing with other pay-TV providers but also with online-only streaming services and over-the-top internet TV providers. These alternatives are very successful and are already a formidable threat to the traditional cable/satellite business model, not in some infancy stage like the DOJ pretends in its complaint. The big three—Netflix, Amazon, Hulu—alone accounted for 33 percent of the 2017 Emmy nominations and 27 percent of  the 2018 Golden Globes nominations. Netflix alone has about 109 million subscribers worldwide and over-the-top services––like Sling TV––that distribute media directly to consumers via the internet are rapidly gaining subscribers as well. All of this comes at a time when consumers are cutting the cord — that is, dropping traditional pay-TV services in favor of online services — at faster rates than ever before.

Moreover, the home video industry is already rife with vertical integration. Leading pay-TV provider Comcast both produces and distributes content and so do other major players like Viacom, Disney, Fox, CBS, Netflix, Amazon and Hulu. The addition of AT&T to this mix wouldn’t disrupt every facet of the industry or pose immense consumer harm — like the DOJ claims. Instead, the merger will realize potential efficiencies and allow for more risk taking and innovation.

Pranjal Drall writes about technology policy. He is a sophomore at Grinnell College. He can be found on Twitter @PranjalDrall.

The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.