The United States government is pressing ahead with its bid to block a major telecoms and entertainment industry merger, in an ongoing antitrust battle that underlines the challenges facing companies and regulators in the digital marketplace.
AT&T’s proposed $80bn takeover of Time Warner is widely seen as a move by both businesses to compete with digital platforms such as Google, Amazon and Netflix, which are increasingly dominating the entertainment industry. Time Warner owns broadcasters HBO and CNN, along with the Warner Brothers film studio. AT&T supplies content to end-users over various different networks. But, on 12 July, the Department of Justice (DoJ) launched an appeal against a court ruling that approved the merger.
Many antitrust experts have been surprised by the DoJ’s appeal. Vertical integration – involving a combination of companies at different points in a supply chain – is relatively uncontroversial in terms of competition rules. Such deals are generally viewed as less harmful to competition than ‘horizontal’ mergers, whereby companies operating in the same industry or similar industries combine.
The DoJ risks being seen as out of step with the digital products and business models that are now commonplace in the media and entertainment market. ‘Last time the DoJ challenged a vertical merger, Jimmy Carter was the president,’ says Nanette Heide, partner at Duane Morris and Vice-Chair of the IBA’s Private Equity Subcommittee. ‘And the last time a vertical merger was blocked, Richard Nixon was the president.’
The DoJ had originally moved to block the deal in November 2017. But the matter appeared to be settled when Judge Richard Leon cleared the deal in June 2018 and issued a decisive rejection of the government’s case. ‘I do not believe the government has a likelihood of success on the merits of an appeal,’ Leon said in the judgement. The decision was highly fact-based, offering few grounds for reversal.
US antitrust laws have long recognised that vertical integration is commonly pro-competitive and output-enhancing, adds Justin Stewart-Teitelbaum, Counsel at Freshfields Bruckhaus Deringer. ‘In the US merger control system, the burden of proof is on the agency – in this case the DoJ – and Judge Leon essentially found that on all three theories of harm posited, the DoJ had not carried their burden as a matter of evidence.’
The government had argued that permitting AT&T to acquire Time Warner was likely to harm competition in the video programming and distribution market by enabling AT&T to use Time Warner’s ‘must have’ television content to either raise its rivals’ video programming costs or drive those same rivals’ customers to its subsidiary, DirecTV. The overall result, the argument went, would be higher prices for consumers.
‘The DoJ didn’t embrace the full breadth of how this merger in some respects was a way for AT&T and Time Warner simply to survive in the face of competition from new online video delivery platforms such as Google, Amazon, Netflix and Hulu,’ says Heide. ‘Consumers are no longer dependent on one distributor. That’s not how content is delivered anymore.’
Heide wasn’t surprised the judge ruled in favour of the deal. ‘If you look at the structure of what AT&T and Time Warner do in today’s marketplace, you do feel like the DoJ’s arguments were a little bit antique,’ she says. ‘I don’t think they really embraced how significantly this marketplace has changed and how it’s still changing every single day.’
Such changes are typical of the digital era. ‘We are witnessing the process of “creative destruction” as outlined by the economist Joseph Schumpeter,’ says Simone Lahorgue Nunes, partner at Levy & Salomão Advogados and former Co-Chair of the IBA Technology Law Committee. ‘eBay, Uber, Airbnb, WhatsApp, FinTech firms and Netflix are just a few of the companies driving that process.’
“I don’t think the DoJ’s arguments really embraced how significantly this marketplace has changed and how it’s still changing every single day
Vice-Chair, IBA Private Equity Subcommittee
Judge Leon’s verdict is a powerful argument in favour of dropping ex-ante regulation for disruptive businesses, says Lahorgue Nunes. ‘No law will be able to forecast and set forth the best solution to ensure competitiveness in such dynamic environments – this is a task for the antitrust authorities.’
However, it’s not an indication that antitrust policy requires a fundamental review. ‘I don’t think the antitrust laws need updating to deal with technological developments or platforms,’ says Stewart-Teitelbaum. ‘We can apply the existing antitrust laws and trust that they’re flexible enough and tethered to the right guiding principles. I think the US Federal Trade Commission and the DoJ generally feel the same way about that.’
It has been suggested that Leon’s judgment will ‘open the floodgates’ for a host of similar vertical integration deals. Soon after the judgment, US cable group Comcast launched a $65bn offer for some of entertainment company 21st Century Fox’s most important assets. Comcast is now locked in an intensifying bidding war with media company Walt Disney for the Fox businesses. A Deloitte report, The state of the deal: M&A trends 2018, points to expectations for a high degree of industry convergence – mainly in related businesses or vertical integration.
‘The fact that the DoJ brought the suit in the first place was out of the ordinary, so for parties considering vertical deals, it may have given them pause,’ says Stewart-Teitelbaum. ‘People were closely watching the outcome, even beyond antitrust lawyers.’
Heide believes the DoJ’s appeal is primarily motivated by its desire to clarify the position on vertical mergers. ‘It’s probably trying to get clarification on the analysis applicable to vertical mergers and there’s speculation it would like to reverse some of Judge Leon’s analysis,’ she says. ‘However, all of this could backfire on the DoJ with precedent set in the appeal that could limit its ability to challenge vertical mergers.’