Last Week in Tech Policy #66: The Fate of Vertical Mergers

Mergers are often  met with skepticism, as intuitively there are less players in the game after the transaction is complete.  Due to the large infrastructure costs and high value of network effects, mergers play a significant role in the telecommunications industry. Pooling resources together can create efficiencies, but there is a fear of harmful effects on consumers- whether by an increase in price or a decline in product quality.

Mergers can be broken up into two categories, vertical and horizontal. A vertical merger occurs between two companies that operate at separate steps of production, typically where transactions costs have driven integration. In horizontal mergers, parties operate in the same market and the combination will eliminate a competitor.

When television broadcasting industry boomed in the early 70s, regulators were extremely worried about vertical integration. In order to counter this concern, the FCC adopted various regulations, such as financial syndication rules that restricted networks from going in the content business. The fear was monopoly leveraging and harm to the consumers. However, these rules did not fare well in the courts and the “Chicago school” of antitrust took hold, rendering vertical integration as an efficiency. In the last four decades, the federal government has not blocked a vertical merger in the courts.

In 2016, AT&T placed a bid to buy Time Warner. This bid garnered significant attention in the telecommunications world, in part because of Time Warner’s involvement in the Comcast/Time Warner merger proposal of 2014. The two mergers are notably different because the latter was a horizontal merger, which would have eliminated a competitor. While the FCC blocked the Comcast deal, the Department of Justice has pumped the breaks on the AT&T deal. Arguments of the case are set to be heard later this month.

Time Warner owns Turner, making it a content mogul that controls its owned channels (CNN, TBS, TNT, TruTV) and the popular HBO channel. The merger may be guided by 2010 Comcast/NBCU merger. While that merger was approved, the parties were compelled to agree to  imposed stipulations or “voluntary commitments.” These included net neutrality provisions stating Comcast could not disfavor online video distributors. In addition, the settlement included program access and binding arbitration terms. When presenting arguments later this month, both parties will likely put their own spin on the effects the 2010 merger had on consumers.

What were the Comcast/NBU effects on consumers? The video market has grown overall in the past decade. New platforms have emerged that distribute content, such as Snapchat’s Olympics coverage and Amazon’s live streaming of NFL games. Even Comcast’s price per channel has declined since the NBCU merger. Promotions are springing such as free HBO for AT&T customers and Netflix discounts for T-Mobile customers. Are these deals benefiting customers, or locking in indifferent buyers to a choice they would not otherwise make?

There are other interesting aspects of the DOJ’s case against the merger. First, US District Court for the District of Columbia Judge Richard Leon is the same judge that approved the Comcast/NBCU merger agreement. If Judge Leon were to be persuaded again by voluntary commitments, which type of commitments would suffice in a deal like this?

Time Warner has already been propping the stage by showing its content will be available to competitors. For example, Turner-owned channels are being added to YouTube’s TV package, which is available for a monthly subscription to YouTube users. The addition gives customers access to sporting events and other popular content.

The second interesting aspect is the role of the White House. CNN, a Tuner owned channel, has been under constant fire from President Trump for allegations of “fake news.” President Trump’s crusade against CNN has been well-documented and he has also spoken out publicly against the merger. This has raised questions about the partiality and motives of the DOJ’s case. It is unclear what effects this will have on the case. Earlier last month, the judge ruled that White House private communications regarding the merger will not be released.

Finally, AT&T’s strongest argument may be that vertical integration promotes efficiency and is necessary to compete with the video content industry, particularly “Big Tech.” If there is an emerging market that requires the dual function of distribution and content creation, it would suggest the surviving company would be able to add to competition. For example, Netflix no longer only licenses television shows and movies for its subscribers, but now creates its own shows and movies. Even traditional telecommunications giant Comcast is in the content business because it owns NBCU. “Big Tech” is disrupting tradition norms by rolling out live events over social media. The question remains: will Time Warner/AT&T be a monopolistic giant in small industry or an underdog trying to combat tech companies in a much larger market?