Without Risk-Taking There's No Progress: Let AT&T & Time Warner Merge
The Department of Justice (DOJ) suit to block the proposed merger between AT&T and Time-Warner expresses concerns about an acquisition that doesn’t eliminate rivals in the same business but could possibly give the merged entity competitive advantages. Its complaint accepts theories about competition that return antitrust enforcement to a time when authorities did not understand that, unlike combinations between rival firms, mergers of the AT&T-Time-Warner variety represent risk-taking in dynamic markets. That’s exactly the sort of private activity regulatory policy should prize and the reason DOJ’s suit is wrong.
One doesn’t have to look further than the most valuable public companies in the world to see the benefits of corporate risk-taking: Apple, Alphabet-Google, Microsoft, Amazon, and Facebook are all the result of smart (but risky) ideas that entrepreneurs and investors made into world-class ventures worth more than $3 trillion combined.
It is no accident that these and many other ventures like them were started and anchored in the United States: the U.S. legal system gives companies the freedom they need to take risks and generate rewards for themselves and others, including society at large. This includes giving firms leeway to decide when to buy, sell, combine, or divide business ventures. While antitrust laws require approval for some business combinations and limit combinations that unduly restrict competition, those laws have been applied in recent decades in ways that suit dynamic markets and permit risk-taking.
Antitrust enforcement over the past 40 years has understood the law as protecting competition, a dynamic process that serves the interests of consumers and the public in general, not as a tool for limiting firm size or protecting smaller businesses against competition from larger ones. That understanding is reflected in administrative choices and court opinions covering pricing decisions, tying, and other business practices that under some—but only some—circumstances could reduce competition, restrict output, and increase prices to consumers, insisting that the law target only practices that produce those harms.
The vision of antitrust law as protecting competition also has informed analyses of mergers, both in judicial decisions and in the Merger Guidelines developed by DOJ and Federal Trade Commission. The Guidelines make clear that vertical mergers—mergers between firms engaged in different parts of the chain of commerce, such as input supply, production, and distribution functions—should be judged under different standards than mergers among competitors in the same line of business. Vertical integration can create significant efficiencies, increase inter-brand competition, and benefit consumers. Supreme Court decisions recognize the relationships implicit in vertical integration as broadly compatible with pro-competitive consumer benefits, standards consistent with setting a high bar for blocking vertical transactions.
The AT&T and Time-Warner merger looks very much like a classic vertical combination: AT&T is in the information-entertainment carriage-and-distribution business, while Time-Warner is in the information-entertainment production business. Nothing in their combination suggests the sort of harm to competition or consumers that the Guidelines and four decades of precedent have sought to prevent. Certainly, there is no reason to think that the merger will lead to collusion among competing video producers or distributors. On its face, this merger strengthens a vertical relationship with potential to achieve considerable efficiency gains. That is the bet the two firms and their investors have made.
Yet the DOJ’s complaint combines corporate statements about desires to improve competitive position with theories that can support any antitrust intervention because advantages to one firm can “raise rivals’ costs.” Speculation about possible harms from integration of firms in different lines of business, however, has not been accepted by courts for a long time. Instead, courts have recognized that creating a stronger firm with greater efficiency tends to help consumers even if that harms rival firms. Fears that harm to competitors will harm their customers conflates harm to rivals with harm to consumers, a confusion that would justify stopping almost any efficiency-enhancing merger and dramatically reduce antitrust’s broader benefits.
Of course, there’s no guarantee that the merger will be successful. Putting businesses together from different parts of the commercial enterprise doesn’t always work. AT&T-Time-Warner would merge businesses in dynamic, global markets, where information dissemination by cable and satellite and broadcast and wire intersect and where packaging of information and entertainment by on-line entities competes with production by longer-established firms. Major players in information-entertainment such as Disney, CBS-Viacom, Google/YouTube, and NBC-Universal still are searching for the right combination of resources and business lines to succeed.
Changing business arrangements represents a risk that firms can choose to take (as AT&T and Time-Warner have) or not. Whether that judgment will be a success or a failure should be for the market, not antitrust enforcers, to decide.