Among economists, business executives and consumers, it is now well understood and widely accepted that a handful of large firms have been allowed to gain too great a control over too many industries, raising prices, reducing choice, eroding service, invading privacy and allowing the shareholders, executives and employees of those firms to earn higher incomes than they would in a genuinely competitive marketplace.
Nowhere is this tendency toward excessive consolidation more apparent than in telecom and media, where rapid technological change, huge economies of scale and our natural inclinations to be part of the same networks has created monopolies and winner-take-all competition. These developments have revealed the inadequacy of our antitrust law, whose statutes and case law were meant to deal with a manufacturing economy of an earlier era.
In the past year, Richard J. Leon, a senior judge of the U.S. District Court in Washington, had the opportunity to update the antitrust law to deal with the competitive realities of a new era. The vehicle was the government’s challenge of an $85 billion merger between AT&T, which provides phone, Internet, video and data services, with Time Warner, owner of Warner Bros., the venerable producer of movies and TV shows, and cable networks CNN, HBO and Turner Broadcast Network, home to the NCAA Final Four basketball tournament and Major League Baseball.
Together, the two companies can count as customers practically every household in America. Leon’s challenge was to determine whether, as the government alleged, the combination of a major producer of content with an even bigger distributor of content could substantially lessen competition in the media marketplace.
Unfortunately, as we discovered Tuesday, Leon was not up to the task. What he produced, instead, was a 172-page hatchet job that was selective and biased in its use of the evidence, stubbornly hidebound in its analysis and ignorant of economic theory and business practice. His opinion allowing the merger to proceed offers little if any useful precedent and will delay even further the development of effective competition policy for the high-tech economy.
This is not to say that there weren’t good reasons to dismiss the government’s case.
Leon could have reasonably concluded that the technology and industry structure and economics were now changing so quickly that it is too early to tell whether a merger would be more likely to increase or decrease competition and that the government should stand back and let things work themselves out in the marketplace.
Similarly, he might have approved the deal but imposed the same conditions he himself approved seven years ago in another “vertical” merger, that of cable giant Comcast and content producer NBC/Universal. Under that decree, which reflected the Obama-era policy of “net neutrality,” Comcast was prohibited from using its control over Internet access to deny or disadvantage the distribution of competitive content from other producers, and NBC agreed not to charge unreasonable prices to rival distributors for its “must-have” content. In his opinion, Leon repeatedly cited the fact that Comcast hasn’t raised cable prices as a reason we shouldn’t fear a combination between another content producer and distributor, without ever raising the issue of whether similar conditions need be applied.
Indeed, it is curious that in 172 pages, Leon takes no judicial notice of lots of obvious things, such as that three or four companies now dominate the markets for wireless phone service, cable television and high-speed Internet access, or that there are extremely high barriers for any new company to enter those markets, or that prices in those markets are generally are higher than in other countries.
He puts much emphasis on the competition that Facebook and Google have brought to the advertising market without even a hint of recognition that they are basically monopolies that daily mock the antitrust law. Nor does it occur to him that, because competition is so imperfect, the $1.5 billion a year in cost savings that AT&T foresees from the merger might not make its way to consumers in the form of lower prices or better service.
Leon declares, incorrectly, that video content producers and packagers such as Hulu, Netflix and Amazon Prime are themselves now “vertically integrated” because they can use the Internet to bypass cable companies, apparently oblivious to the fact that it is cable companies and phone companies like AT&T that provide Internet access.
Nor does he share any convincing logic or evidence to conclude that a combined AT&T/Time Warner would never, ever want to use its control over Internet access to shut out or disadvantage content from rivals.
Cherry-picking evidence is the last refuge of the judicial scoundrel, and Leon is a master scoundrel. He devotes tens of pages to dismissing and ridiculing the testimony of the government’s main economic witness, Carl Shapiro, a former top economist in the Justice Department’s antitrust division and member of the White House Council of Economic Advisers, on the key issue in the case — whether a combined company would gain sufficient negotiating leverage with cable companies to raise prices for must-have channels CNN, HBO and TBS.
And then he turns around and relies on other portions of Shapiro’s testimony when it conveniently supports his own conclusions on other issues. In a similar vein, the judge relies on the testimony of AT&T competitors and customers when it serves his purposes but gratuitously dismisses it as self-interested tripe when it does not.
Contrast that with the deference Leon gave to the testimony of Randall Stephenson, AT&T’s chief executive, concerning the personal notes he brought to the boardroom on the day he asked directors to approve the Time Warner deal.
“How can you advantage your own distribution (TV, [Broadband], Wireless) without harming TW [Time Warner’s] position as a wide distributor of content to … cable networks and broadcast networks,” read the note discovered by government lawyers.
Asked about the notes at trial, Stephenson explained that the point he was making was that AT&T couldn’t use the merger to gain extra leverage with customers in that manner. My guess is that there isn’t a traffic court judge in America who would have fallen for that explanation, but Senior Judge Richard J. Leon did.
Indeed, Leon’s opinion oozes with empathy for legacy companies like AT&T and Time Warner that are suddenly bleeding advertising revenue to Facebook and Google and bleeding viewers to Netflix and Amazon.
In his opinion, Leon reminds us that Turner Broadcasting expects that its annual domestic subscription revenue growth will decrease to the low single digits between 2018 and 2022 and that this will come at the very time that increased competition for the best actors and directors is driving up the cost of production, squeezing profit margins. We can’t let that happen now, can we?
One standard question in merger analysis is whether the two firms could achieve efficiencies or competitive advantage through contractual cooperation rather than permanently merging. In exchange for Time Warner giving AT&T data on consumer viewing habits, for example, AT&T could give Time Warner cheaper or better access to consumers. Citing “bargaining friction” (whatever that means), Leon dismisses that possibility out of hand.
A careful judge would have also considered whether all that competition coming from upstarts with new technology and new business models might get snuffed out if the industry is allowed to restructure itself into three or four vertically integrated giants like Comcast-NBC and ATT/Time Warner, making it all but impossible for a small firm to enter the industry at only one point along the chain of production and distribution. Nothing from Leon on that.
Throughout his opinion, he ridicules the government for its failure to produce “real world evidence” that a merged AT&T and Time Warner would use its scale and scope to raise prices for rivals or exclude them from the market, as if such definitive proof were even possible. Antitrust law, by its nature, requires judges to speculate about the future based on credible theories, supported by experience, of how profit-maximizing firms behave in a market with specific structures and competitive dynamics. Instead, Leon approached the task much as he would a criminal price-fixing case, pretending to look with an open mind for the hard evidence that he knew could never be found.
Every lawyer I spoke with this week agreed that, in the matter of U.S. v. AT&T, the Justice Department put forward a bad case, and as the old admonition warns, wound up creating bad law. Appealing the decision may never unscramble the merger, but it would allow the department to erase the unfortunate precedent set by this lousy bit of jurisprudence.
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