Back in 2018, AT&T merged with Time Warner. The merger was challenged on antitrust grounds by the US Department of Justice, the case went to court, and the government lost–which means the merger was allowed to proceed. Now, a few years later, we can see what happened.
As I pointed out in a post a few weeks ago, when big mergers are litigated, there is often a clash between dire predictions of what will happen if the merger is allowed to proceed from one side, confronted by arguments asserting the enormous social gains that are sure to happen if the merger is allowed. In the case of AT&T/ Time Warner, the original idea behind the merger was to combine the AT&T broadband and wireless networks (including ownership of DirecTV) with the content and of Time Warner (which was made up of Warner Bros., HBO and Turner Broadcasting). At a deeper level, the idea was that AT&T would be able to use its vast customer database to see how people were actually interacting with shows–and thus guide the content providers to more popular fare.
On the other side, the antitrust concern here is about a “vertical” merger. Most people are used to the idea of a “horizontal” merger, in which two firms are selling similar products, so if the two firms merge–and there is not an array of other competitors also in the market–the merged firm could have power to raise prices. But in vertical merger, one firm (in this case, Time Warner) is providing an input to another firm (in this case, AT&T). The antitrust concern is that this kind of merger can lead to less competition if one firm locks up access to a key input. The concerns over reducing competitiveness are harder to enunciate in a vertical merger: indeed, the AT&T/Time Warner merger was the first vertical merger to be litigated by antitrust authorities in the last 40 years.
The AT&T merger turns out to be another case where neither the rosy predictions of its supporters nor the gloom-and-doom of its opponents quite came to pass. The merger was announced in October 2016. The court decision allowing the merger happened in June 2018. By May 2021, AT&T announced that it was selling off TimeWarner, a deal that closed in April 2022.
The merger clearly failed in business terms: for a discussion of the strategy and culture clashes between the firms, the New York Times ran a story last November with the title, “Was This $100 Billion Deal the Worst Merger Ever?” But of course, the job of the antitrust authorities is not to second-guess whether a merger is a good business idea, but only to make sure consumers and competition are protected. Given that the merger evaporated in three years, it’s hard to make a case that this merger allowed AT&T to rake in higher profits in a way that caused injury to consumers and competition were injured.
The case is interesting to economists in part because litigation over vertical mergers is so rare, and in part because high-powered economists consulted for both sides and testified before the court. From the side favoring AT&T and the merger, Dennis W. Carlton, Georgi V. Giozov, Mark A. Israel, Allan L. Shampine have written “A Retrospective Analysis of the
AT&T/Time Warner Merger” (Journal of Law and Economics, November 2022, pp. S461-S497). From the side supporting the US government and opposing the merger, Carl Shapiro has written “Vertical Mergers and Input Foreclosure Lessons from the AT&T/Time Warner Case”
(Review of Industrial Organization 2021, pp. 303–341.
Shapiro explains the government case that the AT&T merger with Time Warner would reduce content available to other “multichannel video program distributors” like Comcast, Dish Network, Sony Vue, and others. Carlton and his co-authors make the case that competition would not be injured. The arguments get into the details of what Shapiro called a “raising rivals costs” model and what the Carlton group calls a “bargaining leverage over rivals” model can captures the interactions in this kind of market and how the vertically-merged firm might lead to higher costs for competitors–which in turn could be passed along to consumers.
I won’t relitigate the arguments and evidence here, except to note that details end up mattering a lot. For example, if AT&T ended up negotiating with other firms over distributing the TimeWarner content, is it better to model these negotiations over as one-shot or multi-stage? How might negotiations with one firm affect outcomes with other firms? In what ways did evidence from previous mergers apply here–in particular, when Comcast National purchased NBC Universal in 2011, which included the NBC network, along with Universal Pictures and cable channels such as Syfy, CNBC and MSNBC.
As one example of the kinds of issues that arise, in the Comcast/NBC Universal case, which involved a consent decree but did not go to litigation, the US Department of Justice required that the newly merged firm agree to binding arbitration. In the AT&T case, the rule would have been that if some outside distributor wanted access to the TimeWarner content, AT&T would not be allowed just to deny that content while a negotiation was underway, but instead would need to provide the content and submit to binding arbitration over the price. Presumably, this provision makes it harder for the vertically-merged firm to exploit its access to the key input. Given that the US Department of Justice had required this form of binding arbitration in the previous case, the government was then in the awkward position of arguing that it was not a sufficient safeguard in the AT&T case.
What are the main takeaways from all of this? Vertical mergers are hard for the antitrust authorities to challenge, and losing this high-profile case makes them harder. Modeling how a merger will come out is an inexact science: this holds whether the model is done by the firms involved in the merger or by those supporting or opposing the merger. Antitrust is about preserving competition, not about preventing firms from making deals that turn out to be unwise in a business sense. But at a broad level, antitrust also seeks to shape where businesses look for the opportunity to make profits. It seeks to push firms away from looking for profits by squeezing consumers, and instead to push them toward looking for profits by providing more desirable products and services. The next time a vertical merger is challenged, it is likely to involve the details of a different industry in a different time and place, and the antitrust arguments for and against may play out differently, too.