Considerations for media and telco vertical mergers in the rise of the digital media age

Traditional media is being challenged by Google and Facebook but views differ around the world about whether this means media companies can merge or integrate vertically as a response to the threats they face.

On 12 June 2018, the United States District Court for the District of Columbia refused the Trump Administration's request to block the merger of AT&T and Time Warner Inc. The District Court ruled that the US DOJ had failed to show that the merger was likely to substantially lessen competition in the video programming and distribution market in the US.

The AT&T/Time Warner Decision is a significant ruling on a vertical merger. The merger combines AT&T's mobile and fixed telecommunications networks and DirecTV cable television with Time Warner Inc, a leading media content producer. The merger has prompted other media transactions to follow, such as Comcast’s all-cash bid for the bulk of the 21^st Century Fox business in June 2018.

Key to the District Court's findings were the changes in the US video market. High speed internet access has allowed new video content (sport, movies and other content) and advertising offerings by Facebook, Google, Netflix and Amazon to directly challenge traditional media in the form of cable/subscription television.

The US decision is in stark contrast to the New Zealand decision last year to oppose the proposal made by Vodafone Europe B.V. (a telco provider) to acquire the subscription television assets of Sky Network Television Limited. In that decision, the New Zealand Commerce Commission (NZCC) concluded that the merged firm would have too much power to bundle its content with telco offers, to the detriment of competition from other telco providers. The NZCC concluded :

" we cannot rule out a real chance that rivals would be unable to access content from the merged entity on terms that would allow them to effectively compete with the merged entity’s offerings."

Later in 2017, the NZCC also declined clearance to the merger of the print media assets of Fairfax and New Zealand Media and Entertainment (NZME), despite the entry of Facebook and Google into media advertising markets, citing concerns over loss of competition and media plurality in traditional news reporting.

That NZME merger raises different issues to the AT&T/Time Warner merger and is still subject to appeal in the NZ Courts. In the NZME Decision, the NZCC did not see Google and Facebook as significant competitors in production of news reporting, even if they were aggregators of content and were taking advertising away from traditional print media.

Proposed efficiencies offered by media and telco mergers

In both the NZME Decision and the AT&T/Time Warner Decision, there was substantial evidence presented of efficiency savings likely to be delivered by the merged vertically integrated firms. However, very different conclusions were reached about the effect of the combination and the value of these efficiencies.

The US District Court accepted that the AT&T merger was likely to lead to substantial integration efficiencies by eliminating "double margins" and bargaining costs between AT&T and Time Warner, to the benefit of their customers. The Court found that AT&T would significantly lower the price to subscribers for DirecTV.

In contrast, the NZCC in the Vodafone Decision concluded that the customer savings identified did not warrant the risks to smaller competitors or media plurality:

"The proposed merger would have created a strong vertically integrated pay-TV and full service telecommunications provider in New Zealand owning all premium sports content. We acknowledge that this could result in more attractive offers for Sky combined with broadband and/or mobile being available to consumers in the immediate future."

While the NZCC recognised that there may be benefits to customers of having an integrated pay-TV and full service telecommunications provider, it saw this as a negative for the merger because the efficiencies for the merged firm were evidence, in the eyes of the NZCC, of the challenges faced by non-integrated rivals. That approach appears inconsistent with the views of the US District court

Assessing risks to future competition in the market

Both the NZME Decision and the AT&T/Time Warner Decision involve predictions as to the future of media markets as technology offers new forms of distribution.

The differences between the decisions can be found in the legal standards of assessing future threats to competition. The US Court indicated that it needed to be persuaded that a substantial lessening of competition was likely or probable, rather than a bare possibility. In contrast, the NZCC (like the ACCC) seemed to apply a lower threshold of whether there was merely a 'real chance' or possibility that the combination 'might' reduce competition by rivals in some way.

Digital Competition

The US District Court found that media distributors and programmers were facing declining video subscriptions and television advertising revenue, as Facebook and Google's digital advertising platforms surpassed television advertising and revenue.

The US District Court defined the relevant product market as that for multichannel video distribution, which comprised cable TV networks as well as on demand content to subscribing consumers. The market also included multichannel cable TV providers, direct broadcast satellite providers, telecommunications providers, and virtual distributors such as Google's YouTube TV, Sony PlayStation Vue, Hulu live and DirecTV Now.

The Court found that the number of cable TV subscribers was declining as consumers increasingly turned to virtual providers and subscription video on demand which included providers such as Netflix, Hulu and Amazon Prime.

Control of 'must have' content?

The US District Court ruled that a vertical merger is not subject to any necessary presumption that it will reduce competition. The merger should only be blocked if there is evidence that the merged firm would control a competitively significant supplier to rivals, or otherwise be in a position to withhold a "must have" product - a source of supply which was a necessary input to rival competitors.

In the AT&T/Time Warner Decision, significant emphasis was placed on whether Time Warner's programming content, which included HBO, was in the "must have" status, which meant that the merged firm would be able to raise costs to rival distributors of that content.

The US District Court ruled it was not, and that rival distributors could effectively compete and remain viable, even if they did not take up the programming from Time Warner. The Court accepted that Time Warner had valuable content and some bargaining leverage but that existed before the merger.

Considering the evidence, the Court ruled that Time Warner was under a strong incentive to make its content available to rivals and this would continue after the merger.

Competitors' concerns about Time Warner's increase in leverage over this content were considered by the US District Court but described as speculative and not based on any firm data (eg no competitor said that it would "give in" and accept any price increases demanded by Time Warner as a result of its purported increase in leverage post-merger).

Finally, the US District Court did not accept that it was likely that the merged firm would foreclose rival networks access to their HBO content as HBO's business model depended on promotion by distributors. Additionally, the Court was not persuaded that HBO content was so significant that there were no effective marketplace substitutes.

Competition for high quality news content

As AT&T did not compete as a news publisher, the US District Court did not consider the market for news readership, although the importance of CNN to Time Warner was noted.

However, the readership market was the key stumbling block in the NZME Decision, as both parties were competitors in the supply of news content to readers:

“We found that Facebook and Google compete for digital revenue on the advertising side of the market. The significant share of digital revenue they currently obtain poses significant challenges to news media globally. However, in the reader side of the market, they act only as a distributor. Neither Google nor Facebook create New Zealand news content. This distinction between the advertising and reader markets is important.

In the reader market, we found that the NZME and Fairfax rivalry leads them to produce higher quality content than would exist with the merger. Competition between them incentivises investment in editorial resources, motivates journalists and editors in their day-to-day work and acts as a safeguard to plurality (diversity of media voices).”

On appeal the NZ High Court confirmed the NZCC decision and noted that:

“the internet and digital technologies have facilitated the growth of businesses that collate and redistribute news produced by a range of sources. Internationally, this role is dominated by entities such as Facebook and Google. Their ability to very speedily collate and make available news and information with the facility to tailor content to the algorithmically predicted areas of interest of the viewer has transformed the manner in which news and current affairs information is accessed for those familiar with (and potentially reliant on) communications in digital form.”

An appeal against the AT&T/ Time Warner Decision has not been ruled out.

What are the implications of the two merger decisions for Australia?

The AT&T/Time Warner Decision and NZME Decision highlight the changes in traditional broadcast industries and the increasing disruption caused by digital technologies. Different jurisdictions will assess differently the impact of digital media on traditional media markets and the outcomes will turn on the particular facts and circumstances. Uncertainty as to the long-term impacts of digital platforms poses a challenge for market regulation and has implications for the approval of mergers and acquisitions in the telco sector. It is not wise nor appropriate to view the media landscape through a pre-digital lens, particularly when assessing competition issues. Australia has started, and will need to continue, to investigate and respond to the challenges posed by digital platforms and technology.

In 2017, the Turnbull government relaxed media laws in Australia by amending the Broadcasting Services Act 1992 (Cth) and removing the “two-out-of-three” rule which previously prevented a media company from operating a newspaper, radio station and TV station in a single market and barred many of Australia’s big media companies from merging.

In early 2018, the Australian Competition and Consumer Commission commenced an inquiry into digital platforms to better understand the effect of digital search engines, social medial platforms and other digital content aggregation platforms on competition within the market for media content and advertising services. Rod Sims, Chairman of the ACCC, reflected on the increasing disruption caused by digital technologies noting that “there are growing concerns that digital platforms are affecting traditional media’s ability to fund the development of content.” Additionally, the ACCC hopes that the digital inquiry will shed light on the evolving way consumers search, access and receive news in Australia. The ACCC is expected to issue its final report in early June 2019.

Moreover, in 2017, the ACCC released its revised Media Merger Guidelines. The revised guidelines recognise the recent significant changes in technology which impacts how media content is delivered and consumed, and how they have altered the nature of competition in media markets. The Guidelines state explicitly that in considering mergers in the media space, "The ACCC will … take into account the changing nature of media technology and the competitive impacts of this technology, where there is sufficient evidence that the changes are likely to occur."

The themes present in the AT&T/Time Warner Decision and NZME Decision will also play out in Australia and the increasing disruption caused by digital technologies in the media landscape will need to be thoroughly evaluated when looking at the competition implications of a proposed merger or acquisition. The relaxation of the rules in the Broadcasting Services Act, the ACCC's recognition of the impact of digital media on the way content is delivered and consumed and the ACCC digital inquiry are steps toward reforming Australia’s regulatory framework governing the media landscape and addressing the challenges of an e-society.

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