Antitrust and media experts were surprised last week when the Department of Justice (DOJ) leaked its staff’s opposition to the AT&T-Time Warner merger. The surprise is summed up by Ed Lee, managing editor at Recode, who told CNBC that AT&T “has a slam dunk court case” against the Justice Department. If the agency decides to pursue staff’s recommendation, it’s likely to lose in federal court and the court of public opinion.
Most antitrust challenges involve mergers between companies that serve the same customers (“horizontal” mergers), like Walgreens’ attempt to acquire Rite Aid, because horizontal mergers eliminate a competitive choice from the marketplace. The AT&T-Time Warner deal is a “vertical” merger of companies who don’t serve the same set of customers — Time Warner creates programming to sell to distributors and AT&T distributes programming to consumers.
Challenges to vertical mergers are rare because the number of competitive choices for each set of customers remains the same. To successfully challenge this vertical merger, DOJ would need to show that the combined company would have sufficient market power to foreclose rival video distributors from accessing Time Warner content or rival programmers from accessing AT&T’s distribution network. Precedent, economic theory, and empirical evidence make it unlikely that the DOJ could prove the combined company would have sufficient market power to engage in either foreclosure strategy. Read More