Washington, D.C. – While the industry and Wall Street may support the ATT-Time Warner merger, it represents one of the most damaging, anti-competitive, anti-consumer mergers in recent history. Wall Street and industry supporters of the merger are simply and totally wrong, when they claim this is an unprecedent and illegal break with antitrust principles. They are flatly ignoring the history of antitrust in the communications sector, the pattern of development of antitrust practice, and the very powerful trend in antitrust thinking over the past three decades. Denial of this merger fits squarely in the century-long tradition of antitrust action in the communications sector and the development of antitrust practice in the past decade. Allowing it to proceed would serve a devastating blow to the competition both consumers and the marketplace need to foster both innovation and fair pricing.
Vertical leverage, i.e. the ability to use control over choke points to undermine competition, has always been a strong concern in communications because of the need for and importance of interconnection for competitors in horizontal markets. The consent decree signed by AT&T and the Department of Justice in 1910, one of the first ever executed by the DOJ under the Sherman Act, addressed the refusal to ATT to allow independent phone companies to connect to their local network (a horizontal problem) or their long distance market (a vertical problem), which undermined their ability to compete for customers. The break-up of AT&T 70 years later, had strong elements of vertical leverage. Its motivation was the abuse its relationship with Western Electric in the purchase and sale of telecommunications equipment.
Over the thirty years since the breakup vertical leverage conduct continued to play a role, when head-to-head (horizontal) competition failed to develop. Faced with highly concentrated, vertically integrated markets, the abuse of vertical leverage and conglomeration that facilitated coordination effects attention turned to a wide range of issues beyond horizontal concentration.
European competition authorities studied oligopolies and vertical merger intensely and the European Union adopted updated non-horizontal guidelines in 2008. The U.S. updated it Horizontal Merger Guidelines in 2010, with strong implications for coordination effects, but did update the non-horizontal guidelines. There is widespread recognition in the antitrust practice that these guidelines, which were issued in 198,4 are out of date and out of touch with current thinking and market reality.
At the start of the 21st century, antitrust authorities did take a number of actions that reflected these underlying forces. The Microsoft case was about vertical leverage used to prevent horizontal competition and undermine competition in vertically connected markets – the manipulation of and application interface, or API, to create a barrier to entry while stifling competition in the markets that ride on the platform. More directly on point, the Department of Justice placed vertical integration at the center of its complaint in the NBC-Comcast merger and extended the logic in the Charter-Time Warner merger, and even the ATT-DirecTV merger.
Antitrust practice in the U.S. develops in a pragmatic manner, as practices and the academic literature create pressure of change. Consent decrees that involve the filing of a complaint and competitive impact statement define problems, followed by the acceptance of a judge, after opportunity for comment by the public and affected parties, become legal parts of the evolving antitrust landscape.
These consent decrees are important guideposts in the process that define the legal terrain, but they are not endpoints. While Comcast-NBC- set the direction, there are a number differences in the ATT-Time Warner merger that suggest it needs a more vigorous response. In some way ATT-Time Warner poses a greater threat to competition.
ATT sits at a more fundamental location in the digital communications network, which gives it more anticompetitive tools and potentially greater anticompetitive effects. It controls four digital distribution networks, broadband, business data services, satellite, and wireless. It has a much larger base of subscribers that is more widespread. Behavioral remedies are always seen as second best at the DOJ. The approach taken in the NBC-Comcast merger relies on “industry practices,” but as the number of unintegrated participants shrinks, it becomes harder for that approach to prevent abuse of market power.
This leads to a third reason that later mergers might be rejected, while earlier mergers might have been conditioned – coordination effects. Both horizontal concentration and vertical integration affect the ability of firms to explicitly or implicitly coordinate behaviors. Although the Horizontal Guidelines note that “coordinated interaction includes conduct not otherwise condemned by the antitrust laws,” they argue that merger review should reach this behavior because the merger could produce conditions in the market that make it extremely vulnerable to harmful coordination. This is exactly what the ATT-Time Warner merger does.
That the ATT-Time Warner is touted as “the” case of the early 21st century is not surprising, since control of choke points has been a central concern in communications networks since the early 20th century. The courts will decide this case based on its merits, not innuendo about political motives and competition and consumers will benefit greatly when the DOJ prevails.
Contact: Mark Cooper, 301-384-2204
The Consumer Federation of America is a national organization of more than 250 nonprofit consumer groups that was founded in 1968 to advance the consumer interest through research, advocacy, and education.