The DOJ’s Case Against AT&T Is Stronger Than You Think — Again.

I want to start by applauding Randal Stephenson for coming out quickly and denying the rumors that DoJ asked them to sell CNN as the price of getting the merger done. At the same time, however, he acknowledged that negotiations were “complicated,” and that he and recently confirmed Asst A.G. for Antitrust Makan Delrahim were still “getting to know each other” and “figure out the ask on the other side of the table.” He also made it clear that, if DoJ does challenge, AT&T is prepared to go to court and are confident they will win.

 

AT&T is generally pretty good at persuading everyone that DoJ doesn’t really have a case against them. As folks may recall, despite the fact that the proposed AT&T/T-Mo transaction violated just about every basic tenant of existing antitrust law, AT&T managed to convince everyone for the longest time that DoJ was just playing hardball with them and didn’t really mean it because DoJ didn’t really have a case. While Stephenson refused to discuss what was negotiated, the rumors suggest it was a demand to divest either DIRECTV or the Turner Broadcasting cable channels (which include CNN, as well as TNT, HBO and a bunch of other real popular programming.) Once again, you have antitrust experts who do not have any particular experience with cable mergers shaking their heads and predicting that DoJ has no case.

 

In  fact, demanding divestiture of either the must have content or the DIRECTV distribution platform is precisely the remedy you would expect if you believe the deal presents significant harm because of the vertical integration issues. That’s been the position of my employer, Public Knowledge, which has opposed the transaction since AT&T announced the deal. (That predates Trump’s election, for those of you wondering.) If you want a more detailed understanding of the theory of the harms, you can find it in my boss Gene Kimmelman’s testimony to Congress here. While generally true that vertical deals are hard to challenge, the cable industry has long been something of an exception, and the remedy here is similar to what the FTC imposed on the AT&T/Turner deal in 1996, where the FTC imposed stock divestitures and restructuring to eliminate the voting interest of John Malone and Liberty Media because of Malone/Liberty’s ownership TCI, which was then the largest cable operator in the United States (25% national market share). Given the massive criticism of “behavioral” remedies and a call to return to “structural” remedies from the right and the left, it’s unsurprising that DoJ would want actual divestiture rather than go the Comcast/NBCU consent decree route.

 

But as Stephenson noted, negotiations have only just begun in earnest, so we may end up with behavioral remedies after all. We’ll see.

 

I dig into details below . . . .

Remind Me How This Whole “Antitrust Review Thing” Works?

 

I wrote a lengthy set of blog posts about how antitrust review works in the media world. You can find them here, here, and here (you can skip the one about the FCC because the FCC is not reviewing this merger). Short version: DoJ reviews the deal before it closes. If it believes the merger is “likely to substantially reduce competition,” it challenges the merger as a violation of the Sherman Act and Clayton Act. Because antitrust is hard to litigate, the DoJ prefers to negotiate settlements with merging companies to alleviate the dangers caused by the mergers. Traditionally, the DoJ generally required divestitures and other “structural remedies” to prevent the harms. Alternatively, the DoJ can impose conditions that prohibit or require certain kinds of behaviors. This approach is called “behavioral remedies.” Since the DoJ is not a regulatory agency, it polices these behavioral remedies through a consent decree administered by a district court. It also generally limits the behavioral remedies to some period of years, rather than entering them permanently.

 

In the first part of the Obama Administration, the DoJ shifted from a clear preference for structural remedies/divestiture to preferring behavioral remedies. The archetypal examples of the shift to behavioral remedies are the Ticketmaster/LiveNation and Comcast/NBCU consent decrees. This is important because both of these mergers have come under sharp criticism in recent years as being utterly useless in constraining market power for a variety of reasons.

 

Pushback on the “Behavioral Remedies” Approach And Revival Of Antitrust Generally.

 

Because of the similarities between this deal and Comcast/NBCU, it’s important to recognize that Comcast/NBCU actually marked a substantial shift away from the more traditional approach of structural remedies. Mind you, behavioral remedies were not a new invention of the Obama Administration. They go back decades, including the consent decree that makes it possible for musicians to license permission for music covers from ASCAP and BMI, which dates back decades. But the Obama Administration in its first term — known to progressives as “the Wuss Epoch” — tilted massively in favor of behavioral remedies. In fairness to DoJ and FTC, as then Asst Sec. For Antitrust Christine Varney explained, courts have generally made it much harder to press cases against vertical mergers rather than horizontal mergers — so settling for behavioral remedies was a safer course for DoJ to pursue.

 

The pushback against behavioral remedies is part of a much broader pushback on current antitrust law as being altogether too weak and inadequate. While getting more aggressive on antitrust is generally associated with Democrats, there has been considerable pushback on the use of behavioral remedies from conservatives as well. True, conservatives are more inclined to like the current “consumer welfare standard” and economic theories that favor mergers, they balk at behavioral remedies as being too “regulatory.” But for principled conservatives who do not reside in Econ Cloud Cuckoo Land, the virtue of antitrust over general industry regulation is that it keeps government out of the market as much as possible. Structural remedies like divestiture are “one and done.” Behavioral remedies require ongoing government supervision and thus, in the view of conservatives, distort the market as badly as any other regulation.

 

On the left, folks like Barry Lynn and Matt Stoller argue that antitrust has suffered from massive revisionist history and economics, particularly since the publication of Robert Bork’s “The Antitrust Paradox” — which is widely credited with completely shifting analysis of antitrust away from the dangers of size to a focus on “consumer welfare,” by which Bork meant all the good things that come from bigger is better. If you think today’s markets are highly concentrated, a disaster for innovation, and a threat to democracy by creating massive concentrations of economic power, than you think either Bork was awful or, at a minimum, that we need to rethink how we are applying the consumer welfare standard to generally get more aggressive on merger review — particularly on vertical mergers. By contrast, if you think current antitrust law is generally fine, then you mock this as “hipster antitrust.”

 

On the right, as I’ve noted previously, the Bannon/Nativist-Populist wing of the Republican party has also been pushing hard on reviving antitrust from their general distrust of concentrated power in the hands of people other than themselves. In keeping with this approach, they have generally focused on limiting the power of Silicon Valley tech companies and on stopping the AT&t/TW deal. As a result, we have seen a number of “strange bedfellows” coalitions in recent days, including my employer Public Knowledge sending a joint letter with the Tea Party Patriots and a bunch of other conservative groups opposing the AT&T/TW deal.

 

It’s also important to note that in other mergers, Wall St. analysts expecting a bonanza have been somewhat disappointed in the “mixed signals” from the Trump Administration on antitrust enforcement. While letting the Amazon/Wholefoods deal go without even a cursory look, they rejected the proposed Walgreens/RiteAid deal. In particular, Wall St. has been uncertain — given the general antitrust fervor on both the left and the right — how the Trump Administration will approach vertical mergers.

 

Finally, we have newly confirmed head of the DoJ Antitrust Division Makan Delrahim’s maiden speech post-confirmation at NYU about two weeks ago. Traditionally, these kinds of speeches are signals as to how the new guy in charge will approach things. Addressing the behavioral remedies v. structural remedies debate in a question after the speech, Delrahim said he was “suspicious” of consent decrees and emphasized that DoJ should act as an enforcement agency and not a regulator. i.e., use structural remedies like divestiture not behavioral remedies like consent decree conditions.

 

So in evaluating what is going on here, and whether DoJ really has a case or if this is just part of Trump’s general attack on press critical to him, it’s important to recognize that this isn’t just about the AT&T/TW transaction and didn’t just drop out of a clear blue sky. This merger has always been highly controversial, and since it was announced over a year ago has generally been held up as a prime example by antitrust advocates on both the left and the right as an example of a merger that functioning antitrust law should block.

 

Theory of the Harm — Or, “What Does DirecTV Have To Do With This?”

 

One of the things that has people who do antitrust generally, but don’t have a lot of experience in this particular neck of the woods (looking at you Herbert Hovenkamp) is the failure to understand that the theory of harm of vertical integration of cable programming and conduits is extremely well developed in antitrust doctrine, dating back to the Cable Television and Consumer Protection Act of 1992. As Congress explicitly found in Section 2(a)(4) and (a)(5):

 

(4) The cable industry has become highly concentrated. The potential effects of such concentration are barriers to entry for new programmers and a reduction in the number of media voices available to consumers.

(5) The cable industry has become vertically integrated; cable operators and cable programmers often have common ownership. As a result, cable operators have the incentive and ability to favor their affiliated programmers. This could make it more difficult for noncable-affiliated programmers to secure  carriage on cable systems. Vertically integrated program suppliers also have the incentive and ability to favor their affiliated cable operators over nonaffiliated cable operators and programming distributors using other technologies.

 

The legislative history explicates this even further, but I can’t link to the legislative history.

 

To explain in plain English. Cable programming is not like most goods such as steel or plastic widgets. It is “non-fungible.” Someone who wants HBO’s Game of Thrones or the NBA finals on Turner does not regard Netflix’s “Stranger Things” or ESPN as an acceptable substitute. They want the specific thing. In cable in particular, the 1992 Act’s legislative history recognized the concept of “marquis” or “must have programming.” If you do not have access to this programming, then you can’t launch a successful competing service. If you are vertically integrated, you can prevent your rivals from getting any of this “must have” programming you actually own — or otherwise raise their price and limit their ability to compete via contract conditions.

 

This is important because the reason it has become so hard to oppose a vertical deal is because courts do not believe in foreclosure — the idea that you can keep enough of a necessary input to hurt your rival. If the problem is getting more coal for your steel refinery and your rival buys your usual supplier, you can generally find another supplier. If someone managed to buy up enough coal mines to make it a real problem, the theory goes, someone else would just open another coal mine. So foreclosure doesn’t happen and therefore vertical mergers are not a problem. Q.E.D.

 

Whatever the virtues of this theory in the general case (and it has come under a lot of criticism in recent years), this theory does not apply in a situation where foreclosure is possible. That includes markets where goods are non-fungible, like the cable programming market. So if the cable operator vertically integrates with the programming channel, and that programming is “must have” programming, there is no substitute. Foreclosure happens, and the vertical merger is a threat. Which is why Cableville operates under a somewhat different set of rules than most of Antitrustland.

 

In addition to the fact that programming is considered unique and non-fungible, being big MVPD (and the market being generally concentrated) means that you can also exert power over unaffiliated programmers, since if they don’t toe the line you won’t carry them. And while the cable operator generally does not need a new indie programmer, the programmer needs someone to carry it so it can reach an audience.  Since the cable operator has lots of customers, and the hypothetical MVPD competitor the indie programmer might want to sell to — like DBS in 1992, or a streaming service these days — has zero customers, indie programmer will agree not to sell to the competitor aqs a condition of carriage. If you think this is hypothetical, you should ask why Comcast didn’t carry MASN until the FCC forced it to, or why Discovery Channel suspended their contract with Sky Angel when they tried to go from satellite to being a virtual MVPD. (And if you want to tell me those were all a long time ago, trust me, I got lots of examples.)

 

Which brings us to the basic theory of the harm in AT&T/TW, as my employer Public Knowledge keeps explaining. TW controls lots and lots of “must have” programming for anyone trying to offer a rival streaming service or other MVPD-type service over your mobile phone. In particular, the Turner Broadcast Channels include such “must have” programming as HBO, TNT, TBS and –yes — CNN.  Allowing a combination of the largest pay-tv provider (DIRECTV), the second largest mobile distribution platform (AT&T Wireless), and a wealth of “must have programming” is precisely the harm that Congress identified and wanted to undo in the 1992 Cable Act.

 

This is why it was so important to determine whether this was just about CNN, or was a much broader divestiture request (and why I give props to Randal Stephenson for publicly squashing the rumor that DoJ asked them to divest CNN). If this were just about CNN, it would make no sense from an antitrust perspective. But if its divestiture of either the “must have programming” (which would include CNN) or the largest MVPD distribution platform (DIRECTV) — the two ingredients that when combined vertically has been proven to promote market power since 1992! — it follows naturally from the theory of harm. Get rid of one of the two ingredients for total market power dominance and you eliminate the threat to competition on the new platforms of streaming and mobile wireless.

 

But Wait! That’s An FCC Thing, Not An Antitrust Thing!

 

True, the 1992 Cable Act was an amendment to the Communications Act, which is why the findings also talk about the strong governmental interest under the First Amendment to promote a diversity of voices and opinions in the mass media — which is much more an FCC thing. It’s also why the remedies mandated by the 1992 Cable Act are prophylactic as well as remedial. But the theory of the harm is straight up antitrust theory of how size and vertical integration create massive market power in this particular market.

 

In any event, this theory of harm made the crossing from FCC over to antitrust back in 1996, when the FTC used exactly this theory to require that  TCI/Malone divest a bunch of stock to eliminate his ownership interest in the vertical programming part, as well as a bunch of behavioral remedies to address the harms identified in the consent decree governing the merger of Time Warner and Turner Broadcasting. The DoJ further expanded on this theory of harm in the Comcast/NBCU consent decree and the Charter/TWC consent decree. (And, for what it’s worth, you have former FCC General Counsel Jonathan Sallet explaining the same reasoning on why they said no on Comcast/TWC and yes on AT&T/DIRECTV). If you read the Comcast/NBCU complaint and settlement, it meticulously explains how the vertical integration of Comcast and NBCU programming would give it oodles and squindoodles of market power in terms of favoring its own content on both its broadband systems and its cable platform, using its control over must have content to severely disadvantage potential streaming rivals (and yes, streaming is in the same $#@! market) and compelling others to deny programming to rivals by refusing to carry them if they gave programming to an online rival. Lest you accuse me of gaslighting, here is my blog post from January 2011 explaining all this in the context of Comcast/NBCU. This is why Comcast/NBCU had all those behavioral conditions that were supposed to address these concerns.

 

The Charter/TWC consent decree was the same theory based on market size in the broadband/MVPD market, but not the vertical integration. So DoJ imposed a bunch of behavioral remedies to keep Charter/TWC from using its now vastly expanded size to force programmers to withhold programming from potential rivals, or otherwise advantage itself in the tradition cable or online video market and broadband service market.

 

So Why Did DoJ Allow Comcast/NBCU and Charter/TWC, But Wants Divestiture In AT&T/TW.

 

This is why I spent so much time 1500 words ago describing the whole behavioral remedies v. divestiture/structural remedies debate. As I noted back above, Comcast/NBCU is usually held up as exhibit “A” in “why behavioral conditions totally suck.” None of the behavioral conditions effectively stopped Comcast from using its market power in exactly the way we were worried about (such as zero-rating its own streaming service, or refusing to sell content to online streaming services, or discriminating against independent programmers in favor of its own content and other whacky shennanigans). The experience was so awful and pathetically lame that it led directly to rejecting the Comcast/TWC deal.

 

So it’s important to distinguish between the theory of harm, which is identical to that used in the last 3 cable mergers the DoJ reviewed, and the proposed remedy. For those who don’t understand the DoJ case against AT&T/TW if they have to go to court (which I’m hoping they do), they ought to actually take a look at the last 20 years of antitrust law about cable deals, not just the general aphorism that verticals are generally harder to challenge. We are not arguing about a difference in theory, but a difference in remedy — which gets us to the whole behavioral conditions v. structural conditions thing.

 

In other words, this is exactly the kind of divestiture we would expect a serious, conservative antitrust regulator to demand. The theory of harm from the vertical is well established (for anyone who actually bothers to research it). The DoJ has used the theory fairly recently, so this isn’t just something dredged up from the 1990s. The failure of the Comcast/NBCU behavioral conditions underscores why a structural remedy is necessary. While I would expect a conservative to challenge fewer mergers overall (owing to their rigid Chicago School orthodoxy and rejection of things like behavioral economics, nobel prize committee be damned), when they actually do challenge, we should expect to see demands for divestiture or lawsuits to block rather than consent decrees with behavioral conditions.

 

So You Don’t Think It Was Trump?

 

“One sinner destroys much good,” the Book of Ecclesiastes warns. Certainly the fact that President Trump has spent an inordinate amount of his time waging Twitter war against the press and doing everything possible to undermine and discredit the institutions of government gives rise to suspicion. As Matthew Yglesias pointed out, the problem is that having Trump in charge makes it very hard to tell if this is corrupt authoritarianism or good, populist antitrust enforcement. But for all of the above reasons, coupled with Stephenson’s denial that he was ever told he needed to divest CNN to get the merger approved, I am inclined to believe that this is staff driven and Delrahim approved. Mind you, if you told me that staff had initially recommended conditions and Delrahim said “we are not going to be regulators, if you think we have a case then we should demand divestiture,” I’d believe it. But I have no idea. Certainly staff were worried enough about this theory of harm in Comcast/TWC, and thought their case was strong enough, to recommend blocking the deal. I have no trouble believing the feel the same way here.

 

So Do You Think DoJ Would Win In Court?

 

It’s always hard to say, especially since what may be the most compelling evidence (internal documents, affidavits from competitors, etc.) is confidential and may not even be made publicly available in the trial. Additionally, while the theory is fairly well established here in Cableville, and has been used to get consent decrees or persuade companies to give up their deals, it has never been tested in court. So while I think it is pretty solid (especially since Congress actually put it relevant legislation as a Congressional finding), I can’t say for sure it’s a slam dunk.

 

But I can say that it is a Hell of a lot stronger than most people give it credit for, just like in AT&T/T-Mo.

 

Stay tuned . . . .

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