Justice Has a Case on AT&T/Time Warner
The Justice Department’s new head of antitrust enforcement, Makan Delrahim, is getting plenty of grief for his surprise decision to challenge the merger of AT&T and Time Warner. He's been accused of stretching the law “beyond the breaking point,” and of helping President Donald Trump act on his long-running grudge against Time Warner’s flagship news network, CNN.
Actually, Justice is to be commended for spelling out its rationale and making a compelling case -- something it had failed to do in the run-up to the announcement. A big point in its favor: Consistently applied, this new thinking on anti-trust could in fact reduce the need for other kinds of antitrust regulation.
To be sure, Delrahim’s demands are tantamount to killing the deal, which would bring together one of the country’s largest distributors of news and entertainment programming and one of its largest producers. He's asking for the divestment of either DirecTV, one of AT&T’s main ways of delivering content to U.S. viewers, or Turner Broadcasting, which includes offerings such as CNN that are central to any pay-TV package. The merger is unlikely to make sense without both properties.
Note too that the Justice Department’s intervention marks a shift in its approach to such “vertical” mergers, which combine companies at different points in the supply chain (as opposed to “horizontal” mergers of direct competitors). Generally, the government has chosen not to impede these deals, requiring instead that companies promise not to engage in anti-competitive behavior. It last litigated one to conclusion 38 years ago -- and lost.
But times have changed and the mechanism by which the government judges and controls antitrust may be in need of updating, too. The competitive environment in the U.S. has been remade in recent decades. Industries are increasingly dominated by smaller numbers of larger companies. Lack of competition is often bad for consumers, obliging them to pay more or put up with worse products and services. A growing body of research also suggests that this concentration of market power is harming business dynamism, weighing on productivity growth and even cutting into workers’ share of national income. Many economists point to lax antitrust policy as a culprit.
The Department of Justice argues that the AT&T/Time Warner merger would contribute to this anti-competitive trend. On its own, for example, Time Warner faces limits on what it can charge cable companies and online distributors for CNN or HBO, because it doesn’t want to lose access to their customers. But for the combined company, raising prices to those distributors -- or even withholding access -- would weaken DirecTV’s competitors (which, as one Turner executive put it, would be “[expletive] without Turner”). Similar incentives could affect DirecTV’s dealings with suppliers that compete with Time Warner. In either case, consumers would be likely to suffer.
AT&T says otherwise, arguing that the merger is pro-innovation and pro-competition. The main idea, it says, is to make its mobile services a stronger rival to the cable providers that dominate local and regional markets. That requires, among other things, new kinds of content tailored for delivery over mobile devices. Designing such content requires close collaboration -- the kind that's best achieved within a single merged firm.
If the deal went ahead, the government could adopt the traditional approach of watching the combined firm to ensure it behaved itself and didn't exploit any anti-competitive opportunities. In a speech last week, Delrahim argued that this would mean getting deeply involved in companies’ operations, crafting agreements and monitoring compliance. This kind of regulation is narrower but more intrusive; it makes heavy demands on the regulator and has a poor record of success. Agreements of this kind are often violated, generating added litigation (Bloomberg LP, the parent of Bloomberg News, won such a case against Comcast in 2013). Better and less cumbersome, Delrahim says, to stop the bad incentives arising in the first place by lopping off the parts of the business likely to cause competitive trouble.
That's the theory, at least. The Justice Department and Delrahim still have work to do to make their case, but the approach they advocate isn't unreasonable and deserves a hearing. Applied consistently and in good faith, it could be a useful framework for promoting freer and fairer markets.
--Editors: Clive Crook, Mark Whitehouse
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at firstname.lastname@example.org .