From populists on the right like Donald Trump to populists on the left like Bernie Sanders, the recently announced AT&T-Time Warner merger has been fiercely condemned by politicians seeking to exploit the anti-establishment wave.
Back in the world inhabited by regulators, antitrust lawyers, and economists, where merger policy is based on the strict application of rules and precedent to the specific facts of the case, the merger’s competitive effects are to be determined. How boring.
To her credit, and in a very measured and un-Trumpian way, Hillary Clinton offered a dispassionate assessment of the merger, claiming via a spokesperson that she “thinks that regulators should scrutinize it closely.”
Merger policy must be applied consistently so that firms can predict outcomes and plan accordingly. If merger rules change based on the populist winds, with deals being rejected on abstract notions of “gross concentration of power,” firms will be discouraged from pursuing even pro-competitive transactions.
What might a traditional application of merger principles to the AT&T-Time Warner merger look like? The closest and most recent template is the Department of Justice’s and Federal Communications Commission’s conditioned approval of the Comcast-NBCU merger in 2011—a case in which a broadband and traditional video distributor (Comcast) vertically integrated into content (NBCU).
As an alternative template, some commentators have pointed to the recently blocked horizontal mergers between Comcast and Time Warner Cable (not to be confused with Time Warner) and between AT&T and T-Mobile. Unlike those deals, the pending merger between a distributor (AT&T) and a content maker (Time Warner) would not increase concentration, grossly or otherwise, in any relevant antitrust market. For that reason alone, regulators could be less inclined to block the deal.
In Comcast-NBCU, regulators anticipated that Comcast might withhold newly acquired NBCU content from distribution rivals, both traditional pay TV providers and nascent online video distributors (“OVDs”). To protect against these acts of “foreclosure,” the DOJ and FCC tightened existing protections for rival cable television providers, and imposed new protections for OVDs, requiring Comcast to license content to all OVDs at “fair-market value” conditional on the OVD’s licensing content from a similarly situated content provider. Such protections are examples of “behavioral remedies,” and are distinguished from “structural remedies,” which require a change in the structure of the transaction (for example, a divestiture of certain assets).
How successful were these behavioral remedies? Project Concord, an ad-supported OVD, brought the first complaint under the NBCU protections. The arbitrator ruled in favor of the complainant in short order, compelling Comcast to license its online content at the rate sought by Project Concord. Another OVD filed a notice of intent to arbitrate under the NBCU protections, but withdrew the notice after reaching a programming agreement with Comcast. That two out of two challenges resulted in speedy relief for complainants suggests that the Comcast-NBCU behavioral remedies were not as ineffective as some analysts believe.
In an economic appendix to its order approving the deal, the FCC developed a foreclosure model to predict the likelihood that Comcast would withhold content from distribution rivals (a loss to the upstream division), with the aim of boosting Comcast's subscribers (a gain to the downstream division). As my co-authors and I have shown, the foreclosure calculus boils down to two key parameters: (1) how important the potentially withheld NBCU content was for rival distributors (informing the “departure rate”), and (2) how big Comcast’s share was in the relevant distribution market (informing the “diversion rate”).
With respect to the departure rate, NBCU owned certain “must-have” content in the form of several local NBC affiliates, suggesting that Comcast could now inflict pain on its pay TV rivals. And Comcast’s share of the pay TV market was 60 percent in certain local markets such as Philadelphia, Chicago, and Miami, indicating that the diversion rate could also be high. Based in large part on these two parameters, the agencies determined that post-transaction, Comcast would profit from foreclosure of its distribution rivals. Hence the need for behavioral protections.
While it is too early to know what the FCC’s foreclosure model will predict in the case of AT&T-Time Warner, we can question whether AT&T’s withholding any Time Warner content would cause a rival distributor’s customers to depart in a material way. Nothing in Time Warner’s content portfolio has ever been characterized as must-have programming, a label that until now has been limited to local sports or local broadcast networks. This is not to suggest that CNN and HBO are not special. The question is whether either network is so special that its fan base would be willing to switch pay TV providers—or in the case of HBO Now, to switch broadband providers—to keep watching.
We can also question whether a departing customer who was so upset about missing Time Warner programming would likely be diverted to the merged firm. Even after acquiring DIRECTV, AT&T has on average 27 percent of any local pay TV market, significantly less than Comcast’s average video penetration rate of 41 percent. And if the relevant distribution market is mobile broadband, AT&T’s share is 33 percent.
The potential lack of must-have inputs in Time Warner’s content portfolio, combined with AT&T’s relatively small downstream market share (compared to Comcast’s) suggests that, at least according to the FCC’s foreclosure model, the present merger might be treated the same or even more leniently than Comcast-NBCU.
This is not music to a populist's ears, who would prefer that the foreclosure model be scrapped or, in the case of Mr. Trump, be deported to Mexico.
Of course, it’s too early to make any predictions on the merger's effects. While it might benefit politicians to condemn the merger now based on gut feelings, analysts scrutinizing the deal should take a deep breath, look for historical precedent, and let the facts lead them to their conclusions.
Twitter: @halsinger
