On November 20, the Department of Justice (DOJ) filed a lawsuit under section 7 of the Clayton Act to enjoin the merger between AT&T and Time Warner. According to the government, the deal—which has been in the works since October of last year—is worth $108 billion and would have a deleterious effect on consumer prices for television subscriptions. ((Compl. at 1-2, U.S. v. AT&T Inc., (D.D.C. 2017) (No. 1:17-cv-02511).)) AT&T became one of the largest distributors of television services in the country after its acquisition of DirecTV in 2015. ((Cecila Kang & Michael J. de la Merced, Justice Department Sues to Block AT&T-Timer Warner Merger, N.Y. Times (Nov. 20, 2017), https://nyti.ms/2jJLC2B.)) Following in the footsteps of its competitor Comcast, which acquired NBCUniversal in 2011, AT&T seeks to enter the video content market by acquiring Time Warner. Time Warner owns a number of popular networks, including CNN, TBS, TNT, HBO, and Warner Bros, that it licenses to the major video distributors. The AT&T-Time Warner merger would create an entertainment giant.
The deal would constitute a vertical merger in which AT&T would acquire significant upstream assets in the video content market that it could then distribute to consumers downstream via bundled network packages. Antitrust laws have traditionally been more concerned with horizontal mergers than it has been with vertical mergers. ((See Steven C. Salop & Daniel P. Culley, Revising the U.S. Vertical Merger Guidelines: Policy Issues and an Interim Guide for Practitioners, 4 J. Antitrust Enforcement 1, 3-4 (2015).)) The DOJ’s merger guidelines reflect this concern with horizontal mergers. The Non-Horizontal Merger Guidelines were initially promulgated as a subsection of the Horizontal Guidelines in 1984, and they have not been updated or modified since. ((See U.S. Dep’t of Justice, Non-Horizontal Merger Guidelines (1984), available at https://www.justice.gov/atr/non-horizontal-merger-guidelines.)) The Non-Horizontal Guidelines remain sympathetic to efficiency justifications for vertical mergers and the DOJ “will give relatively more weight to expected efficiencies in determining whether to challenge a vertical merger than in determining whether to challenge a horizontal merger.” ((Id. at § 4.24.)) In contrast, the Horizontal Merger Guidelines have been updated three times since 1984 and outline a significantly more comprehensive and restrictive approach to mergers between competitors. ((See U.S. Dep’t of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines § 1 (2010).)) Some scholars have called for a revision of the 1984 Non-Horizontal Merger Guidelines to better address current issues with respect to vertical mergers, but, until the DOJ undertakes that task, merging companies and government agencies are left with unclear and out-of-date guidelines. ((See Salop & Culley, supra note 3, at 7.))
Although vertical mergers are generally less suspect than horizontal mergers and despite the fact that the vertical guidelines are outdated, the DOJ’s challenge to the merger does not reflect a substantial change in policy. The DOJ has challenged fifty-two vertical mergers since 1994; the majority of these have been challenged on a theory of input foreclosure. ((See Steven C. Salop & Daniel P. Culley, Vertical Merger Enforcement Actions: 1994 – 2016, Georgetown University Law Center (2017), http://scholarship.law.georgetown.edu/cgi/viewcontent.cgi?article=2541&context=facpub.))
The government’s complaint identifies two theories that explain how the merger would have anticompetitive effects. In line with its earlier practices, the first theory is that the merged company would harm competition and consumers through what is called input foreclosure. By acquiring an upstream content provider, AT&T would have the “incentive and ability to weaken its video distributor competitors by charging them higher prices for [Time Warner’s] networks.” ((Compl., supra note 1, at 18.)) If competing distributors “cannot substitute to other equally cost-effective inputs, their costs will be raised” and consumers will have to make up the difference. ((See Salop & Culley, supra note 3, at 24.)) With the rise in consumer prices of competitor distribution services, AT&T will have the ability to attract consumers with lower prices on Time Warner network content.
The argument rests upon the assertion that many of Time Warner’s networks are “must carry” networks. ((Compl., supra note 1, at 4.)) The video distributors currently compete for favorable contracts with the content providers (such as Time Warner). The government defines the relevant markets in this case as the “All Video Distribution product market” and the “Multichannel Video Distribution market,” the latter comprising a subdivision of the former. ((Id. at 13.)) These defined markets focus on the downstream market in which AT&T currently competes with other distributors for consumers—the Complaint leaves implicit the input market where the distributors compete for content and which is the primary concern of the input foreclosure theory. According to the theory, the harm to consumers materializes when competing distributors cannot substitute content in that market. The government asserts that, among other things, coverage of live sporting events (including the lucrative NCAA March Madness tournament) and HBO at least are must-have Time Warner content. It remains to be seen whether this “must-carry” claim is viable—consumers may prefer one news network over another, but CNN certainly competes with news networks not owned by Time Warner. If there is sufficient competition with the Time Warner networks, the government’s input foreclosure theory will be undermined.
In any event, the lawsuit may reflect the current administration’s less permissive view of blockbuster vertical mergers. In a speech in early November, Makan Delrahim, the newly-minted head of the DOJ’s antitrust division, expressed his preference for “structural” remedies with respect to potentially anticompetitive mergers over the “behavioral” remedies that the DOJ imposed in approving the Comcast-NBCUniversal merger. ((Brian Fung, AT&T Wants to Close its Deal with Time Warner. But First, it has to Go Through This Guy., Wash. Post (Nov. 2, 2017), https://www.washingtonpost.com/news/the-switch/wp/2017/11/02/att-wants-to-close-its-deal-with-time-warner-but-first-it-has-to-go-through-this-guy/?utm_term=.396391235ee0.)) Accordingly, reports prior to the lawsuit suggested that the DOJ would require Time Warner to sell significant assets before it would approve the deal—a requirement that AT&T was unwilling to entertain. ((See id.)). If the government remains unwilling to compromise with behavioral fixes, U.S. v. AT&T may signal a more constraining approach to vertical mergers.
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