After 18 months of hard-fought investigation, litigation, congressional testimony, and media coverage, US District Court Judge Richard Leon recently rejected an attempt by the US Department of Justice (DOJ) to enjoin AT&T’s $108 million acquisition of Time Warner.
As the first litigated challenge to a so-called “vertical” merger in nearly 40 years, AT&T/Time Warner attracted substantial attention from the antitrust bar and the media more broadly. AT&T/Time Warner is a vertical merger that combines two firms at different levels in the distribution chain. By contrast, most of transactions challenged by DOJ and FTC are horizontal mergers that combine two direct competitors at the same level in the distribution chain. The horizontal/vertical distinction is critical. While horizontal mergers by definition eliminate an independent competitor from the market, vertical mergers do not. For this reason, vertical mergers rarely attract significant antitrust scrutiny.
Judge Leon’s decision, while lengthy, is straightforward: he found DOJ’s documentary evidence and witness testimony to be inconclusive at best, and its econometric analysis to be both unsupported by facts and unreliable. As a result, DOJ failed to meet its burden to show that the transaction is likely to substantially lessen competition.
The Video Programming and Distribution Industry
Television content traditionally reaches viewers through a three-stage distribution network. First, content creators create original television programming, such as TV shows and rights to show live sporting events. Second, video programmers acquire and aggregate television content from content creators and package that content into television networks. Finally, video distributors license TV networks from video programmers and distribute those networks to end consumers, usually through cable bundles.
AT&T and Time Warner both generally compete in the video programming and distribution industry, but at different levels in the distribution chain. Time Warner creates content (through its Warner Bros. studio) and aggregates content into networks (through CNN, TBS, HBO, and Cartoon Network, among others), while AT&T distributes networks to end consumers (through DIRECTV and U-Verse).
This distribution model is undergoing several significant changes. AT&T and Time Warner face increased competition from Netflix, Hulu, Amazon, YouTube TV, and others that both create content and distribute programming via third-party facilities. Millions of consumers have “cut the cord” and switched from traditional television distribution to these new distributors. Additionally, traditional distributors have lost substantial advertising dollars to digital advertisers, such as Google and Facebook. AT&T and Time Warner viewed the transaction as a means to better compete against these new forms of video distribution and advertising.
DOJ’s Challenge and Judge Leon’s Decision
After a 12-month regulatory investigation, DOJ filed a complaint in November 2017 seeking to enjoin the AT&T/Time Warner transaction. In its complaint, DOJ alleged that AT&T’s ownership of Time Warner—and, in particular, so-called “must-have” networks, such as CNN, TBS, and HBO—would provide the combined company with increased leverage during negotiations with rival distributors, such as Charter cable and Dish satellite. To the extent Time Warner failed to reach a deal with distributors, lost revenues (content fees and advertising revenues) would be offset as some customers switched to AT&T distribution. All of this would, in turn, result in higher subscription fees for consumers.
During the trial, AT&T and Time Warner attempted to assuage these concerns by offering a settlement “fix.” Specifically, AT&T agreed to go into “baseball-style” arbitration in any carriage disputes with rival distributors, during which it would not blackout “must-have” channels. The parties argued this would eliminate any increased leverage resulting from the transaction.
In past vertical matters, DOJ has agreed to similar remedies to mitigate the potential for anticompetitive harm arising from the transaction. However, the new Assistant Attorney General for the DOJ’s Antitrust Division, Makan Delrahim, has expressed disfavor of so-called “behavioral” remedies, instead preferring parties to divest assets or businesses to resolve agency concerns. As a result, DOJ was unwilling to agree to the parties’ offer to arbitrate carriage disputes and instead chose to litigate.
In a 170-page opinion, the court was unpersuaded by DOJ’s theory and evidence, including documents and testimony from the parties and industry participants and the government’s expert economist. The court found no evidence to support DOJ’s increased leverage theory in the parties’ documents. Third-party testimony, largely from AT&T’s video distributor competitors, was frequently inconsistent. The court also relied heavily on DOJ’s concession that the transaction would create substantial efficiencies and found the parties’ commitment to arbitrate fee disputes would have a real-world impact on fee negotiations.
In sum, the DOJ failed to show that the transaction was likely to substantially lessen competition in video programming and distribution industry, and the court denied DOJ’s attempt to enjoin the transaction. DOJ has appealed Judge Leon’s decision; the parties closed the transaction in June.
Despite substantial media coverage, the AT&T/Time Warner decision is not a sea change in merger enforcement. Vertical mergers have been, and remain, harder to challenge than horizontal mergers due to their built-in efficiencies. While every merger is different, the decision may temper future challenges to vertical mergers. But it is unlikely to have any real impact on horizontal merger challenges, which make up the vast majority of agency enforcement actions.