The AT&T Merger Decision Is a Win for Consumers

And it’s based on good economics.

US District Court Judge Richard Leon’s recent decision allowed AT&T and Time Warner to merge, reaffirming long-held precedent on vertical mergers. The court recognized that the media market is dynamic and competitive and that traditional pay-TV and cable providers are now struggling to compete with streaming services. Perhaps most importantly, this decision is a victory for consumers because the newly-merged AT&T-Time Warner company can cut costs of services.

This Ruling Was Easy to Predict

Judge Leon’s decision to allow the merger shouldn’t come as a surprise. After all, the decision follows decades of precedent in antitrust law. Vertical mergers have long been understood to pose no consumer harm unless case-specific evidence of consumer harm is presented. The Department of Justice (DOJ) clearly failed to provide concrete evidence of such harms in this case.

This history, combined with the fact that the media market has become more competitive since 2011, makes the recent AT&T decision all the more predictable.

The last case similar to this one was the merger of Comcast, a content distributor similar to AT&T, and NBCUniversal, a content producer like Time Warner. That merger was cleared back in 2011, albeit with certain conditions. This history, combined with the fact that the media market has undoubtedly become more competitive since 2011, makes the recent AT&T decision all the more predictable.

Streaming services by tech giants like Amazon, Google, Netflix, and Hulu have grown exponentially since then. Consumers are dropping traditional pay-TV services for online options at faster rates than ever before. Judge Leon recognizes these changes in the market, stating, “I simply cannot evaluate the Government’s theories and predictions of harm….without factoring in the dramatic changes that are transforming how consumers view video content.” As online streaming services gain market share in the media industry, incumbents like AT&T need to be vertically integrated to effectively compete.

Section 7 of the Clayton Act, which was the basis of the DOJ’s complaint, prohibits mergers that substantially lessen competition. Judge Leon correctly states that the burden of proof then lies on the DOJ. This is also supported by the 1984 Non-Horizontal Merger guidelines that say vertical mergers should be judged on a case-by-case basis and that a successful challenge requires case-specific evidence of harm. In this case, the DOJ needed to provide sufficient evidence that a merged AT&T-Time Warner is likely to “lessen competition.”

The DOJ's Claim Doesn't Hold Water

The DOJ’s central claim in the original complaint is that a merged AT&T-Time Warner would be able to credibly threaten blackouts—that is, withhold Time Warner content from AT&T’s competitors—to extort higher prices from other distributors. Moreover, the traditional costs associated with such a blackout would be less for AT&T as not having Time Warner’s content will incentivize customers to switch to AT&T’s services.

Judge Leon finds that “neither category of evidence was effective in proving the Government’s increased leverage theory.”

This “increased leverage theory” rests on testimony from the DOJ’s economic witness, Professor Carl Shapiro, an antitrust economist at the University of California-Berkeley, who testified that a merged AT&T-Time Warner would lead to significant consumer harm. The DOJ’s harm theory also cites regulatory filings and internal documents to support their theory of harm.

However, Judge Leon finds that “neither category of evidence was effective in proving the Government’s increased leverage theory.” He then states that Shapiro’s predictions lack “reliability and factual credibility” given contrary econometric evidence from AT&T’s expert witness Professor Carlton, an antitrust scholar at the University of Chicago’s Booth School of Business, and witness testimony from NBC-Universal and Time Warner executives.

The decision even goes on to say that Shapiro’s testimony and evidence weren’t able to prove any raised costs on the parts of distributors or consumers, let alone enough to outweigh the $350 million in annual cost savings to AT&T’s customers. These savings of $350 million, predicted by Shapiro, come from the elimination of double marginalization, which is a benefit that comes with all vertical mergers. AT&T, mainly a content distributor, and Time Warner, mainly a content producer, operate at two different levels in the supply chain. Therefore, they both charge individual markups.

After looking at the body of evidence presented by the DOJ, Judge Leon concluded that it falls short of the Clayton Act standard.

A merged AT&T will be able to shrink this combined markup as AT&T would no longer have to pay broadcasting fees to Time Warner to distribute their content on its distribution channels like DirecTV and U-Verse.

After looking at the body of evidence presented by the DOJ, Judge Leon concluded that it falls short of the Clayton Act standard. He states that an “incentive to engage in anti-competitive behavior,” as the government suggested and presented evidence for, doesn’t meet the Section 7 standard which requires a “probability of anticompetitive effects.”

This Is a Win for Consumers

The theories of harm presented by the DOJ relied on far-reaching hypotheticals and were clearly not enough to convince Judge Leon, and they shouldn’t convince anyone else, either. The econometric evidence presented by AT&T and the historical evidence of lack of anticompetitive conduct by vertically merged companies indicates that this merger isn’t likely to hurt consumers. Moreover, the Federal Communications Commision already has safeguards in place to prevent exactly the type of harms that the DOJ is alleging.

Since this decision heavily relied on the evidence presented in this particular case, it won’t substantially help other similar mergers like CVS-Aetna, Comcast/Disney-Fox, or CBS-Viacom. However, it is a green light for businesses to pursue deals that they were already planning on pursuing. It’s also important to realize that this was a vertical merger and will not impact decisions on horizontal mergers like that of Sprint and T-Mobile.

In conclusion, a merged AT&T-Time Warner would be able to engage in risk-taking while cutting costs for consumers and competing with online streaming services. This is a clear win for consumers—and it’s based on good economics.

Further Reading

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