Glimpsing into the Future After the AT&T–Time Warner Trial

The internet hosted several hot takes last week following AT&T’s sweeping victory in one of the biggest antitrust trials in history. Although the Justice Department has not indicated whether it will appeal its loss, it did heed the court’s advice not to seek a stay of the merger pending appeal, which opened the door for the deal to close on Thursday. As the dust begins to settle, it’s a good time to begin assessing the impact that Judge Richard Leon’s 172-page decision will have on the larger competitive landscape.

Via REUTERS

We have seen the future of entertainment, and it is data

At trial, AT&T stressed the rapidly evolving competitive landscape for video entertainment. The company argued that internet-based companies such as Facebook and Netflix have disrupted traditional entertainment and advertising markets and that a merger of content provider Time Warner and distributor AT&T was necessary for these old-media giants to continue to compete. Judge Leon’s opinion reflects this reality: Although the decision focuses primarily on the deficiencies in the government’s evidence, it also takes time to discuss the deleterious effect that streaming video-on-demand providers have had on the traditional pay television market. At one point, the opinion notes that Netflix will spend more on content this year than Time Warner, which helps portray the two as direct competitors for viewer attention.

One of the hallmarks of this disruption is the marriage of content and distribution. Amazon, Netflix, and other streaming video-on-demand services increasingly produce their own content to distribute alongside outside programming. And as these new players vertically integrate backward, traditional content producers such as Disney and CBS are vertically integrating forward, building direct-to-consumer distribution channels for company-owned content. In that sense, AT&T and Time Warner were following business trends but seeking to grow via merger instead of organically.

Why is this combination so attractive? One big reason is the ability to gather more information about consumer preferences and use that data to tailor individual content — and advertising. As Judge Leon notes, “[t]hrough their access to and use of consumer data, Google and Facebook are better able to discern the purchasing preferences and interests of individuals viewing particular online content,” allowing them in turn to “tailor digital advertisements to those users” and gather “confirmatory data that demonstrates whether particular ads are effective.” Traditional television advertising is Paleolithic by comparison. AT&T hopes that integrating content and distribution will help it develop a more sophisticated understanding of its customers’ preferences on par with its digital competitors. In fact, the post-merger company will be organized into four divisions, one of which is AT&T advertising and analytics.

Judge Leon’s embrace of a larger competitive media landscape raises an important question. Customers are increasingly cord cutting or cord shaving, reducing their spending on traditional pay television because of internet-based alternatives. To what extent is this phenomenon being driven by the ability of these new entrants to monetize our personal data and thus reduce subscription fees? Perhaps obviously, Amazon can use viewing preferences to optimize its retail channel, and YouTube can help Google ads. Netflix famously eschewed advertising, though it uses personal data in other ways to improve its recommendation engines and keep market share. These insights help shed additional light on the privacy debate and help inform the trade-offs that may come with greater privacy protections.

The future of antitrust enforcement

Several other hot takes have suggested that the government’s loss will usher in a wave of corporate consolidations. But this is perhaps a bit overstated. It’s important to note that Judge Leon’s decision was incredibly fact specific, focusing on the government’s failure to carry its burden based on the evidence it adduced — and on the government’s concession of the significant efficiencies gained by the merger. The judge explicitly stated that “the temptation by some to view this decision as being something more than a resolution of this specific case should be resisted by one and all!” And of course, the loss of this vertical merger case says almost nothing about the likelihood of success of a challenge to a horizontal merger such as T-Mobile-Sprint. That said, it’s hard not to conclude that the government’s loss reflects the difficulty of trying a vertical merger case. And that’s unsurprising: The empirical evidence suggests that most vertical mergers are either competitively neutral or positive because of the deal’s efficiency gains.

And although Judge Leon’s decision turned largely on the facts, there is perhaps one broader takeaway for the Justice Department: the riskiness of the department’s shift away from behavioral and toward structural remedies to correct for potential anticompetitive effects. I’ve discussed this before: Behavioral remedies involve enforceable promises not to engage in anticompetitive conduct, while structural remedies involve altering the transaction to remove the incentive to engage in such conduct. Antitrust Division Assistant Attorney General Makan Delrahim prefers structural remedies because they do not require ongoing government monitoring to protect consumers. But the downside is that structural remedies reduce some of the efficiencies of a deal. This means that a company is more likely to agree to behavioral than structural remedies — especially if AT&T’s victory reduces the risk of rolling the dice on a trial.

The next step for AT&T will be to integrate Time Warner in a way that realizes the vision it sold at trial. And that is by no means certain — some argue that poor integration sunk the vision of the AOL–Time Warner merger nearly two decades ago. Meanwhile, analysts are already looking ahead to the looming battle between Comcast and Disney for control of Fox, as other old-media companies struggle to figure out how best to survive in the rapidly evolving entertainment landscape.