A
preliminary reading of the District Court decision (available at: http://www.dcd.uscourts.gov/sites/dcd/files/17-2511opinion.pdf
leaves me with despair and several unanswered questions. I am not an antitrust law expert, nor do I
have a Ph.D. in antitrust economics. On
the other hand, I offer unsponsored, non-doctrinal common sense.
The
Judge places great emphasis on the pro-consumer benefits of a vertical merger. On several occasions, he states that the
merger will accrue $352 million in cost savings to the combined company (p. 67)
now able to eliminate one of two content price markups: 1) Time Warner’s profit
margin in licensing content to AT&T as content distributor and 2) AT&T’s
profit margin in delivering content to subscribers. Economists term this benefit the Elimination
of Double Marginalization (“EDM”).
This
makes sense intuitively, but specifically as to the video entertainment market,
how much—if any-- of this $352 million flows downstream to cable/DBS
subscribers? This is a question for
which empirical data does exist. The
Judge excoriates the Justice Department and its expert witnesses for failing to
provide conclusive and persuasive evidence of consumer harm, largely because it
has to be predictive. But insofar as the
flow through of vertical integration’s efficiency gains and EDM, empirical evidence
provides a clear answer.
Year
after year, the FCC’s reports that video content prices rise, well in excess of
a broader measure of consumer prices. See Implementation of Section 3 of the
Cable Television Consumer Protection and Competition Act of 1992, Statistical
Report on Average Rates for Basic Service, Cable Programming Service, and
Equipment, MM Docket No. 92-266, Report On Cable Industry Prices (rel. Feb. 8,
2018),; available at https://apps.fcc.gov/edocs_public/attachmatch/DA-18-128A1.docx. Over the five years ending January 1, 2016,
the price of expanded basic service rose, on average, by 4.4% percent annually with the average price per channel
(price divided by the number of channels offered with expanded basic service)
increasing 2.1% percent to 47 cents per channel, even with the proliferation of
unwanted channels in an enhanced basic programming tier.
Let’s
consider a previous blockbuster vertical merger: Comcast’s acquisition of
NBC-Universal. Did Comcast reduce its
rates to reflect EDM and operational synergies?
More broadly, why hasn’t Comcast reduced its rates in response to cord
shaving, cord cutting and significantly greater churn?
The
Judge mistakenly assumes that the combined AT&T-Time Warner will pass
through at some—if not all (see p. 69)-- of the EDM savings, but Comcast did
not do so after it acquired access to a large inventory of cable networks. Simply put, the Judge erred in thinking that
the AT&T-Time Warner acquisition financially benefits consumers in a speedy
and measurable way. When pressed to
identify consumer benefits of NBC-Universal acquisition, Comcast senior
managers admitted that cost savings and rate reductions for subscribers were
not likely.
The
Judge also did not accept any element of the Government’s assertion that a
combined AT&T-Time Warner would have heightened negotiation leverage with competing
content aggregators and distributors.
Again, common sense and empirical evidence challenge his confident—bordering
on arrogant—conclusions.
Just
look historically at the content licensing process and identify who blinks
first in the negotiation process, particularly when a blackout has
occurred. Time after time, content
distributors cave, largely as “must see” television appears on the
horizon. No DBS or cable operator will
hang tough once the NFL regular season starts.
Content providers have the upper hand in negotiations and who among us
will pay $50 a month for a package of channels lacking CNN, TBS, TNT and other
Time Warner networks?
There
are several instances where vertically integrated ventures evidence
self-serving, anticompetitive behavior.
Consider this example: Comcast inserted its wholly owned Golf Channel in
the enhanced basic programming tier, but relegated the unaffiliated Tennis
Channel to a most expensive sport tier. The FCC’s Administrative Law Judge determined
that Comcast’s tiering decision was motivated in part by a strategy to harm a
competitor. On appeal to the FCC
Commissioners, the decision was reversed.
One can readily smell a rat here, but even without politics and
partisanship, the FCC staff would have been hard pressed to prove
anticompetitive intent. There always
plausible deniability—that Comcast determined its subscribers like golf more
than tennis, or any of a number of plausibly legitimate business motivations.
Let
us also consider a scenario where AT&T does not use its leverage, or does
not have the upper hand. Content
carriage fees will increase, probably well in excess of a general measure of
consumer prices. Some non-AT&T video
content subscribers will consider reducing or eliminating their cable/DBS monthly
rates. They will seek the alternatives
including AT&T’s U-verse and DirecTV as well as the options the company
offers via its broadband wireless, cellular radio service and “over the top” options
available to broadband wired subscribers.
A significant percentage of churning video subscribers will migrate to
an AT&T option, so in at least some scenarios AT&T enjoys a “win-win”
proposition: 1) it can maintain or raise profit margins for still loyal
subscribers and 2) it can capture new market share with churning subscribers of
competitors who do not want to pay higher rates, even if they do not reflect greater
AT&T leverage, post-merger.
I’ll
stop for the time being with a prediction: consumer video content costs will
rise well in excess of general inflation measures and this decision will lead
to an even more concentrated industry having less incentives to enhance
consumer welfare and compete on price.