Antitrust Scrutiny of Vertical Mergers Under the Trump Administration

By: Andrew Saba

The business world welcomed the Trump administration with open arms, believing it would usher in a new era of unprecedented growth by disposing of many of the barriers implemented during the Obama Administration, such as Net Neutrality. During his first week in office, President Trump signed Executive Order 13771, which requires federal agencies to cut two existing regulations for every new regulation they enforce. Since the implementation of the executive order, deregulation has ensued, the market has improved, and growth has been steady. One area where this pro-business approach has not been observed uniformly is that of vertical mergers in the cable industry. Most famously, the Department of Justice  (DOJ) sued to block the $85 billion merger between AT&T and Time Warner back in November, and the case is headed for an early trial in March. The ruling in this case will be largely influential in the cable industry, as more distributors and programmers of content are merging in order to stay competitive with the relatively new threat of streaming services.

The merger between AT&T and Time Warner is a vertical merger—a merger between two companies that operate at different stages of the production process for a specific finished product.  It usually occurs when two or more firms, operating at different levels within an industry’s supply chain, merge operations.  Time Warner is a producer of  cable content. It owns networks and premium content, including CNN and HBO. AT&T is a distributor of this content, and it owns DirecTV.  Historically, the DOJ and the Federal Trade Commission (FTC) have not blocked these types of mergers. The focus of their scrutiny largely concentrates on horizontal mergers (a merger between direct competitors) because a direct competitor is being eliminated from the market and anticompetitive effects are more readily apparent. Vertical mergers are thought to be generally beneficial to consumers. However, concerns have surfaced. With the advent of new streaming services across multiple platforms, vertical mergers have become more prevalent in the cable industry. In these vertical mergers, the DOJ is concerned with “foreclosure” in the relevant market. Here, the foreclosure concern is that AT&T, with its already substantial distribution capability through DirecTV, can effectively refuse to license or substantially raise prices of Time Warner content to its competitors. With the exclusive “must have” content of Time Warner (such as HBO and exclusive sports broadcasts), as the complaint alleges, AT&T has the potential to substantially lessen competition, raise prices for consumers, and stifle innovation in the industry.

The DOJ faced a similar situation in 2011 when Comcast merged with NBC Universal, a deal that brought together the nation’s largest cable operator with one of the nation’s largest programmers. The deal is very similar to the AT&T-Time Warner deal, with both involving a major distributor and programmer in the cable industry. In contrast to the AT&T-Time Warner transaction, however, the DOJ approved the Comcast-NBC Universal deal. The approval was subject to the parties agreeing to behavioral conditions, such as promising not to use Comcast’s cable infrastructure to give NBC content favorable treatment, as well as an arbitration process to handle disputes over program access with other distributors. In response to the government’s suit, AT&T and Time Warner have stated they would comply with similar conditions. The effectiveness of these behavioral conditions, however, has been debated among antitrust experts (including the DOJ’s top antitrust regulator Makan Delrahim) and may be the reason why the government is now seeking structural remedies instead, which forces a company to sell assets before a merger or acquisition. AT&T and Time Warner have flatly denied any proposed structural conditions to the merger, and the case looks headed for trial.

As the trial approaches, many unknowns remain. Experts are largely unsure who will win as there is little to no precedent on vertical mergers, and the decision to block this merger contradicts the historical approach taken by the government towards vertical mergers. To complicate matters, Time Warner owns CNN, a news network that President Trump has attacked throughout his presidency, with a myriad of tweets as evidence. Some pundits believe that the Trump-CNN feud may be motivating the decision to block the merger. Whatever the outcome, this decision will be largely influential for vertical mergers in the cable industry, as more of these mergers are taking place. Disney and Fox have recently agreed to a proposed merger, and the approach taken by the DOJ in that case may give the public an answer to the real motivations behind the decision to block the AT&T-Time Warner merger.