Results tagged “ATT/Time Warner Merger”

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. 
 
November 13, 2017 11:22 AM

The Strange Case of the Inverted Vertical Merger

After a year of not really hearing anything about AT&T's proposed acquisition of Time Warner Entertainment ("TWX"), we learned last week that the deal could be in serious jeopardy from the Antitrust Division of the U.S. Department of Justice ("DoJ" or "Department").  Many of the stories earlier in the week, citing "DoJ sources," suggested that the Department wanted AT&T to sell CNN, in order to gain approval.  In an extensive interview at the New York Times DealBook Conference, AT&T's Chairman, Randall Stephenson put the rumor to rest that CNN was a divestiture the DoJ was seeking, or that AT&T had offered. (See video of the full interview).  
 
Stephenson also noted his "surprise" that the Department would have concerns serious enough to litigate; noting that a vertical merger had not been successfully challenged in court in over 40 years, and that Comcast's acquisition of NBCU had presented much more difficult content problems than AT&T's proposed TWX acquisition.  Stephenson is understandably surprised, because he's absolutely correct on the law.  Nonetheless, the DoJ must have some concern about the deal, so what's going on here?
 
What an Anticompetitive Vertical Merger Looks Like
 
The words "vertical" and "horizontal" are used in antitrust to refer to firms' positions in the supply chain, from creating a product through to its delivery to consumers.  Firms at the same position in the supply chain are, of course, direct competitors, and a merger between them would be called a "horizontal" merger. On the other hand, the merger of a bakery with a grocery store would be an example of a vertical merger--the bakery produces products that are distributed to the public through grocery stores.
 
A vertical merger will rarely present an antitrust problem, unless one or both of the two merging partners has "market power." For example, if the distribution of a service is a monopoly (think local telecommunications services prior to the late 1990's) and a provider of a "competitive" service using this distribution network (like a long distance voice company) wanted to acquire the local telephone exchange, the antitrust agencies would likely be concerned that the acquiring firm may be able to foreclose other long distance companies from being able to continue to access the local distribution network to sell their services to end users, resulting in higher prices to consumers of long distance service.
 
AT&T and TWX

AT&T provides consumer fixed line voice, internet, and multi-channel television service throughout the service territories of its former incumbent local exchange providers. AT&T also provides nationwide mobile voice and internet service through AT&T Wireless, and nationwide multi-channel television service through its satellite (DirecTV) and streaming (DirecTV Now) services. All of the consumer services provided by AT&T are "competitive" services, available from multiple providers.
 
TWX is a worldwide entertainment conglomerate.  Its 3 major divisions are HBO (premium television/streaming entertainment), Turner Broadcasting (includes a number of popular cable channels, including CNN, TBS, and TNT), and Warner Bros. (primarily film and television production/distribution).  The Turner Broadcasting division, it should be noted, owns the rights to broadcast a number of basketball (NBA and NCAA Tournament) and MLB games, as well as assorted sports that no one watches, like golf and women's Irish curling [probably].
 
Nominal Overlap: While generally AT&T distributes the programming of others, it does own some regional sports networks under the "AT&T SportsNet" name. Although AT&T owns the exclusive rights to distribute the games of certain local teams (NBA/NHL/MLB/some NCAA) in Houston, Pittsburgh, Portland, OR, Seattle, and Utah, these regional sports properties do not "compete" with the games that Turner Broadcasting distributes nationally.
 
What Is Going On?
 
Adding to the confusion surrounding the Department's concerns, the reactions from even well-informed commenters have diverged greatly. Because this merger presents nothing exceptional from an antitrust perspective, some, like economist Hal Singer, have concluded that the only reason the DoJ is holding up the deal is to further prosecute President Trump's ongoing personal feud with CNN (owned by TWX).  However, others, like Harold Feld, argue that the DoJ is on the right track and that only large scale divestitures (like all of Turner Broadcasting, or DirecTV) could remedy the competitive problems with this merger.  
 
While Feld makes a compelling case to question the "spite" theory, and he offers the DoJ an ostensible case theory, it's not a convincing argument; as it ignores current market conditions, and relies on a lot of the same, now obsolete, market "assumptions" that the 1992 Cable Act is based on. Of course, this should come as no surprise, since Public Knowledge's current president--Gene Kimmelman--was one of the principle forces behind the Cable Act (on the side of broadcasters).  See, e.g., this NY Times article from 1992.  Note that the 1992 Cable Act continues to richly reward the broadcasters that these ("natural monopoly") arguments favored.  Consumer Reports notes that cable company "price hikes are mainly driven by the rising costs they face for carrying both traditional broadcast networks, such as CBS and Fox, and regional sports channels."
 
The Blind Men and the Elephant
 
Sometimes, as the old fable illustrates, you can't get an accurate picture by focusing on the smallest possible market that could (conceivably) be defined; and this is what I think is going on here.  In Feld's analysis, the post-merger firm is either a distribution colossus (why else would it need to divest DirecTV?), or a "must have" programming hoarder who may well put competitive video distributors (like Comcast?) out of business.  However, to have this opinion one has to explicitly disregard AT&T's stated reason for the deal--to build an advertising platform of the scale to offer competition to the Google/Facebook duopoly on mobile and desktop screens.
 
Public Knowledge, and the other opponents of AT&T's acquisition of DirecTV, ignored the company's stated purpose for that deal--that AT&T needed scale to be a more effective video distribution competitor. Instead, opponents preferred to focus only on the limited number of TV markets that would "lose" a multichannel competitor (those in which AT&T already provided U-verse TV).
 
Three years later, where are we?  Well, customers are continuing to "cut the cord" of traditional pay TV services, like the service offered over AT&T's U-verse.  However, by creating an entirely new video product--DirecTV Now--AT&T has, in less than a year, obtained 800,000 additional customers (a number that represents about 15% of AT&T's entire base of U-Verse TV customers at the time of its DirecTV merger announcement) and 60% of these customers are entirely new customers to AT&T

Said differently, in less than a year of marketing DirecTV Now, AT&T acquired 15% of the customers that took U-Verse TV 10 years to acquire. Rather than losing a choice in a few markets, consumers nationwide gained a choice and acted on it. Thus, consistent with its stated reasoning for acquiring DirecTV, the acquisition allowed it to stimulate output of multichannel video services. Opponents failed to realize the implications of AT&T's DirecTV purchase, in which a new nationwide competitor was created to challenge not only the traditional DirecTV satellite & U-Verse TV services, but also cable companies, other OTT providers, and may have even spurred the entry into the market of newer "large screen" players like Google, Hulu, others.
 
The Opportunity and the Danger
 
The AT&T/TWX merger, as noted by Mark Cuban at a Senate Judiciary Committee Hearing almost a year ago, gives AT&T a chance--and not a very good one, at that (according to Cuban)--to compete against the dominant new media ad giants.  To do this successfully, AT&T will have to, again, expand output of the firm it is acquiring; there simply are not any credible hypotheticals where AT&T "wins" anything by restricting TWX output. 
 
But, if the Department insists on defining the elephant as a snake, based on the shape of its trunk, there is a danger that it leaves existing markets worse off than when it found them.  If, for some crazy reason, AT&T actually agreed to sell off Turner Broadcasting, the only buyer would be another media conglomerate--further concentrating an already highly concentrated market (which is trending toward even greater concentration with Fox-Disney merger rumors) .  Similarly, if AT&T were required to sell off DirecTV, its entire ability to market to a nationwide base of potential video customers would be eliminated--practically guaranteeing that its only profitable strategy would be to restrict output to local market multichannel competitors!