The D.C. Circuit Court of Appeals is allowing the huge merger between AT&T and Time Warner to stand. On Tuesday, the appellate court ruled that the government had failed to prove that the transaction valued between $85 billion and $105 billion that would give the nation’s largest telecom control over CNN, TBS and TNT amounted to enhanced leverage that would harm the marketplace.
“The government’s objections that the district court misunderstood and misapplied economic principles and clearly erred in rejecting the quantitative model are unpersuasive,” writes Circuit Judge Judith Rogers for the panel.
The Justice Department sued in November 2017 to block the merger. Because of President Donald Trump’s vocal distaste of CNN and his pledges on the campaign trail to not allow this type of media power consolidation, the move was immediately seen through a political perspective, with many suspecting undue interference. But politics took a back seat to principles of antitrust law as well as a federal judge’s struggles to weigh what amounted to the first courtroom challenge to a vertical merger in decades. AT&T and Time Warner weren’t direct competitors. Instead, Time Warner gave AT&T access to supply, and according to the government, the ability to advantage AT&T’s DirecTV service to the potential disadvantage of other cable and satellite competitors.
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This went to trial in the spring of 2018, and in the aftermath, U.S. District Court Judge Richard Leon handed down a decision finding that the government had presented insufficient evidence to demonstrate why competition in the media industry will be substantially lessened by the merger.
On appeal, the government argued that Judge Leon had ignored “economic logic” and the testimony of its chief expert about the anticompetitive effect of the proposed merger. Professor Carl Shapiro had opined that Turner Broadcasting (the parent company of CNN, TBS and TNT) would have increased bargaining leverage post-merger because the parent company would more readily tolerate blackouts in the event of bargaining friction with Dish, Verizon and other distributors. That, in turn, would lead to these distributors having to pay hundreds of millions more for programming. Consumers would ultimately have to bear these costs.
AT&T presented its own experts testifying about these types of negotiations and had experts doubting Shapiro’s use of Nash bargaining theory. The company also pointed to the lack of statistically significant effects on content pricing from the 2011 Comcast-NBCU merger plus other instances of vertical integration (such as Time Warner-Time Warner Cable). AT&T also presented the merger has being necessary to take on tech upstarts including Netflix, Facebook and Google.
In Tuesday’s decision, Rogers acknowledges “a dearth of modern judicial precedent on vertical mergers and a multiplicity of contemporary viewpoints about how they might optimally be adjudicated and enforced.”
She adds that in a probabilistic world as contemplated by those who enacted Section 7 of the Clayton Act around the turn of the 20th century, uncertainty exists about future real-world impact.
“At this point, however, the issue is whether the district court clearly erred in finding that the government failed to clear the first hurdle in meeting its burden of showing that the proposed merger is likely to increase Turner Broadcasting’s bargaining leverage.”
Writing for the panel, she finds the government hasn’t cleared that hurdle. She points to how the district court accepted Nash bargaining theory but rejected its specific prediction.
“The district court’s statements identified by the government … do not indicate that the district court misunderstood or misapplied the Nash bargaining theory but rather, upon considering whether in the context of a dynamic market where a similar merger had not resulted in a ‘statistically significant increase in content costs,’ the district court concluded that the theory inaccurately predicted the post-merger increase in content costs during affiliate negotiations,” she writes.
Ultimately, the “fact-specific conclusion based on real-world evidence” trumped the government’s theories, and with extra credit for Turner’s offer to go to arbitration and avoid blackouts with any distributor, Judge Leon’s conclusions are accepted as not being of sufficient error to warrant any reversal. While the appellate decision does highlight possible faults in Leon’s quantitative analysis, the judge is found to not have abused discretion in denying injunction relief to block the merger.
David McAtee, general counsel at AT&T, commented, “The merger of these innovative companies has already yielded significant consumer benefits, and it will continue to do so for years to come. While we respect the important role that the U.S. Department of Justice plays in the merger review process, we trust that today’s unanimous decision from the D.C. Circuit will end this litigation.”
The Justice Department says it won’t further appeal the outcome.
As a result of today’s decision, AT&T will no longer need to honor a “firewall” over the management of Turner Broadcasting. That was established to make it easier to unwind the merger should the appellate court chose a different conclusion. Now, AT&T can involve itself in decisions including pricing and staffing at its newly acquired cable television networks.
Tuesday’s ruling avoids definitive broad guidance about future vertical mergers, but will no doubt be seen as a boost to executives throughout Corporate America contemplating M&A without falling into legal traps. There will continue to be second-guessing about whether the Justice Department picked the right strategy in attempting to block the merger. Perhaps most important, the entertainment industry is primed to see the real effects of vertical integration. The theories presented in this case now make way for practical application of a marriage between a telecom behemoth and a company that owns Warner Bros., HBO and some of the television industry’s most premium channels.
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