Sometimes it is easy to miss the forest for the trees.
That may be the case with the outlook for the DOJ v. AT&T-Time Warner case.
In this analysis, rather than recount the legal antitrust “trees” that have been well-argued in the DOJ’s complaint brief and AT&T-Time Warner’s defense brief, and the rule of law “tree” I analyzed initially, it is important to focus on how this case is highly-unusual in one characteristic, and that characteristic begs us to try and examine the forest not the trees.
What is highly-unusual about this precedent-driven case is the Judge, U.S. District Court Senior Judge Richard J. Leon.
That’s because he is the judge who is currently overseeing the 2011-2018 behavioral consent decree of the Comcast-NBCUniversal merger, and the judge who wrote the most relevant legal precedent for this pending merger, a highly-analogous vertical-merger of a communications distributor buying significant content.
In 2011, the DOJ presented Judge Leon a proposed consent decree with Comcast-NBCUniversal that had extensive behavioral remedies that the DOJ sought, and the companies accepted, to which Judge Leon added some behavior remedies of his own, before approving that consent decree in September 2011.
Let me reasonably assume here that the judge will view the 2017 AT&T-Time Warner and 2011 Comcast-NBCUniversal as highly-analogous transactions for precedent purposes, given that they are both vertical communications distribution acquisitions of content and that the DOJ’s brief mentions Comcast nine times.
The purpose of my analysis here is to spotlight what has changed in the intervening six years that has bearing on this case.
First, the most notable legal change is that DOJ has very explicitly changed its longstanding formal antitrust prosecutorial guidelines for vertical mergers, from allowing behavioral remedies to disallowing behavioral remedies – with no advance notice.
Judge Leon then is confronted with the one big legal difference between the Comcast-NBCUniversal merger that Judge Leon approved and the AT&T-Time Warner merger outcome he is asked to decide – i.e. the respective positions of the respective participants towards behavioral remedies has flipped.
In the Comcast case, it apparently was the DOJ that insisted on more remedies than Comcast as they came to the Judge. In the AT&T case, it is apparent that DOJ is now unwilling to entertain behavioral remedies to cure potential anticompetitive harms, and that AT&T is more than willing to be subject to behavioral remedies that the court may deem necessary, (so much so, that it offered in its brief an irrevocable, self-executing, contractually-binding, commitment to not be able to withhold any Turner content, and to subject Turner to baseball-style arbitration to settle any disputes, which is an effective remedy that essentially could cure most of the DOJ’s alleged problems with this merger.)
Now, Judge Leon faces a very personal fundamental judgement question of reasonable fairness.
Does Judge Leon believe it is reasonable and fair for him to allow the government to change the normally-allowed, merger-review, negotiation process to abruptly and self-servingly, tilt the case in the Government’s favor, by changing its guidelines a year after this merger was announced, apparently to oppose behavioral remedies that could block this merger, when in 2011, Judge Leon allowed the DOJ, in a similar case, to cure the Comcast merger with extensive behavior remedies, and to which he added?
Does Judge Leon believe it is reasonable and fair to deny AT&T the normal negotiating freedom, opportunity, and due process, to offer behavioral remedies that could cure potential problems when Judge Leon clearly afforded Comcast that same freedom, opportunity and due process in a similar circumstance?
Second, and likely most importantly, is the huge change in market circumstances over the last six years since Judge Leon’s Comcast-NBCUniversal decision.
What’s changed in the marketplace is the tent-pole part of the DOJ’s entire complaint: i.e. “AT&T/DirecTV would… use its increased power to slow the industry’s transition to new and exciting video distribution models that provide greater choice for consumers.” [p.2] [bold added for emphasis.]
Here, Judge Leon is a key implicit witness to the facts in this case. Seldom in a case is a judge like most every other American, where he or she has personally witnessed how smartphones and tablets, that are ubiquitous, competitive, video-streaming-capable, and broadband-wireless-empowered, have changed video watching choices and opportunities for consumers.
The evidence below shows that the lion’s share of that video-watching transformation change has occurred in just the last six years, since Judge Leon’s Comcast-NBCUniversal decision, and smack in the middle of his oversight of that merger’s behavioral conditions. Smartphone adoption: From 2011-2017, U.S. smartphone adoption grew 141% from 93m in 2011 to 224m in 2017, per Statista.
Wireless broadband speeds: From 2011-2017, average U.S. wireless broadband speeds to enable reliable, quality video-streaming, broadband have grown ~160% from ~5MBps to ~13MBps per Cisco data, practically ensuring largely ubiquitous, reliable, high-quality, mobile device video streaming.
Cloud computing: From 2011-2017 worldwide revenue growth of cloud computing grew, 180% from $93b in 2011 to $260b in 2017, and this is relevant because this is exactly the primary “new and exciting video distribution models” that DOJ complaint apparently believes AT&T-Time Warner somehow threatens, even though dominant platforms, -- Amazon, Microsoft and Google – are all the primary cloud computing providers.
Internet Traffic: From 2011-2017, smartphone’s percent share of all Internet traffic exploded from <10% to >50% largely from Internet video streaming, and outpaced the hyper-fast, Internet traffic volume growth of 320%, the video equivalent of 2011’s ~25b DVDs per month to 2017’s ~108b DVDs per month, per Cisco data.
Amazon Prime: From 2011-2017, Amazon Prime membership with free video privileges grew 1700% from 5m Amazon Prime members in 2011 to 90m Amazon Prime households in 2017, which by the way now represents 72% of America’s 125m households.
Netflix: From 2011-2017, Netflix video-streaming customers grew 470% from 19m in 2011 to 109m in 2017.
Google-YouTube: From 2011-2017, the number of Google-YouTube videos viewed per day grew ~150% from 2b in 2011, to ~5b in 2017.
The three dominant Internet video distribution networks today, Google with search >90% share, Amazon with >70% ecommerce platforms services share (and almost half of the cloud computing market), and Facebook with >60% penetration of all Americans, are disrupting and transforming the video distribution marketplace with the newest video distribution offerings and major investment in new video content creation. From 2012 to 2016, the revenues of Google, Facebook, Microsoft, Apple, and Amazon grew ~180 times faster than Fortune 500 companies overall; and from 2012-2017, the market value of these five companies tripled absolutely, and grew relatively three times more than the S&P 500 Index. See chart.
Third, what also has changed over the last six years, is Judge Leon now enjoys a decade of judicial precedent experience about the reasonableness of assuming that traditional regulated communications networks have and will face enormous and constraining competitive pressure from new unregulated Internet distributors and cloud computing service providers.
Even if Judge Leon surprisingly ignored all the widely-appreciated changes in the Internet video marketplace documented above and somehow ignored his own judicial witness and oversight of the Obama DOJ-Comcast-NBCUniversal consent decree from 2011-2017 within the context of the apparent transforming video distribution and content marketplace in his full view, and even if Judge Leon somehow considered it fair to treat highly-similar mergers highly dissimilarly via an eleventh hour abrupt and disruptive change the DOJ’s prosecutorial guidance, Judge Leon still would have to ignore another key precedent, one on the reasonable weight given to the effect of technological change” in determining its potential anticompetitive effects.
Judge Leon will have address whether it is fair for the Trump-DOJ to abruptly change the reasonable weight the DOJ gives to “the effect of technological change” for AT&T-Time Warner when the rate of expected competitive technological change “played and important role in in the [W. Bush DOJ Antitrust] Division’s assessment of competitive effects,” in approving the 2008 horizontal merger of XM and Sirius, the only two radio satellite distributors in the U.S.
This 2008 W. Bush DOJ’s approval-precedent of the XM-Sirius merger, appears highly-relevant because AT&T owns DirecTV, one of two video satellite distributors (DBS) along with Dish-Sling, that compete with cablecos, telcos, wireless broadband providers, and cloud streamers: Amazon, Netflix, Google-YouTube and Facebook.
Forgive me for having to state the obvious, but for decades the DOJ and FTC have had, and implemented, horizontal and vertical antitrust merger guidelines, and the courts have produced a rich history of horizontal and vertical merger precedents, and those guidelines and precedents are crystal clear that horizontal mergers of competitors have vastly higher risk of being anticompetitive than do vertical mergers that do not combine competitors in the same market.
The W. Bush DOJ allowed the highly-unusual combination of America’s only two licensed radio satellite competitors to become America’s only licensed satellite radio distributor with no DOJ conditions, because the W. Bush DOJ rightly and presciently perceived the coming constraining rapid growth of Apple’s iTunes, podcasting, and “streaming Internet radio to mobile devices.”
Now please consider what the W. Bush DOJ explained as one of the factors why it approved in a highly-usual two-to-one merger of radio satellite distributors:
“Effect of Technological Change: Any inference of a competitive concern was further limited by the fact that a number of technology platforms are under development that are likely to offer new or improved alternatives to satellite radio. Most notable is the expected introduction within several years of next generation wireless networks capable of streaming Internet radio to mobile devices. While it is difficult to predict which of these alternatives will be successful and the precise timing of their availability as an attractive alternative, a significant number of consumers in the future are likely to consider one or more of these platforms as an attractive alternative to satellite radio. The likely evolution of technology played an important role in the Division’s assessment of competitive effects in the longer term because, for example, consumers are likely to have access to new alternatives, including mobile broadband Internet devices, by the time the current longterm contracts between the parties and car manufacturers expire.” [Bold added for emphasis.]
In sum, there is ample reason that AT&T and Time Warner were caught by surprise when the DOJ referee in this game unilaterally changed longstanding overall remedy rules of the game in the fourth quarter of this particular game, and were even more surprised that the DOJ would follow through and actually attempt to block this merger.
Arguably no marketplace has changed faster, more dramatically, and more pervasively for consumers and competition, than the one before this court.
If Judge Leon looks at the “forest” – i.e. the marketplace reality that he and every American consumer and competitor in this space see staring them in the face every day and vertical merger precedent reality every lawyer in the court knows – and not just look at the “trees” of DOJ’s selective facts, assumptions, and market definitions in its DOJ’s brief, it is apparent, in this “Tale of Two Realities:” AT&T- Time Warner’s case “reality” is highly-provable with facts, favorable precedents, and the rule of reason, while the DOJ’s case “reality” effectively requires Judge Leon to ignore basic fairness, a phalanx of strong precedent, and widely-appreciated marketplace competitive and consumer realities.
If you were in Judge Leon’s seat, whose reality would you want to own and defend, if your decision would certainly be appealed?
May Judge Leon not miss the forest for the trees, and may justice here be as swift as the changes in this marketplace.
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Scott Cleland served as Deputy U.S. Coordinator for International Communications & Information Policy in the George H. W. Bush Administration. He is President of Precursor LLC, an internetization consultancy for Fortune 500 companies, some of which are Google competitors, and Chairman of NetCompetition, a pro-competition e-forum supported by broadband interests. He is also author of “Search & Destroy: Why You Can’t Trust Google Inc.” Cleland has testified before both the Senate and House antitrust subcommittees on Google.
