On Wednesday, December 7, 2016 the Subcommittee on Antitrust, Competition Policy & Consumer Rights will hold a hearing on "Examining the Competitive Impact of the AT&T-Time Warner Transaction." Among the witnesses will be AT&T CEO Randall Stephenson, Time Warner CEO Jeffrey Bewkes and AXS TV Chairman Mark Cuban.
There’s been a great deal of ink spilt over the proposed AT&T-Time Warner merger. Much of the commentary on the merger has been critical, with various authors expressing concern that the merger will limit consumer choice and lead to increased prices. Others have sounded alarm at the wave of cable and telecom consolidations we’ve seen in recent years and argued that bringing content and distribution together under a single roof will concentrate too much power in the hands of a single provider. In our current populist climate, it is perhaps unsurprising that an effort to join together two very large companies into one, even larger company would face substantial opposition.
And indeed, when two companies merge, there is always concern that the resulting entity may use its increased size to raise prices or reduce service. When a company has a large enough share of the market, it has the ability to exercise what economists call “market power,” or the ability to charge a higher price for its goods and services because it doesn’t have to worry about competitors or new entrants swooping in and stealing away customers by offering lower prices.
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When two competitors merge, economists call the union a “horizontal merger.” Two companies at the same level in the distribution chain decide to pool resources, simultaneously decreasing competition and increasing concentration in the relevant market. Regulators examine such mergers very closely to ensure that the reduction in competition will not lead to increased market power.
The AT&T-Time Warner merger, however, is not a horizontal merger. AT&T and Time Warner are not competitors. AT&T provides wireless and broadband Internet service, while Time Warner creates movies, TV shows and other content that AT&T and other distributors transmit to consumers. AT&T and Time Warner operate at different levels of the distribution chain. Theirs would be a “vertical merger.”
Economists tend to worry less about vertical mergers than horizontal mergers because vertical mergers don’t reduce the number of competitors in a given market. Rather, they integrate separate levels of the distribution chain. Following a vertical merger, Company A still has the same number of competitors as before. The difference is that rather than having to contract with another company above it in the distribution chain (say, a parts supplier) or below it in the chain (say, a retailer) to obtain a needed service, the company simply merges its operations with the other company. The hope in such a transaction is that the integration of operations will create efficiencies that will lower the company’s costs and increase profits, with some of those savings being passed on to consumers in the form of lower prices.
That’s not to say that vertical mergers are worry-free. A company with market power in a given market could potentially try to use a vertical merger to extend its dominance into another level of the marketplace. Or it could attempt to cut off its competitors’ access to necessary goods and services by purchasing the firm that produces those goods and services and then refusing to deal with the competitor. Some commentators, such as Robert Bork, have argued that such “foreclosure” dangers are ephemeral and that any harm competitors might suffer would result only from cost advantages the merging company would enjoy as a result of increased efficiencies—cost advantages that would ultimately be passed on to consumers.
These are all crucial points to keep in mind as Congress and the Department of Justice consider the AT&T-Time Warner merger. Bigger is not necessarily better, but neither is it necessarily worse. The central question in any merger review is how the transaction will impact consumer welfare. Because AT&T and Time Warner are not competitors, concerns about increased market power or loss of competition do not apply. Rather, the pertinent inquiry is whether AT&T ownership of Time Warner content will lead to exclusive dealing, improper favoritism, or other acts that narrow consumer choice and reduce service quality. At the same time, we should carefully evaluate the parties’ claims that the merger will benefit subscribers by, for example, expanding the amount of available content that doesn’t count against monthly data caps.
Rather than fall prey to hyperbole or to simplistic, knee-jerk claims that bigger is always worse, reviewing authorities owe it to consumers to analyze the AT&T-Time Warner merger according to the law and economic reality. That the proposed transaction is a vertical, rather than a horizontal, merger should give some comfort to concerned parties. But due diligence is still needed to ensure that the merger will benefit consumers.
