DISNEY-FOX, AT&T-TIME WARNER, AND DOJ INCONSISTENCY
By: Shashi Gowda, Volume 103 Staff Member
In October 2016, AT&T Inc. (“AT&T”) announced that it would be acquiring TimeWarner Inc. (“TimeWarner”) through a $108.7 billion purchase. Two years later, The Walt Disney Company (“Disney”) announced that it would be acquiring Twenty-First Century Fox, Inc. (“Fox”) for $71.3 billion. Both potential mergers present monumental impacts to the American economy, however AT&T-TimeWarner (a vertical merger) has faced continuous interference from the Department of Justice (“DOJ”) compared to relative smooth-sailing for Disney-Fox (a horizontal merger). Through Section 7 of the Clayton Act, the DOJ is given authority to regulate acquisitions and block any that would “substantially lessen competition.” Section 7 is regularly used to inhibit horizontal mergers, however rarely to inhibit vertical mergers. Given that anti-trust policy since the Reagan administration has been to accommodate mergers as much as possible, why is it that there has been such a sharp contrast in treatment by the DOJ? Superficially, it seems as though the $37 billion difference in acquisition costs would explain the different reactions, however looking deeper suggests otherwise.
The DOJ’s lawsuit against the AT&T-Fox Merger was filed in November 2017 and alleges a violation of Section 7 of the Clayton act; it was the first vertical merger case heard since 1977. Although there were concerns that this merger was opposed due to political reasons, the DOJ lists numerous economic issues posed by the potential merger. Primarily, the DOJ argued that the merger would inhibit the growth of online distributors in the TV market as well as lessen competition amongst traditional distributors. This was due to the high-value TV networks owned by the merged firm, and the ability to raise costs for against its TV distribution rivals and online distributors. The DC Circuit held that the government failed to show that the merger would substantially lessen competition, noting that any appeal would be unnecessary due to what it saw as tenuous arguments. Although AT&T-TimeWarner formed following the trial, the DOJ has continued its crusade against the merger.
Compare this to the Disney-Fox merger, which has seen little resistance at all from the DOJ. In its complaint against the Disney-Fox merger, the DOJ opposed only one aspect as opposed to the merger as a whole. So long as the merged firm divested 22 regional sports networks, the DOJ believes that this merger would not substantially lessen competition in any markets that would be occupied by Disney-Fox. Yet, the merged firm would still own two of the major television networks, and would dominate the film industry. Both changes would significantly increase Disney-Fox’s bargaining power in their respective industries. Yet neither of these industries changes were acknowledged by the DOJ in the complaint, thereby implying that the DOJ believes that neither would substantially lessen competition. The DOJ has hailed Disney-Fox as a victory for American consumers and has praised the cooperation that the two firms had regarding anti-trust concerns.
Given that the DOJ has traditionally scrutinized horizontal mergers much more heavily than vertical mergers, it is confusing that the exact opposite happened when comparing these two deals. The most interesting difference between the two responses is that Disney-Fox was offered an opportunity to avoid a block by the DOJ through divestment of the regional sports networks, whereas AT&T-TimeWarner was outright blocked. The DOJ placed a large amount of focus on AT&T-TimeWarner’s ownership of Turner networks, and it is surprising that it has not pushed more heavily for those properties to be divested upon merging. Likewise, the lack of focus on Disney-Fox’s increased market shares and bargaining power in the television and film industries is concerning, considering that a similarly large increase was the crux of the DOJ’s complaint against AT&T-TimeWarner. A potential explanation for why the two mergers have been treated differently is due to the ability to control prices. AT&T-Fox’s ability to control prices in television distribution likely explains why the DOJ attempted, and continues to attempt, to enjoin the merger. Furthermore, the significant increase in market share seen through Disney-Fox likely warranted more of a response than it received from the DOJ and its lack of acknowledgement is concerning.
Ultimately, a comparison of Disney-Fox and AT&T-TimeWarner shows some inconsistency with regards to how the DOJ has treated each merger. While there are legitimate concerns to the merger of AT&T and TimeWarner, the lack of similar scrutiny being applied to both is problematic when some of the same concerns exist in Disney-Fox. And while AT&T-TimeWarner will likely survive the DOJ’s appeal, inconsistent treatment from the DOJ in anti-trust transactions will be an issue for merging firms going forward.
- AT&T to Acquire Time Warner, AT&T (Oct. 22, 2016), https://about.att.com/story/att_to_acquire_time_warner.html. ↑
- The Walt Disney Company Signs Amended Acquisition Agreement to Acquire Twenty-First Century Fox, Inc., for $71.3 Billion in Cash and Stock, The Walt Disney Company (June 20, 2018), https://www.thewaltdisneycompany.com/the-walt-disney-company-signs-amended-acquisition-agreement-to-acquire-twenty-first-century-fox-inc-for-71-3-billion-in-cash-and-stock/. ↑
- A vertical merger is the merger of two or more companies involved at different stages in the supply chain process for a common good or service. Will Kenton, Vertical Merger, Investopedia (July 26, 2018), https://www.investopedia.com/terms/v/verticalmerger.asp. ↑
- Press Release, Dep’t of Justice, Justice Dep’t Challenges AT&T/DirecTV’s Acquisition of Time Warner (Nov. 20, 2017), https://www.justice.gov/opa/pr/justice-department-challenges-attdirectv-s-acquisition-time-warner. ↑
- A horizontal merger is a merger that occurs between firms that operate in the same industry. Will Kenton, Horizontal Merger, Investopedia (Aug. 15, 2018), https://www.investopedia.com/terms/h/horizontalmerger.asp. ↑
- Press Release, Dep’t of Justice, The Walt Disney Co. Required to Divest Twenty-Two Regional Sports Networks in Order to Complete Acquisition of Certain Assets from Twenty-First Century Fox (June 27, 2018), https://www.justice.gov/opa/pr/walt-disney-company-required-divest-twenty-two-regional-sports-networks-order-complete. ↑
- 15 U.S.C. § 18. ↑
- DOJ: Vertical Merger Precedent, AT&T, https://about.att.com/content/dam/sitesdocs/AT%26T_TimeWarner/FINAL%20DOJ%20Merger%20Precedent%20One%20Pager%2011.19%203pmET.PDF. The DOJ has the ability to block vertical mergers when they have the incentive to substantially lessen competition by withholding or raising price for that input. See Cable and Television and Consumer Protection Act of 1992, P.L. 102-385. ↑
- Rana Foroohar, Businesses Will Continue to Merge and Purge in 2016, Time (Mar. 1, 2016), http://time.com/4242628/mergers-acquisition-wall-street-layoffs/. ↑
- DOJ: Vertical Merger Precedent, supra note 8. ↑
- See Dade Hayes, DOJ Anti-trust Head: Fox-Disney Deal “A Victory For American Consumers,” Deadline (July 13, 2018), https://deadline.com/2018/07/doj-anti-trust-head-calls-fox-disney-deal-victory-for-american-consumers-1202426137/. There has been much speculation that the DOJ’s response to this merger is meant to be retaliation by President Trump against CNN, a property of TimeWarner. Id. ↑
- Complaint at 3, United States v. AT&T Inc., 2018 WL 3752091 (D.C. Cir., 2018). ↑
- AT&T-TimeWarner owns all of Turner networks as well as HBO. Rachel Sandler & Skye Gould, Here’s Everything AT&T Will Own After It Buys Time Warner, Bus. Insider (June 14, 2018 1:41 PM), https://www.businessinsider.com/att-time-warner-acquisition-what-it-will-own-2018-6. ↑
- Complaint at 3, United States v. AT&T Inc., 2018 WL 3752091 (D.C. Cir., 2018). ↑
- Dad Hayes, DOJ Blasts AT&T’s Reply to its Lawsuit Appeal as “Revisionist” Rehash, Points to Stephenson Floating CNN Sale, Deadline (Oct. 12, 2018), https://deadline.com/2018/10/doj-rips-atts-reply-to-its-lawsuit-appeal-as-revisionist-rehash-1202481231/. ↑
- Complaint, United States v. The Walt Disney Co., 83 Fed. Reg. 40,553, 40,556 (S.D.N.Y. 2018). ↑
- Id. ↑
- Disney-Fox would control both ABC and Fox Studios, two of the major television networks. See The Walt Disney Company Signs Amended Acquisition Agreement to Acquire Twenty-First Century Fox, Inc., for $71.3 Billion in Cash and Stock, supra note 2. ↑
- Disney-Fox would occupy 29% of the domestic box office share in the movie industry. Felix Richter, Disney-Fox Deal to Shake Up the Movie Industry, Statistica (July 4, 2018), https://www.statista.com/chart/12307/market-share-of-major-film-studios/. This would be a larger market share than the next two largest firms combined. Id. ↑
- Makan Delrahim, A Victory for American Consumers, Wash. Times (July 12, 2018), https://www.washingtontimes.com/news/2018/jul/12/how-the-disney-fox-anti-trust-settlement-protects-c/?utm_medium=email&utm_source=govdelivery. ↑
- Assistant Attorney General for the DOJ, Makan Delrahim, claims that AT&T-TimeWarner would only accept “behavioral” remedies involving promises to refrain from anticompetitive conduct. Id. ↑