The D.C. Circuit Court of Appeals affirmed the lower court’s unconditional approval of AT&T’s acquisition of Time Warner. [1]  The appellate court opted not to second-guess the lower court’s findings that dismissed, ignored or misinterpreted the government’s evidence and the findings of its expert witnesses.  The D.C. Circuit Court of Appeals accepted the lower court’s near complete embrace of the findings by AT&T’s expert witnesses who purported to show that the vertical combination of AT&T and Time Warner would have no impact on content prices and create no increased ability for key content outlets, such as CNN and HBO, to demand higher compensation and weather longer blackout period of no compensation to extract better terms. 
            The appellate court also emphasized the offer by Time Warner to accept a seven year period of binding arbitration and to maintain current compensation arrangements instead of withholding content.  Additionally, the court appeared to agree that having alternative sources of “must see” video content, such as DirecTV and Uverse, did not create significantly greater incentives for AT&T to drive a hard bargain with video programming distributors, such as cable operators, knowing that during an extended black out period, disgruntled subscribers could migrate to AT&T-owned options.
            The D.C. Circuit accepted the lower court’s emphasis on “real world” empirical analysis whether a vertically integrated firm would have greater incentives to raise the cost of content to competitors.  Even though AT&T itself had made this assertion in pleadings before the FCC, [2] its expert witness attempted to show that the merger of Comcast with NBC Universal did not trigger increased content costs.  In a battle between conflicting expert witness testimony, the lower court’s preference for AT&T’s expert was not challenged perhaps based on the sense that it was based on real world circumstances while the government’s expert used economic bargaining theory. [3] 
            The D.C. Circuit credits the lower court for accepting the premise that vertically integrated firms could change bargaining tactics, but in this particular situation changed incentives and perception of leveraging power would not end up altering the outcome of content price negotiations. [4]  The appellate court did not question the lower court’s conclusion that even if the merged corporation would have greater resources to survive the loss of revenues during a blackout and even though it could offset losses from subscriber migration to AT&T content options, AT&T would have little more incentive to risk longer and more frequent black outs:
The district court’s statements identified by the government, then, 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 postmerger increase in content costs during affiliate negotiations. [5]
             The D.C. Circuit Court of Appeals concluded that in:
finding the government failed to ‘prov[e] that Turner [Broadcasting]’s post-merger negotiating position would materially increase based on its ownership by AT&T,’ . . .  the district court reached a fact-specific conclusion based on real-world evidence that, contrary to the Nash bargaining theory and government expert opinion on increased content costs, the post-merger cost of a long-term blackout would not sufficiently change to enable Turner Broadcasting to secure higher affiliate fees. [6]

            The appellate court also gave short thrift to the lower court’s assumption that AT&T would pass through all of the $352 million in program cost saving to its customers.  While the D.C. Circuit acknowledged that not all savings would flow through to consumers, as the lower court mistakenly assumed, the court returned to its point of emphasis: that the merger would not trigger content cost increases borne by other video program distributors that they would have passed through to consumers:
The district court accepted Professor Shapiro’s testimony about the $352 million cost savings from the merger. . . . [T]he district court found that the quantitative model as presented through Professor Shapiro’s opinion testimony did not provide an adequate basis to conclude that the merger will lead to “any” raised costs for distributors or consumers, “much less consumer harms that outweigh the conceded $350 million in annual cost savings to AT&T’s customers.”

Whatever errors the district court may have made in evaluating the inputs for Professor Shapiro’s quantitative model, the model did not take into account long-term contracts, which would constrain Turner Broadcasting’s ability to raise content prices for distributors. . . .[7]

            The appellate court notes that the district court did not conduct a costs benefit analysis balancing “increased prices for consumers against cost savings for consumers” [8] and instead found that the government had not shown the merger was likely to lead to any price increases, because Time Warner content negotiators would not have, or use increased leverage in affiliate negotiations after the merger.





[1]              U.S. v. AT&T Inc., No. 18-5214, slip op.  (D.C. Cir. Feb. 26, 2019); available at: https://www.cadc.uscourts.gov/internet/opinions.nsf/390E66D6D58F426B852583AD00546ED6/$file/18-5214.pdf.

[2]              The D.C. Circuit Court of Appeals accepted the lower court’s disinclination to consider such evidence as significant now: “Once the district court credited AT&T’s expert’s opinion based on an econometric analysis that the similar Comcast-NBCU merger had not had a ‘statistically significant effect on content costs,’ . . . the district court could understand that the defendants’ admissions at the time of the Comcast-NBCU merger offered little probative support for the government’s increased leverage theory.” Id. at 25.

[3]              “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.” Id. at 17-18.

[4]              “In other words, the record shows that the district court accepted the Nash bargaining theory as an economic principle generally but rejected its specific prediction in light of the
evidence that the district court credited.” Id. at 19.

[5]              Id. at 21.

[6]              Id. at 22.

[7]              Id. at 32.

[8]              Id. at 33.