November 27, 2017 10:05 AM

Assumptions On Assumptions: The DoJ's Fatally Weak AT&T/TWX Complaint

Good things are even better when they keep coming. When a friend of mine would say, "let me tell you something...before I tell you something else," you knew you'd be laughing a lot. Likewise, who doesn't love Big Sean's "Blessings" (explicit lyrics) ("blessings on blessings on blessings...lessons on lessons on lessons")?  But, unlike Ferg's hilarious commentary, and Big Sean's blessings, some things-- assumptions--only get worse when piled on top of one another.

Last week, the Antitrust Division of the U.S. Department of Justice ("DoJ" or "the Government") filed a Complaint seeking to enjoin AT&T from acquiring Time Warner Entertainment ("TWX").  The DoJ argues that, post-merger, the combined firm will be able to unilaterally raise prices for rival multichannel TV distributors (like cable companies, phone companies, Dish, or over-the-top ("OTT") video providers) and/or retail consumers.  See, Complaint paras. 5-10. The problem with the Government's theory, though, is that even they know that it's a logical house of cards, with a foundation unsupported by any market evidence.    

Relevant Markets

The DoJ notes three kinds of video distributors: 1) traditional multi-channel video programming distributors ("MVPDs"), like cable, legacy phone, and satellite providers; 2) virtual MVPDs ("VMVPDs"), which are similar to MVPDs, but offered over the internet, and available nationally; and 3) subscription video on demand services ("SVODs"), like Amazon Prime and Netflix, who offer video on demand programming nationally, but do not offer live programming like news and sports. Complaint, paras 15-19.  

Based on these definitions, the Government asserts that  two relevant product markets exist: 1) the "All Video Distribution" market, which comprises all types of video distributors (MVPD, virtual MVPD, and SVOD), and 2) the "Multichannel Video Distribution" market, which includes MVPDs and virtual MVPDs (hereinafter, "MVPDs").  The relevant geographic markets, the DoJ argues, are local Designated Market Areas, which are defined by choices of supplier available to consumers (the wireline service providers of Multichannel Video Distribution vary according to their individual network coverage areas).  Complaint, paras 27-30.  

Competitive Effects

The DoJ contends that the merger will harm competition/raise prices in both the All Video Distribution and Multichannel Video Distribution markets throughout the country because it would give the post-merger firm the ability to unilaterally raise the price of wholesale programming (from Turner Broadcasting & HBO) to rival MVPDs.  The enhanced ability to raise prices to rivals is the DoJ's primary argument.

But, almost like the perfunctory "and stuff" ending that teenagers tack on to woefully incomplete answers, the DoJ also claims that the merger will "give the merged company the ability to impede and slow innovation by hindering emerging online competitors and would increase the likelihood of oligopolistic coordination." Complaint, paras. 31-41, generally; quote from Subsection V.B.  I quote the Complaint directly so that readers can see that this alleged harm is simply too general to merit analysis. The Government's main point, though, is not a huge improvement.

Assumptions Everywhere

Putting aside the Government's lack of factual support for its theory, let's look at all the assumptions (unsupported in the Complaint) that we have to accept in order for the Government's argument--that the post-merger firm can profitably raise prices (both for rivals and its retail customers) for TWX programming--to actually make sense.

Assumption: the premerger TWX was not already extracting the highest price that each distributor was willing to pay, i.e., it could have gotten higher prices if it pushed firms into "blackout."

Assumption on assumption *2: Retail MVPD customers are--per subscriber--more profitable than programming (which is also sold on a "per subscriber" basis).
 
Assumption * 3:. "Blackout" situations are always worse for the MVPD distributor than the programmer (i.e., the distributor always loses more customers/revenue from not carrying a channel at a higher price than the programmer forgoes from losing carriage). But see, below..

Assumption * 4: The post-merger TWX, as the owner of its own competitive MVPD, will be even more resistant to the threat of any given rival MVPD not carrying its content, because if some of the rival MVPDs customers defect to other MVPDs as a result of a blackout, at least some of those customers will become AT&T retail MVPD customers.

Assumption * 5: The acquisition of some of the retail customers that will leave an MVPD in response to a TWX programming blackout is at least as valuable as that MVPD was as a program distributor.

Assumption * 6: Post-merger, an MVPD with TWX programming also can profitably charge its own retail customers higher prices.

The Government Knows It's Wrong

Rather than go through every specious block/mistaken factual assumption in the DoJ's Jenga tower of dysfunctional logic, let's just analyze one--Assumption * 3.  This "assumption" (essentially, that the programmer will always get its price, no matter how uneconomic) seems to be something the Government actually believes is required by the antitrust laws; though principles of basic economics, and actual market conditions, say otherwise.  You see, a year ago (and only weeks after this merger was announced), the Government filed suit against AT&T and DirecTV, blaming AT&T's DirecTV unit for every other MVPD's refusal to carry the L.A. Dodgers for (at the time) the past 3 baseball seasons!

The Government filed its case--charging only DirecTV of wrongdoing--knowing full well that AT&T/DirecTV would have to settle prior to closing its merger (which it did in March of this year).  DirecTV's "crime," according to the DoJ, was publicly stating its refusal to accede to Time Warner Cable's (no affiliation w/TWX, and since then acquired by Charter Communications) "extravagant" demands of $5/subscriber simply to carry L.A. Dodgers baseball games, this particular "blackout" continues, and has lasted well over 4 seasons with MVPDs losing relatively few subscribers.

Notably, the Government did not accuse DirecTV, or any other MVPD, of participating in an illegal agreement to "boycott" TWC's regional sports network ("RSN").  Moreover, although AT&T settled the DoJ Complaint in March, Charter Communications (the successor to TWC) is still the only MVPD carrying the Dodgers' regular season games.  Thus, ironically, the DoJ, better than anyone, knows full well that the scheme it outlined in its Complaint has no basis in reality--as even the most "must have" sports content cannot be forced on competitors by a single vertically-integrated competitor (lCharter, which owns the programming (L.A. SportsNet) and serves about half of the L.A. area retail market).

Obviously

Likewise, the aggregate retail market conditions also clearly refute DoJ's assumption that price increases can be easily and profitably passed on to retail customers.  So far, as of the 3rd quarter, in 2017 the number of households, nationwide, subscribing to a MVPD service is down over 11% over the past 3 years. Leichtman Research Note, 3Q 2017 at pp. 2-3 (79% of American households subscribe to a pay TV package--down from 88% in 2014; a decline of over 11% in 3 years).  Moreover, satellite (like DirecTV) and telephone (AT&T's legacy U-Verse) MVPDs are losing customers at a much greater rate than cable. Id. at 6 (in Q3 2017 AT&T lost almost twice as many MVPD customers as all cable providers combined). Thus, any price increase--especially by a satellite or legacy telephone MVPD--would only accelerate customer loses!

The DoJ knows that the foundation of its case--assumptions on assumptions--is supported by nothing but mere speculation and out of context "hot docs." Soon enough, U.S. District Court Judge Richard Leon will know as well that the market realities in this case simply cannot support the Government's assumptions. 
 

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