A Game of Thrones: Will Merging with Time Warner Really Put AT&T in Control of King’s Landing?

Patrick Reagan, Associate Member, University of Cincinnati Law Review

“When you play the game of thrones, you win or you die. There is no middle ground.” Those words were uttered by everyone’s favorite fictional bloodthirsty queen, Cersei Lannister, on the HBO series Game of Thrones. HBO is America’s number one paid premium television service and has churned out a constant string of hits that includes Sex and the City, Big Little Lies, Curb Your Enthusiasm, and The Sopranos. More germane to the law, however, is that HBO is owned by Time Warner, whom AT&T is trying to acquire in a $108 billion deal. United States v. AT&T is different from other antitrust cases because it involves a merger in a rapidly changing industry whose business model is being turned on its head by the Internet and companies like Netflix, Hulu, and Amazon. That is not completely fatal to the government’s case, but it shows that the government made a serious miscalculation of the facts when it drafted the complaint.

The Clayton Act

When most people think of American antitrust law, they think of the Sherman Antitrust Act. Its passage in 1890 allowed the United States to reverse the damaging effects monopolies had wrought on the economy in the 19th century and break up monopolies like Standard Oil.[4] However, the Sherman Act does not target mergers and acquisitions; thus, the Clayton Antitrust Act of 1914 was passed.[5] Among other things, the Clayton Act prevents mergers that will “lessen competition, or to tend to create a monopoly.”[6] It was updated in 1936 and 1976 to ban discriminatory prices/services and to require companies planning large mergers and acquisitions to give the government advance notice of such transactions.

The government is bringing its case under § 7 of the Clayton Act, which deals with mergers and acquisitions like the one in question.[8] The Supreme Court has interpreted § 7 broadly, stating, “[t]he language of this section requires merely that the government prove that the merger may have a substantial anticompetitive effect somewhere in the United States.”[9] Generally speaking, courts employ a burden-shifting framework when evaluating Clayton Act cases. Once the government (1) defines a relevant market and (2) shows th merger’s anticompetitive effects on that market[10] a presumption of illegality is created, which the defendant must then rebut.[11] Courts make specific factual and legal considerations when deciding cases under this standard, but the minutiae of that is beyond the scope of this article.[12]

What is the Government’s Argument?

The government’s complaint focuses on the vertical integrative effect of AT&T/DirecTV absorbing Time Warner, which can be illustrated using a hypothetical involving Harry Potter and HBO. Time Warner owns Warner Bros., whose studios were used to make the Harry Potter movies. In the media industry, studios like Warner Bros. sell broadcasting rights for movies Harry Potter to broadcast networks like HBO.[13] The networks then broadcast the movie through a service like DirecTV or AT&T’s U-Verse cable service, who buy the rights from the networks to include them in their lineup.[14] Thus, in a post-AT&T/Time Warner merger environment, the production and broadcast of Harry Potter would stay completely in-house. Warner Bros. Studios would produce the film; HBO would distribute the film; and DirecTV would broadcast the film into the households of millions of Americans. All along the production to distribution and broadcast food chain, AT&T would generate fees and earn profits. That would give AT&T enormous power to influence and shape the television distribution market,[15] which the government defines in the complaint to include traditional pay TV operators like Comcast and DirecTV as well as newcomers like Netflix, Sling TV and Hulu.[16]

The government’s concern is as follows. Networks like HBO, TNT, TBS, and CNN (all Time Warner entities) negotiate fees with traditional distributors like Comcast, DirectTV, and Charter.[17] Those fees are factored into the monthly subscription prices consumers pay.[18] In its complaint, the government highlights the fact that networks owned by Time Warner can make or break distributors because their programming is sought out by most Americans watching TV.[19] For example, Time Warner entities own the broadcast rights for Major League Baseball (through 2021), professional basketball (through 2025), and NCAA March Madness (through 2032).[20]

Additionally, and perhaps strongest to the government’s argument, is the market power exerted by Time Warner’s HBO. HBO markets itself to distributors as playing “’a key role in attracting and retaining’” customers.[21] HBO shows like Game of Thrones and Sex and the City have large, loyal fan bases. Thus, if distributors like Comcast and Charter do not acquiesce to a potential increase in fees they pay to a combined AT&T/Time Warner to broadcast their networks, the distributors would lose the ability to broadcast those networks.

This would also affect online-only TV options for people who “cut the cord” and do not subscribe to a service like DirecTV or Comcast. Examples of this are Sling TV, Netflix, Hulu. They still have to negotiate fee structures with entities like Time Warner for access to their content, and the government argues that this nascent industry would be crushed by the coercive economic power of a combined AT&T/Time Warner.[22] The government further argues that customers would have no other choice than to subscribe to a distributor like DirecTV or U-Verse, which would benefit from the AT&T/Time Warner merger.[23]

This is Not Your Garden Variety Antitrust Case

Antitrust is one of the areas of law most closely aligned with economics. In order for the government to prove a violation of § 7 of the Clayton Act, they must prove that this acquisition will cause a substantial anticompetitive effect in the media production/distribution market after defining a relevant market in which the anticompetitive effect will be wrought.[24] That is not just any anticompetitive effect, but rather a substantial anticompetitive effect. To meet the first element of a §7 claim, the government has defined its market as both traditional pay TV services and newcomers like Hulu, Sling TV, and Netflix.[25] While there may be some anticompetitive effect in the traditional pay TV market, the government has not shown there will be a substantial anticompetitive effect with internet video distributors like Netflix and Hulu—namely because AT&T/DirecTV is not trying to acquire any of them. While the government could make the argument that AT&T/DirecTV might raise licensing fees to hurt Netflix and Hulu, both services have large subscriber bases,[26] which translates to greater bargaining power.

The government’s complaint follows a traditional market analysis formula portraying AT&T/Time Warner as the profit-maximizing monopolist that squeezes consumers and society. It is a static analysis that does not sufficiently account for the significant impact the internet has had on traditional video distribution. That is a serious flaw because the government has defined the market in which the Time Warner acquisition will allegedly have an anticompetitive effect as one including Internet video distributors (i.e. Netflix and Hulu). AT&T has begun that discussion in its answer to the government’s complaint.[28] However, AT&T’s allegations of trying to become nothing more than a well-meaning, nimble competitor in a cutthroat market should not be taken as gospel truth. No company merges with or acquires another without serious analysis of the risks and benefits involved. It is likely that acquiring Time Warner will give AT&T a more prime position as a market mover and allow it to create a proprietary supply chain of media production and distribution that allows it to cut costs at every step. But where the government misses the mark is that traditional pay TV is a dying market, with more and more people cutting the cord every day.[29] Rather than becoming a market hog, AT&T/Time Warner will have to negotiate agreements with multiple online platforms to remain competitive in the media distribution market.

Cutting into the government’s argument that this acquisition will cause a substantial anticompetitive effect are (1) consumer trends; and (2) the pervasive and flexible nature of internet video distribution. Traditional pay TV distributors lost about 827,000 subscribers in the third quarter of 2017 alone.[30] Of that, 349,000 of the lost subscribers came from satellite TV, of which DirecTV is the largest provider.[31] Additionally, a recent Accenture survey of consumers revealed startling results for TV executives: the number of people who prefer to watch TV shows plummeted by 55%.[32]

Internet video distributors are taking advantage of these consumer trends to reshape the media market. Many people subscribe to multiple online distribution services like Netflix, Amazon Prime, and Hulu. In fact, HBO has its own proprietary service called HBO GO. All of those services spend large amounts of money on original programming and have loyal customer bases. That gives them leverage and influence in the marketplace and drives down prices for consumers as these services are often cheaper than traditional pay TV from DirecTV and U-Verse. Take for example the fact that Apple bought the rights to two seasons of Reese Witherspoon’s forthcoming television show—and they didn’t even watch the pilot.[33] If the show becomes a hit, customers will flock to Apple’s distribution service and watch it. That will make money for Apple and Reese Witherspoon, while creating another competitor for AT&T/Time Warner. Now, if AT&T/Time Warner sought to buy Apple’s distribution, that would be a problem because they would be reducing the number of competitors in a burgeoning industry so they could make more money. But, as is the case before us, simply buying one entity (Time Warner) that creates a lot of media in a last-ditch attempt to possibly push consumers to the dying service of traditional pay TV does not create a serious anticompetitive effect because the market has drastically changed. Basic economic theory holds that monopolists reduce the quantity in the marketplace and raise prices for consumers, which creates a “dead space” of utility lost to consumers.[34] That utility comes in the form of choice and true enjoyment of products—the two things that keep people buying and consuming in a market economy. Acquiring Time Warner in a video distribution market that is quickly decentralizing will not allow AT&T to reduce quantity or utility.This brave new world in which AT&T/Time Warner will have to compete shows that the market is still competitive and is emblematic of how the free market works. Products such as pay TV become old, outdated, and expensive; and newer, better, cheaper products like Netflix and Hulu replace them. That is how free market economics works, which the Department of Justice did not sufficiently take account of when it filed its action against AT&T.

The public would be harmed by one or two companies controlling what is produced and beamed across the airwaves into our homes and onto our smartphones. That would take us into a brave new world of access to information, and the principle of promoting competition translates into a myriad of other industries. That is why the Department of Justice has an antitrust division. But when a market, like media distribution, is rapidly decentralizing because of the internet and market forces, the acquisition of a content creator like Time Warner by a content distributor like AT&T does not create a substantial anticompetitive effect in a defined market—the necessary legal standard by which a Clayton Act claim must be measured. That decentralization is the fatal flaw in the government’s argument against AT&T acquiring Time Warner.

Conclusion: Who Will Rule King’s Landing?

To return to a youthful and culturally-relevant metaphor, the individual who occupies the throne in King’s Landing in the HBO series Game of Thrones wields immeasurable power over the Seven Kingdoms and will have their name etched in history. More relevant to the law, however, the government makes a compelling argument for why AT&T should not be allowed to acquire Time Warner. They paint a picture of a future where you won’t be able to watch TV unless you subscribe to DirecTV while Netflix is sent to the ash heap. The Department of Justice portrays AT&T as a power-hungry and brutally cunning Cersei Lannister, the wife of the king in Game of Thrones who will mow down anyone in her way, which they believe is the reason AT&T is trying to acquire Time Warner. To the Department of Justice, AT&T wants to sit on the throne in King’s Landing and rule the Seven Kingdoms, a.k.a. the media market. However, just as the Seven Kingdoms are in hot competition to rule King’s Landing, so are the creators and distributors in the media market. Instead of just competing against ageing pay TV competitors, a combined AT&T/Time Warner will have to compete against companies like Netflix, Hulu, Facebook, and Google, who have multiple millions of loyal viewers and immense market power because the Internet has allowed them to spread and compete. That is the perfect example of the free market at work. Given that the government’s complaint lists both traditional pay TV and newcomers like Netflix as its relevant market[35] (one of the required elements for a Clayton Act action), it is also the miscalculation the government made when filing its case against AT&T. That is because the aforementioned examples chip away at the government’s argument that the acquisition of Time Warner by AT&T will have a substantial anticompetitive effect. While the government may think AT&T will rule King’s Landing, the facts and economic realities facing this case point otherwise.

[1] Complaint, United States v. AT&T, November 20, 2017, at 1.

[2] Id. at 12.

[3] Id.

[4] Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1911).

[5] Federal Trade Commission, “The Antitrust Laws,” https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/antitrust-laws.

[6] 15 U.S.C. § 18.

[7] Federal Trade Commission, “The Antitrust Laws,” https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/antitrust-laws.

[8] Complaint, United States v. AT&T, November 20, 2017, at 2.

[9] United States v. Pabst Brewing Co., 384 U.S. 546, 548 (1966).

[10] Fed. Trade Comm’n. v. Penn State Hershey Med. Ctr., 838 F.3d 327, 338 (3d Cir. 2016).

[11] United States v. Marine Bancorporation, Inc., 418 U.S. 602, 631 (1974).

[12] See, e.g., Brown Shoe Co. v. United States, 370 U.S. 294, 324-347 (1962) (in affirming judgment for the government in preventing a vertical integration between the appellant and a smaller shoe company, Chief Justice Warren extensively analyzed the anticompetitive effects this merger would have); United States v. Energy Solutions, Inc., 265 F. Supp. 3d 415 (D.Delaware 2017).

[13] HBO isn’t the only broadcast network Time Warner owns. Through its Turner Broadcasting division, Time Warner owns networks like TNT, TBS, and CNN.

[14] Complaint, United States v. AT&T, November 20, 2017, at 8.

[15] See Id. at 8-10.

[16]Id. at 13. (“[t]his merger would substantially lessen competition among all distributors of professionally produced, full-length video programming services to residential customers in the United States.”).

[17] Id. at 16-17.

[18] Id. at 18-19.

[19] Id. at 12.

[20] Id. at 10.

[21] Id. at 12.

[22] Id. at 15-18.

[23] Id.

[24] See 18 U.S.C. § 15.

[25] [25] Complaint, United States v. AT&T, November 20, 2017, at 13. To prove a Clayton Act violation, the government has to define a market.

[26] See Tom Huddleston Jr., “Netflix Has More Subscribers than Cable TV,” Fortune (June 15, 2017), http://fortune.com/2017/06/15/netflix-more-subscribers-than-cable/;Trey Williams, “Hulu subscriber base grew more than 40% in 2017,” Market Watch (Jan. 9, 2018), https://www.marketwatch.com/story/hulus-subscriber-base-grew-more-than-40-in-2017-2018-01-09.

[27] See note 17, supra.

[28] Answer of AT&T/Time Warner, November 28, 2017, at 5-6 (“[i]n sum, Time Warner accounts for a valuable, but exceptionally thin, slice of all the video content available to consumers, and AT&T’s legacy video distribution platforms are being squeezed by cable incumbents and tech giants alike. Far from lessening competition, the vertical combination of these assets is necessary to allow the combined company to keep pace in an environment where cable is the incumbent market leader and viewer preferences are rapidly tilting towards the direct-to-consumer platforms of Netflix, Google, Amazon Prime, Facebook, Apple, Hulu, and others.”).

[29] “Cord-cutting is speeding up: here’s how many people ditched cable TV this quarter,” Fast Company (Nov. 15, 2017), https://www.fastcompany.com/40496540/cord-cutting-is-speeding-up-heres-how-many-people-ditched-cable-tv-this-quarter (this article specifically refers to DirecTV, which is owned by AT&T, as losing a large number of subscribers).

[30] Jeff Baumgartner, “Decline of Traditional Pay TV Accelerates in Q3,” Multichannel News (November 16, 2017), http://www.multichannel.com/news/content/decline-traditional-pay-tv-accelerates-q3/416644.

[31] Id.

[32] Jon Lafayette, “Study: 55% Drop in Viewers Who Prefer TV Sets,” Multichannel News (April 24, 2017), http://www.multichannel.com/news/content/study-55-drop-viewers-who-prefer-tv-sets/412390.

[33] Michael J. Santorelli, “Why the AT&T-Time Warner Merger Makes Sense,” The New York Times (November 16, 2017), https://www.nytimes.com/2017/11/16/opinion/att-time-warner-merger.html.

[34] See Thomas D. Morgan & Richard J. Pierce, Jr., Modern Antitrust Law and Its Origins 14-15 (2018).

[35] Complaint, United States v. AT&T, November 20, 2017, at 13.