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The Justice Department would face significant — but not insurmountable — challenges if it sues to block the pending $85 billion merger between AT&T Inc. and Time Warner Inc., the type of deal between a supplier and buyer that rarely faces antitrust scrutiny.
Antitrust regulators tend to focus on proposed mergers between direct competitors rather than a vertical deal like this one between a producer of media content such as Time Warner and AT&T, which is primarily a content distributor. Since 2000, the Justice Department and the Federal Trade Commission have reviewed only about 20 vertical deals that raised antitrust concerns, according to Jennifer Rie, a senior litigation analyst with Bloomberg Intelligence. Of those, one transaction was abandoned and the rest ended in consent orders. None went to court.
“Aside from small possible areas of overlap” between the two companies, “I don’t see the rationale for blocking this on regulatory grounds,” Paul Verna, a senior analyst with research firm eMarketer, told Bloomberg Law. He noted that nothing makes this merger stand out from transactions that antitrust regulators have cleared before.
Nevertheless, John Bergmayer, senior counsel for digital consumer advocacy group Public Knowledge, told Bloomberg Law that he sees “a fairly strong legal case that can be made against this deal.”
Rather than focusing on market overlaps, Bergmayer said regulators could show that “coordinated effects” between AT&T and Time Warner could drive up prices to consumers and rivals and give the merged entity the “incentive and ability to harm both rival video distributors and rival programmers.”
As an example, Bergmayer pointed to “cross-licensing.” The companies license programming to each other for their respective video platforms. If both companies are under the same corporate umbrella, each recoups some of what it pays to the other party, he said. That could create an incentive to charge above-market prices to each other, because neither company suffers from that deal. They could then use those prices as a benchmark to overcharge third parties. The companies could also seek to use those high prices to justify rate increases to consumers, he said.
The proposed tie-up of AT&T and Time Warner could also pose a risk if it is part of a wider shift into massive, vertically-integrated media silos. In particular, analysts compare the AT&T deal to Comcast Corp.'s 2011 takeover of NBC Universal, which the Justice Department cleared after the parties agreed to behavioral remedies that included a pledge not to discriminate against rivals on content or platform.
Enforcing those remedies hasn’t been seamless, with several content providers complaining that Comcast discriminated in favor of its content on its cable platforms in ensuing years.
Concentration by itself has competitive implications. “In concentrated industries, it’s easier for companies to just observe and copy each other,” Bergmayer said. “The benefits of competition in terms of lower costs, different kinds of products, etc., often only become clear once you pass a certain competitive threshold.”
AT&T’s bid for Time Warner “makes it obvious that Comcast/NBC was not a one-off,” he said.
In that sense, he said, the proposed tie-up might mark a point at which concentration among providers and pathways threatens the competitive ecosystem at large.
Challenges to vertical mergers are rare, and this one would be particularly unusual. Antitrust practitioners haven’t seen the hallmarks of a dangerous vertical merger in this case, such as significant overlap between the parties at an important level of the business, downstream market power, or “must have” content that will be locked up on AT&T’s network.
Vertical deals are generally not thought to raise serious antitrust issues unless there is market dominance in upstream or downstream market, Rie said. The way regulators typically evaluate vertical deals, that would make the DOJ’s case hinge on how it defines the market in which one of the two players has a dominant position. That case is hard to make in court, and decades have passed since DOJ last tried.
Some observers suggest that the motivation to bring a suit might be political, a conclusion the Justice Department will be keen to avoid. Regulators instead want to be seen as methodically applying established merger guidelines when they investigate proposed deals, said Jonathan Lee, a former trial attorney in the DOJ’s antitrust division. Lee now works as a consultant on telecom issues.
“The antitrust division always wants to give the impression, because it’s usually true, that they’re not very political. They have these guidelines that tell people, ‘This is how we analyze the transactions. It doesn’t matter if you’re a favored political party or not. We’re just going to look at the market power.’”
Referring to a possible lawsuit, Lee told Bloomberg Law, “I don’t think anybody would have anticipated this just by the application of their guidelines,” adding that the Justice Department is in a “tricky situation.”
But Verna noted that these types of deals are complex and involve rapidly evolving markets. That can make it difficult to handicap their competitive effects. Without knowing what information the DOJ has garnered over a year of reviewing the deal, it is impossible to say for sure what is in regulators’ hands.
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