A Prospective Competitive Effects Analysis of the AT&T/Time Warner Merger

• Published date: 01 March 2024
• DOI: http://doi.org/10.1177/0003603X241228689
• Author: Paul R. Zimmerman,George Chang,Shawn W. Ulrick
• Date: 01 March 2024
• Subject Matter: Articles

https://doi.org/10.1177/0003603X241228689

The Antitrust Bulletin

2024, Vol. 69(1) 44 –73

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DOI: 10.1177/0003603X241228689

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Article

A Prospective Competitive Effects

Analysis of the AT&T/Time Warner

Merger

Paul R. Zimmerman*, George Chang**,

and Shawn W. Ulrick*

Abstract

The vertical merger of AT&T and Time Warner combined one of the largest multiple video program

distributors (MVPDs) in the United States with one of the largest providers of pay-TV programming.

This study evaluates the potential competitive effects of the transaction by considering changes in

the equity valuations of the respective upstream and downstream competitors to the merging parties

when news of their proposed merger became public. Consistent with the government’s central

theory of harm, it appears that financial markets expected the proposed transaction to result in Time

Warner increasing its carriage fees to AT&T’s and DirecTV’s MVPD rivals. Market reactions to the

announcement of AT&T’s commitment to enter into binding arbitration when negotiating future

carriage fees for Tuner content provide further support for this inference. The results are difficult to

rationalize in terms of the various efficiencies and synergies that AT&T claimed it would realize from

the merger.

Keywords

AT&T, event study, foreclosure, pay-TV, vertical merger, video distribution

I. Introduction

In October 2016, AT&T announced its intention to acquire Time Warner for approximately US$85

billion. The relevant antitrust product markets implicated by the merger were the distribution of

video programming content to pay-TV consumers and the associated supply of that programming

to distributors. AT&T operated as a downstream (“retail”) multi-programming video distributor

(“MVPD”) primarily through its ownership of DirecTV, whereas Time Warner was an “upstream

content provider” (UCP), that is, a firm that produced and sold upstream video programming

*Economist, U.S. Federal Trade Commission, Washington, DC, USA

**Professor, Department of Finance, Grand Valley State University, Grand Rapids, MI, USA

Corresponding Author:

Paul R. Zimmerman, Economist, U.S. Federal Trade Commission, Washington, DC 20580, USA.

Email: paul.r.zimmerman@pm.me

1228689ABXXXX10.1177/0003603X241228689The Antitrust BulletinZimmerman et al.

research-article2024

Zimmerman et al. 45

1. MVPDs distribute linear television programming, that is, content aired on specific channels at specific times. As employed

herein, the term ‘traditional MVPDs’ applies to facilities-based cable (e.g., Comcast) and telecom (e.g., Verizon) com-

panies as well as satellite-based providers (e.g., DirecTV) that supply linear pay-TV programming to consumers (end

users). A virtual MVPD (e.g., Sling TV and Hulu) refers to any firm that distributes linear programming over the Internet

without also providing the physical data path (be it land-, satellite-, or wireless-based) over which content is delivered to

consumers. Other Internet-based distribution platforms known as ‘subscription video on demand services’ (“SVODs”)

offer libraries of content that can be streamed by the consumer. As such, consumers can start watching content at the time

of their choosing and are not otherwise limited by a linear programming schedule. Relatedly, subscription video on demand

services do not generally offer live video programming including, for example, sports events or concerts. Examples of these

distributors include Netflix and Amazon Prime.

2. Nor was there any substantive indication that the parties intended to compete against one another by respectively integrat-

ing into the adjacent vertical segment.

3. Articles suggesting benefits include Larry Downes, Why Mergers Like the AT&T-Time Warner Deal Should Go Through,

Harv. Bus. rev., Nov. 16, 2017, https://hbr.org/2017/11/why-mergers-like-the-att-time-warner-deal-should-go-through

[https://perma.cc/G6DY-SNAS]; Matthew C. Klein, The DOJ’s Case Against the AT&T/Time Warner Deal Makes No

Sense, Fin. Times, Nov. 29, 2017, https://ftalphaville.ft.com/2017/11/29/2196219/the-dojs-case-against-the-atttime-warner-

deal-makes-no-sense/ [https://perma.cc/3Z8Y-RDMU]; Michael J. Santorelli, Why the AT&T-Time Warner Merger Makes

Sense, n.Y. Times, Nov. 16, 2017, https://www.nytimescom/2017/11/16/opinion/att-time-warner-merger.html [https://perma.

cc/6BDT-MY3T]. Articles suggesting harm include Susan Crawford, Why the Government is Right to Block the AT&T-Time

Warner Merger, Wired, Nov. 22, 2017, https://www.wired.com/story/why-the-government-is-right-to-block-the-atandt-time-

warner-merger/ [https://perma.cc/ZU49-SBCM]; Charles Gasparino, Why Consumers Should Fear the AT&T-Time Warner

Merger, n.Y. PosT, Nov. 30, 2201, https://nypost.com/2017/11/30/why-consumers-should-fear-the-att-time-warner-merger/

[https://perma.cc/6LXC-9QE9]; Lloyd Grove, The Perils of an AT&T-Time Warner Merger, THe dailY BeasT, Oct. 26, 2016,

https://www.thedailybeast.com/the-perils-of-an-atandt-time-warner-merger [https://perma.cc/FB8Q-EVCT]; Chris Sagers,

The DOJ Has a Strong Case Against the AT&T-Time Warner Merger, PromarkeT, Nov. 21, 2017, https://www.promar-

ket.org/2017/11/21/doj-strong-case-att-time-warner-merger/ [https://perma.cc/SG4F-RM2D]. Unsurprisingly, the outcome

of that trial stimulated even further commentary either supporting (see, for example, Stephen Moore, Why the AT&T-Time

Warner Merger Is a Win for Consumers, n.Y. Times, June 13, 2018, https://www.nytimes.com/2018/06/13/opinion/att-time-

warner-merger-good-consumers-antitrust.html; Joshua D. Wright & Jan M. Rybnicek, AT&T/Time Warner Decision: The

Triumph of Economic Analysis, THe FederalisT socieTY, June 27, 2018, https://fedsoc.org/commentary/fedsoc-blog/at-t-time-

warner-decision-the-triumph-of-economic-analysis [https://perma.cc/NG67-KKC7]) or condemning (see, for example, Nilay

Patel, The Court’s Decision to Let AT&T and Time Warner Merge is Ridiculously Bad, THe verge, June 15, 2018, https://

www.theverge.com/2018/6/15/17468612/att-time-warner-acquisition-court-decision; Steven Pearlstein, How Judge Leon

Blew It With U.S. v AT&T, WasH. PosT, June 15, 2018; Chris Sagers, The AT&T-Time Warner Merger Is Already Damaging,

slaTe, June 19, 2018, https://slate.com/technology/2018/06/why-the-at-and-t-time-warner-ruling-might-be-among-the-worst-

opinions-in-antitrust-history.html) Judge Leon’s ruling. Two amicus briefs filed in the appellate case and authored by a host of

veteran antitrust scholars/practitioners are themselves important contributions to this post-trial discourse. Brief of 27 Antitrust

Scholars as Amici Curiae in Support of Neither Party, United States v. AT&T Inc., No. 18-5214 (D.C. Cir. Aug. 21, 2018);

Brief Amici Curiae of 37 Economists, Antitrust Scholars, and Former Government Antitrust Officials in Support of Appellees

and Supporting Affirmance, United States v. AT&T Inc., No. 18-5214 (D.C. Cir. Sept. 26, 2018).

4. Complaint, United States v. AT&T Inc., No. 1:17-cv-2511 (D.D.C. Nov. 20, 2017).

5. United States v. AT&T Inc., 310 F. Supp. 3d 161 (D.D.C. 2018).

6. The DOJ appealed the district court’s decision to the U.S. Court of Appeals for the District of Columbia. Motion of the

United States to Expedite Consideration of the Appeal, United States v. AT&T Inc., No. 18-5214 (D.D.C. July 18, 2018).

In February 2019 the appeals court sided with the defendants, thereby upholding Judge Leon’s decision. United States v.

content to MVPDs throughout the United States.1 The proposed transaction therefore represented a

“pure” vertical merger as the parties were not significantly involved in each other’s primary lines

of business.2 An extensive public debate formed before and during the district court trial on whether

the AT&T/Time Warner merger was likely to benefit or harm pay-TV consumers.3

The U.S. Department of Justice (“DOJ”) sued to block the merger in the U.S. District Court of

Columbia.4 The district court trial culminated in June 2018 with Judge Richard J. Leon issuing a ruling

in favor of the defendants.5 The court—in unusually strong language—criticized almost every facet of

the plaintiff’s affirmative case, placing particular emphasis on the assumptions underlying the govern-

ment’s Nash bargaining model (used to predict downstream welfare effects); the inputs used to param-

eterize that model; and the other theories of harm advanced by the DOJ for enjoining the merger.6 The

court also gave significant weight to the parties’ claims of various revenue synergies arising from the

combination of their viewership and advertising assets.