The
D.C. Circuit Court of Appeals affirmed the lower court’s unconditional approval
of AT&T’s acquisition of Time Warner. [1] The appellate court opted not to second-guess
the lower court’s findings that dismissed, ignored or misinterpreted the
government’s evidence and the findings of its expert witnesses. The D.C. Circuit Court of Appeals accepted
the lower court’s near complete embrace of the findings by AT&T’s expert
witnesses who purported to show that the vertical combination of AT&T and
Time Warner would have no impact on content prices and create no increased
ability for key content outlets, such as CNN and HBO, to demand higher compensation
and weather longer blackout period of no compensation to extract better
terms.
The
appellate court also emphasized the offer by Time Warner to accept a seven year
period of binding arbitration and to maintain current compensation arrangements
instead of withholding content. Additionally,
the court appeared to agree that having alternative sources of “must see” video
content, such as DirecTV and Uverse, did not create significantly greater
incentives for AT&T to drive a hard bargain with video programming
distributors, such as cable operators, knowing that during an extended black
out period, disgruntled subscribers could migrate to AT&T-owned options.
The
D.C. Circuit accepted the lower court’s emphasis on “real world” empirical analysis
whether a vertically integrated firm would have greater incentives to raise the
cost of content to competitors. Even
though AT&T itself had made this assertion in pleadings before the FCC, [2] its
expert witness attempted to show that the merger of Comcast with NBC Universal did
not trigger increased content costs. In
a battle between conflicting expert witness testimony, the lower court’s
preference for AT&T’s expert was not challenged perhaps based on the sense
that it was based on real world circumstances while the government’s expert
used economic bargaining theory. [3]
The
D.C. Circuit credits the lower court for accepting the premise that vertically
integrated firms could change bargaining tactics, but in this particular
situation changed incentives and perception of leveraging power would not end
up altering the outcome of content price negotiations. [4] The appellate court did not question the
lower court’s conclusion that even if the merged corporation would have greater
resources to survive the loss of revenues during a blackout and even though it
could offset losses from subscriber migration to AT&T content options, AT&T
would have little more incentive to risk longer and more frequent black outs:
The district court’s statements
identified by the government, then, do not indicate that the district court
misunderstood or misapplied the Nash bargaining theory but rather, upon
considering whether in the context of a dynamic market where a similar merger
had not resulted in a “statistically significant increase in content costs,”
the district court concluded that the theory inaccurately predicted the
postmerger increase in content costs during affiliate negotiations. [5]
finding the government failed to ‘prov[e]
that Turner [Broadcasting]’s post-merger negotiating position would materially
increase based on its ownership by AT&T,’ . . . the district court reached a fact-specific
conclusion based on real-world evidence that, contrary to the Nash bargaining
theory and government expert opinion on increased content costs, the
post-merger cost of a long-term blackout would not sufficiently change to
enable Turner Broadcasting to secure higher affiliate fees. [6]
The
appellate court also gave short thrift to the lower court’s assumption that
AT&T would pass through all of the $352 million in program cost saving to
its customers. While the D.C. Circuit
acknowledged that not all savings would flow through to consumers, as the lower
court mistakenly assumed, the court returned to its point of emphasis: that the
merger would not trigger content cost increases borne by other video program
distributors that they would have passed through to consumers:
The district court accepted Professor
Shapiro’s testimony about the $352 million cost savings from the merger. . . .
[T]he district court found that the quantitative model as presented through
Professor Shapiro’s opinion testimony did not provide an adequate basis to conclude
that the merger will lead to “any” raised costs for distributors or consumers,
“much less consumer harms that outweigh the conceded $350 million in annual
cost savings to AT&T’s customers.”
Whatever errors the district court may
have made in evaluating the inputs for Professor Shapiro’s quantitative model,
the model did not take into account long-term contracts, which would constrain
Turner Broadcasting’s ability to raise content prices for distributors. . . .[7]
The appellate court notes that the district
court did not conduct a costs benefit analysis balancing “increased prices for
consumers against cost savings for consumers” [8]
and instead found that the government had not shown the merger was likely to
lead to any price increases, because Time Warner content negotiators would not
have, or use increased leverage in affiliate negotiations after the merger.
[1] U.S.
v. AT&T Inc., No. 18-5214, slip op. (D.C. Cir. Feb. 26, 2019); available at: https://www.cadc.uscourts.gov/internet/opinions.nsf/390E66D6D58F426B852583AD00546ED6/$file/18-5214.pdf.
[2] The
D.C. Circuit Court of Appeals accepted the lower court’s disinclination to
consider such evidence as significant now: “Once the district court credited
AT&T’s expert’s opinion based on an econometric analysis that the similar Comcast-NBCU
merger had not had a ‘statistically significant effect on content costs,’ . . .
the district court could understand that the defendants’ admissions at the time
of the Comcast-NBCU merger offered little probative support for the government’s
increased leverage theory.” Id. at
25.
finding that the
government failed to clear the first hurdle in meeting its burden of showing
that the proposed merger is likely to increase Turner Broadcasting’s bargaining
leverage.” Id. at 17-18.
[4] “In
other words, the record shows that the district court accepted the Nash
bargaining theory as an economic principle generally but rejected its specific
prediction in light of the
evidence that the
district court credited.” Id. at 19.
