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

The vertical merger of AT&T and Time Warner combined one of the largest downstream multiple video program distributors (MVPDs) with one of the largest upstream providers of pay-TV programming. The U.S. Department of Justice sued to block the merger, arguing that the combined entity would have the ability and incentive to partially foreclose Time Warner programming to unaffiliated MVPDs that compete downstream against AT&T. The government's decision to sue was inherently controversial because vertical transactions — due to their presumptive efficiency effects — are rarely litigated. This study evaluates the potential competitive effects stemming from the merger based on the stock market reactions of upstream and downstream competitors to the merging parties when news of their intent to merger was made public. While event studies of proposed vertical transactions cannot ordinarily distinguish between efficiency and foreclosure effects on the stock price reactions of (downstream) rivals, by considering specific industries (such as pay-TV) in which certain efficiencies are likely to be small or absent, it may be possible to draw sharper inferences from the event study approach. We find that the announcement of AT&T's proposed acquisition of Time Warner exerted a negative impact on the expected future profitability of rival MVPDs and a positive effect on rival content providers. The results do not support the hypothesis that, post merger, AT&T would compete more effectively against incumbent online advertising platforms such as Facebook and Google; nor do they suggest that the proposed merger was likely to result in anticompetitive effects in video content production/distribution via customer foreclosure or collusion. Rather, the results support the government's central theory of harm: namely, that the combination would unilaterally and credibly increase the bargaining leverage of the merged entity and thereby allow it to partially foreclose rival MVPDs by increasing their affiliate fees