Can Justice Department De-FAANG AT&T and Time Warner’s Merger Argument?

Randall Stephenson AT&T TimeWarner Merger

In the six weeks of the AT&T-Time Warner antitrust trial, one theme emerged from the companies’ defense of their merger: We’re getting left in the dust by big tech, and we need to bulk up to better compete.

Equally clear was what the Justice Department thought about that rationale: When it comes to antitrust law, we don’t have a whole lot of sympathy.

The DOJ refers to the new threat posed by Facebook, Amazon, Apple, Netflix and Google as a straw man argument, because it feels the so-called FAANG companies are not necessarily playing in the same competitive markets as traditional media congloms like AT&T and Time Warner.

Much attention will be paid to how U.S. District Judge Richard Leon, a George W. Bush appointee, weighs in on that argument when he announces his decision on June 12.

At the very least, the trial highlighted that conglomerates seeking future combinations should take note: If the rationale for a merger centers on the argument that big tech needs bigger rivals, antitrust officials will respond with a degree of scrutiny and even skepticism.

Disney is about to launch a subscription streaming service, and it could argue that its combination with many of Fox’s assets will create a much more robust rival to Netflix, not to mention a controlling stake in Hulu. But it also will have to address how the merger will impact more traditional options — like theatrical box office and cable network carriage fees.

“It is not going to be enough to just throw spaghetti at a wall, hoping something sticks,” says Ketan Jhaveri, former antitrust attorney for the DOJ’s Telecommunications Task Force and co-CEO of legal tech platform Bodhala. “You have to go deeper than that.” He adds that what will be critical in how Disney and Fox need to argue is how Leon decides and the Justice Department reacts.

In its post-trial brief, the Justice Department claims that AT&T and Time Warner “seem to be asking the court to find a new defense to an illegal merger: ‘We are getting killed by new competition in different markets.’” The DOJ notes that rarely has that “failing firm” defense been accepted by courts.

Jhaveri says the failing firm argument isn’t all that new. During the 1990s, he says, rival companies used it as Microsoft gained strength.

Hal Singer, economist and adjunct professor at Georgetown University, sums up the implications for the media business if the court adopts the DOJ’s view.

“Had the DOJ negotiated conditions, the state of the law wouldn’t have changed. But [with the government] having gambled, the outcome may be a new antitrust precedent.”
Larry Downes, Georgetown Center for Business and Public Policy

“The only efficiencies that are recognized [would be] those that could counteract a price effect in the relevant market,” he says. In the DOJ’s view, that relevant market is the one for pay-TV services, not the Facebook-Google competition for advertising.

AT&T and Time Warner believe the government has fallen far short of proving its case even from that standpoint, or in suggesting the idea that consumers will be harmed by their merger.

Even before the trial, though, there had been a steady drumbeat of calls from the right and the left that the problem isn’t in the DOJ’s interpretation of antitrust laws but in the laws themselves. Given the rise of big tech, the thinking goes, the time has come for a revision.

For instance, Apple’s market cap alone has nearly doubled over the past two years, and is quickly approaching $1 trillion. That’s nearly four times as much as AT&T and Time Warner would be worth together, based on their current market caps. Some even believe that Apple’s mobile app and content sales could soon dethrone some of the entertainment industry’s most prestigious moneymakers. “As of this year, the App Store alone will overtake global box office revenues,” forecast Apple analyst Horace Dediu earlier in 2018.

A recent report by the World Economic Forum on creative disruption notes that Google and Facebook together control more than half of all global mobile ad revenue. “Our concern is the sustainability of the industry,” says the World Economic Forum’s Farid Ben Amor.

The real threat may not be pressure on traditional media but on new players trying to enter the market, especially as technologies like artificial intelligence and augmented and virtual reality emerge, he says.

Larry Downes, project director at the Georgetown Center for Business and Public Policy, believes that the government’s case in the trial willfully turn a blind eye to market realities.

“If the government loses, I expect dealmaking will ramp up even faster,” he says. “Had the DOJ simply negotiated conditions with AT&T and Time Warner, the state of the law wouldn’t have changed. But [with the government] having gambled, the outcome may be a new antitrust precedent that makes clear vertical mergers continue to be beneficial for consumers, and that the 1950s black-and-white view of media the government argued is, as a matter of law, dead and buried.”