What the AT&T-Time Warner Suit Says About Antitrust
The news that the Department of Justice (DOJ) has filed suit to block the AT&T-Time Warner merger highlights a fundamental antitrust policy issue: What is the appropriate role of structural vs. conduct remedies in the merger review process? This was also the subject of newly installed Antitrust Division Chief Makan Delrahim’s recent remarks before the American Bar Association.
The threshold question always comes down to whether the merger leads to significant concerns about competition and consumer welfare. For instance, does the merger increase the incentive or ability of the integrated firm to act in an anticompetitive manner? If it doesn’t, the deal should go through without any remedies, and the question of structural vs. conduct remedies is moot. But let’s assume the DOJ has legitimate competition concerns, at least for the sake of this discussion.
Conduct remedies impose behavioral requirements that constrain what the firms can do in certain areas. The advantage of a conduct remedy is that, in principle, it can be tailored to address specific concerns without destroying the value that the firms in question believe will be created by the merger.
But conduct remedies can also be quite extensive. For example, to acquire NBCUniversal in 2011, Comcast agreed to more than 150 conditions — what effectively amounts to a quasi-regulatory regime for just one company. This regime has many of the drawbacks of traditional regulation, plus some others associated with ongoing monitoring by agencies and courts that are likely to be poorly suited to the task. Mr. Delrahim expressed concerns that the Antitrust Division has become overly reliant on conduct remedies, pointing to nearly 1,300 consent decrees still in effect, some over 100 years old.
By contrast, structural remedies require a firm to divest itself of certain assets or businesses. The advantage of a structural remedy is that it changes the firm’s incentives and its ability to act on those incentives without requiring any monitoring. These remedies can be more effective than behavioral restrictions in promoting competition because they allow the company to separate the problematic assets and then compete unencumbered by bureaucratic oversight.
While structural remedies may sound preferable to conduct remedies, in fact, each approach has its own costs and benefits.
AT&T likely went into the current transaction assuming it could negotiate conditions similar to those attached to the Comcast/NBCU deal, which was also a vertical merger of a content distribution with a content creation company. Those conditions required Comcast and NBC to make their content available on reasonable terms to other video distributors, and prohibited Comcast from discriminating against other companies’ content that might be competitive with its own. Because the DOJ was particularly concerned that the merger might harm the fledgling online video distributor (OVD) sector, it also required that Comcast broadband not discriminate against OVDs.
The new leadership at the Antitrust Division is sending strong signals that it does not favor such conditions in the AT&T-Time Warner case, instead favoring structural relief. Reports indicate the DOJ has proposed that AT&T-Time Warner undertake major divestitures, either of DirecTV — which constitutes the bulk of AT&T’s multichannel video programming distribution (MVPD) business — or of Time Warner’s Turner Broadcasting unit, including its basic cable networks, such as CNN. These divestitures would be aimed at reducing the incentive and the ability of the new entity either to discriminate in providing content to competing MVPDs and OVDs, or to favor Turner Broadcasting programming at the expense of rivals. AT&T would retain its wireline and mobile broadband businesses, which might increase its incentive to promote the development of OVDs and online video content generally.
But divestitures have real costs, including destroying some of the value and increased efficiencies that the parties hope to get out of vertical integration. Another cost is that major divestitures can be quite disruptive and involve large up-front costs. These must be weighed against the ongoing costs of regulatory oversight associated with a detailed behavioral relief regime.
Whatever the outcome of the AT&T-Time Warner merger, the Justice Department is highlighting a fundamental antitrust policy issue. The right course of action — whether structural or conduct remedies — will depend on the facts of that case.
Thomas M. Lenard is Senior Fellow and President Emeritus of the Technology Policy Institute.