Key points
- A United States District Court judge has today unconditionally approved the US$85 billion merger between telecommunications and pay-TV provider AT&T, and mass media and entertainment conglomerate Time Warner.
- The approval is likely to spark a further wave of acquisitions in a media industry already experiencing significant consolidation.
- It is also a significant setback for the Department of Justice (DOJ), which was 'out on a limb' after taking the rare step of opposing a merger between companies that are not direct competitors.
- Although it was rebuffed by the District Court in this case, the DOJ's opposition to AT&T/Time Warner's 'vertical merger' arguably reflects a greater willingness among a number of regulators around the world (including the New Zealand Commerce Commission (NZCC)), to oppose transactions between firms that are not direct competitors.
- While we expect the NZCC will carefully consider the market dynamics described in the AT&T decision, and factor those features into its consideration of future media mergers, we do not expect to see materially different merger control outcomes in New Zealand as a result of this decision.
Background to the merger
In October 2016, AT&T (which owns national broadband and satellite television networks across the United States) announced its intention to acquire Time Warner (which owns media properties such as HBO and CNN).
The merger takes place amidst a wave of consolidation in the wider media industry, as traditional incumbents struggle to adjust to the rapid growth of 'digital disruptors' such as Netflix and Amazon. The industry view among incumbents is that if traditional media is to survive against these new digital challengers – who began as content distributors, but are now making significant investments in original content creation as well – incumbents must become similarly vertically integrated, combining their creation and distribution functions.
This merger would achieve such vertical integration, combining AT&T's distribution with Time Warner's content.
Opposition by the Department of Justice
The United States DOJ had opposed the merger, and sued to block the deal in the District Court, arguing that the merger would disadvantage consumers, including by:
- allowing the merged entity to charge AT&T's rivals more for the licensing of valuable content (like certain men's basketball tournaments) that are currently broadcast to a large extent on Time Warner's networks; and
- stifling competition from AT&T's online streaming competitors like SlingTV, by allowing the merged entity to withhold Time Warner content from those competitors.
The DOJ's opposition to the deal was notable, as it was a rare example of a regulatory challenge to a so-called 'vertical merger' (i.e. a merger between firms that are active at different levels of the supply chain (here, content creation and content distribution respectively), rather than competing at the same level).
Regulators have very rarely challenged vertical mergers in the past, because the prevailing economic wisdom has been that mergers between parties that are not direct competitors are less likely to raise competition law concerns.
The District Court decision and its implications
The District Court judge dismissed the DOJ's opposition, and approved the proposed merger without imposing any structural or behavioural conditions on the parties. The DOJ had pressured Time Warner to divest the parts of its business that the DOJ considered would raise the most competition concerns post-merger, but Time Warner had resisted, opting instead for litigation: a gambit that has now paid off.
In reaching his decision, Judge Richard J. Leon found that the DOJ had not proved that the merger would detriment consumers in the way that it had claimed.
The judge's decision is a setback for the DOJ, which was out on a limb following its rare opposition of a vertical merger.
Although the DOJ was rebuffed by the District Court in this case, its opposition to the AT&T/Time Warner merger reflects a growing willingness by a number of international regulators to oppose mergers between firms that are not direct competitors.
In New Zealand, similar dynamics drove the NZCC's rejection of the proposed vertical merger between Vodafone and Sky, on the grounds that the merged entity would be able to leverage Sky's market power in premium sports content into Vodafone's more competitive markets for retail mobile and broadband packages.
While each case will turn on its individual facts, one of the key features of the NZCC's Vodafone/Sky decision was the test mandated by the Courts, which is that the NZCC must be "satisfied" that it can exclude all "real chance" scenarios in which a substantial lessening of competition might arise in order to give clearance. This means that the NZCC can form the view that the most likely outcome of a merger is positive from a consumer welfare standpoint, but still be required to decline the merger if there are other potential outcomes that have a "real chance" of arising, where the merger would give rise to a substantial lessening of competition.
Although we expect the NZCC will carefully consider the market dynamics described in the AT&T decision, and factor those features into its consideration of future media mergers, we do not expect to see materially different merger control outcomes in New Zealand as a result of this decision.
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