Since Nov. 20, the date on which the Department of Justice Antitrust Division launched its challenge to the AT&T-Time Warner merger, through June 27, the date on which the division announced its conditional approval of the Disney-Fox merger, the media and entertainment marketplace has been peering deep into the legal crystal ball to anticipate the antitrust fortunes of these two landmark transactions.
For those who reflexively follow the “big is bad” principle, the Antitrust Division’s aggressive challenge to the AT&T-Time Warner combination was a welcome surprise while its failure to challenge the Disney-Fox combination in its entirety was a predictable disappointment.
Yet, courts demand persuasive evidence that a combination will likely result in net harm to consumers — an economic translation of the statute’s prohibition of only combinations where “the effect ... may be substantially to lessen competition."
Absent this evidentiary safeguard, dealmakers could not assess regulatory risk and firms would shy away from acquisitions that can enhance shareholder value and benefit consumers.
Both the district court’s ruling in the AT&T-Time Warner merger and the Antitrust Division’s conditional approval of the Disney-Fox merger represent sensible applications of modern antitrust law.
Properly understood, these transactions are logical responses to the creative forces of digital destruction that are rippling through the content markets and challenging legacy production and distribution models.
Both combinations represent competitive efforts to engineer entities with the combination of creative capacities and distribution scale required to compete in digital content markets that are converging on a handful of leading integrated platforms.
While these transactions naturally raise concerns over apparent increases in concentration within certain market segments (at least when those segments are viewed in isolation from the broader content landscape), rejecting these transactions would have most likely favored existing content platforms that already enjoy substantial “moats” against competitive threats. In short, these are likely cases in which bigger is mostly not bad.
In the AT&T-Time Warner merger, the government had argued that the combined entity, which brings together AT&T’s wireless and satellite TV subscribers and Time Warner’s creative properties, would demand higher fees from cable providers for “must have” content and consumers would then bear higher subscription prices.
But the government struggled to show this would happen. The problem is that AT&T would probably not have any credible threat to withhold content.
A “blackout” of any considerable duration would likely be economically irrational for AT&T, which would forfeit substantial licensing revenues with certainty in exchange for the possibility that it would poach a sufficient number of new subscribers to win that high-risk gamble.
Digital disruption makes that especially unlikely. Given the large and growing percentage of consumers who “cut the cord," combined with the billions of dollars invested by Amazon and Netflix to produce content for those consumers, it is unlikely that AT&T could expect that “starving” cable competitors of popular content would yield substantial numbers of new subscribers.
AT&T’s cable competitors would know all that and, as a result, any increased bargaining leverage attributable to the Time Warner acquisition falls to nominal levels.
The Disney-Fox combination is even more straightforward. The DOJ rightly scrutinized this transaction closely given that certain elements involve a horizontal combination in which head-to-head competition is potentially displaced and the likelihood of consumer harm is greatest.
While some have observed with alarm that combining Disney and Fox reduces the number of major studios from six to five, this ignores the entry of two major new studios that happen to be called Amazon and Netflix. In 2018, Netflix alone is expected to produce more output than any network or studio.
Hence, it is unlikely that the Disney-Fox combination would confer incremental pricing power in a market that is now overflowing with high-value content. The Amazon/Netflix factor similarly allays concerns over the vertical element of the transaction — namely, the fact that Disney will acquire a majority interest in the Hulu platform.
While this raises “content denial” concerns as in the AT&T/Time Warner transaction, those concerns are mitigated given that the combined Disney-Fox entity may bolster Hulu, which currently trails the leading platforms (yes, Amazon and Netflix) for original content in the video streaming market.
The most troublesome element was the horizontal combination of the Fox and Disney-owned regional sports networks and the division appropriately conditioned approval of the transaction on divestiture of Fox’s properties in that market.
Scrutiny of these transactions has produced an end-result that restores clarity as media and entertainment enterprises seek to acquire an integrated package of production and distribution capacities to remain competitive in markets that are abandoning pre-digital business models for monetizing content assets.
Even more fundamentally, regulatory and judicial scrutiny of these transactions has illustrated that, contrary to recent assertions, modern antitrust law has a competent toolkit to undertake the balancing analysis required to filter out “probably mostly good” from “probably mostly bad” combinations.
While digital disruption raises novel competition policy issues, antitrust law’s recent foray into the content M&A market provides assurance that its established methodologies are ready to meet that challenge.
