Judge Richard J. Leon, above from 2012, allowed AT&T to complete its merger with Time Warner.
Judge Richard J. Leon, in his 172-page opinion Tuesday, allowed AT&T Inc.’s T -1.08% proposed merger with Time Warner Inc., to go through, over objections by the U.S. Justice Department that the deal, if consummated, would have anticompetitive effects and violate the antitrust laws.
Below are highlights and analysis on Judge Leon’s opinion.
•Page 1: “If there ever were an antitrust case where the parties had a dramatically different assessment of the current state of the relevant market and a fundamentally different vision of its future development, this is the one. Small wonder it had to go to trial!”
Judge Leon is the rare federal judge who makes liberal use of exclamation points.
•Page 1: “According to the government, consumers nationwide will be harmed by increased prices for access to Turner networks, notwithstanding the Government’s concession that this vertical merger would result in hundreds of millions of dollars in annual cost savings to AT&T’s customers and notwithstanding the fact that…no competitor will be eliminated by the merger proposed vertical integration.”
Tea leaves! If you’re the government, this paragraph is a very bad sign indeed.
•Page 4: “Ultimately, I conclude that the Government has failed to meet its burden to establish that the proposed ‘transaction is likely to lessen competition substantially.’”
By the fourth page it is over: Judge Leon is ruling against the government.
•Page 38: “The Government’s own expert predicts that, due to a standard benefit of vertical integration, AT&T’s DirecTV and Uverse customers will pay a total of about $350 million less per year for their video distribution services.”
Judge Leon castigates the government’s main witness, UC Berkeley economist Carl Shapiro. It won’t be the last time.
•Page 49: “To say the trial was well staffed would be an understatement. Thirty-two lawyers entered appearances for the Government, and 14 did so for defendants….In total, I admitted into evidence over 3,000 pages of documents, broken up into over 120 exhibits. The trial transcript itself exceeds 4,300 pages in length.”
U.S. v. AT&T Inc. was a big, big undertaking.
•Page 54, footnote 17: “I will nevertheless pause to mention briefly why I am confident that defendants will achieve considerable efficiencies beyond those conceded by the Government.…The efficiencies, defendants explain, come both on the ‘cost’ side, and on the ‘revenue’ side. By defendants’ calculations, cost synergies will total $1.5 billion and revenue synergies $1 billion on an annual basis. On the cost side, AT&T’s John Stankey testified that the marriage of AT&T and Time Warner will lead to the elimination of redundant positions in each company, achievement of certain economies of scale, and insourcing of services that the acquired entity currently acquires from vendors. And on the revenue side, AT&T and Time Warner expect to see the gains in innovation—particularly by way of a new programmatic advertising platform—that motivated the merger in the first place.”
Judge Leon, earlier in this footnote, makes clear that he can effectively end the inquiry by determining that the government failed to prove that the merger would reduce competition. Still, he goes out of his way to show the efficiencies that AT&T will gain through the purchase of Time Warner. In other words, he’s laying it on thick here, writing that, sorry government, the merger won’t only avoid harmful effects, but will promote beneficial ones.
•Page 58: “Given all of the competing considerations at play, the ‘analysis of vertical mergers’ has been described as ‘much more complex than the analysis of horizontal mergers.’ Things are made more difficult still by the lack of modern judicial precedent involving vertical merger challenges—a dearth of authority that is unsurprising, considering that the Antitrust Division apparently has not tried a vertical merger case to decision in four decades!”
Judge Leon’s observation is largely borne out by the opinion itself, which seems to rely as much on antitrust insights from experts as it does from case law, or precedent established by previous judicial rulings.
•Page 68: “The Government’s primary theory of harm to competition focuses on the challenged merger’s integration of Turner’s important video content—content that includes, among other things, the networks CNN, TNT, and TBS—with AT&T’s video distributors, U-verse and DirecTV. Specifically, the Government contends that, should the challenged merger proceed, Turner’s relationship with AT&T will enable Turner to extract greater prices from AT&T’s rival distributors for its ‘must-have’ content than it could without the merger. The Government argues that distributors would then pass on those price increases to their subscribers, resulting in an increase of hundreds of millions of dollars in annual consumer payments.”
Here, at the beginning of the deep dive into the antitrust analysis, Judge Leon gives a nice encapsulation of the government’s theory, i.e., that postmerger, AT&T will be positioned to force its competitors to pay premium prices to carry Time Warner (Turner) networks, like CNN.
•Page 75-76: “Based on the evidence, I agree with defendants that Turner’s content is not literally ‘must have’ in the sense that distributors cannot effectively compete without it. The evidence showed that distributors have successfully operated, and continue to operate, without the Turner networks or similar programming…I therefore give little credit to blanket statements by third-party competitor witnesses indicating that the entire ‘viability of [their] video model’ could depend on whether they offer Turner programming.”
In other words, competitors are unlikely to feel forced to purchase Time Warner’s content—and pay elevated prices—given that the content isn’t “must have,” or entirely vital to the competitors’ ability to compete.
•Page 90-91: “In short, despite the Government’s efforts to paint a contrary picture, this is not a case containing direct, probative evidence of anticompetitive intent on the part of high level executives within the merging company. Stephenson’s statements and the Government’s other proffered documentary evidence instead suggest, at the very most, that AT&T…recognized that one possibility of uniting content and distribution would be to withhold or otherwise limit content from other distributors in an attempt to benefit AT&T’s distribution platforms. But evidence indicating defendants’ recognition that it could be possible to act in accordance with the Government’s theories of harm is a far cry from evidence that the merged company is likely to do so (much less succeed in generating anticompetitive harms as a result).”
Here’s Judge Leon diving into the evidence. He simply doesn’t buy the government’s attempt to frame AT&T discussions about the potential anticompetitive effects of a merger as proof that they’d behave anti-competitively were the merger to go through.
•Page 99: “For the reasons discussed above, the Court is not convinced that the ‘real-world objective evidence’ offered by the government provides sufficient support for its increased-bargaining leverage claim. That conclusion is further bolstered by evidence relating to three prior instances of vertical integration in the video programming and distribution industry.…[Witness and expert testimony] both provide significant, real-world evidence indicating that, contrary to the Government’s increased-leverage theory, these prior instances of vertical integration did not affect affiliate fee negotiations or content prices.”
Here, Judge Leon cites News Corp ’s acquisition, in 2003, of DirecTV, which it spun off in 2008; the 2009 split of Time Warner from Time Warner Cable; and the 2011 combination of Comcast and NBCUniversal.
•Page 100: “…neither the Government nor professor Shapiro presented original analysis of any prior vertical transactions in this industry.”
Back to Berkeley economist Carl Shapiro. Here’s Judge Leon pointedly calling Mr. Shapiro’s argument that AT&T would have leverage over rivals an “assumption,” without “an independent basis of evidence.” That scrutiny—and Judge Leon’s skepticism of Mr. Shapiro’s testimony—is a central thread in his decision, which goes into great detail about the shortcomings of Mr. Shapiro’s models and analysis.
•Page 101: “Defendants, by contrast, did seek to analyze the available pricing data resulting from prior instances of vertical integration. Although they initially had trouble obtaining some of the relevant pricing data from the Government or third-parties…they were eventually able to obtain the data after seeking relief from this Court. Defendants’ lead economic expert, Professor Dennis Carlton, then analyzed that third-party pricing data, among other proprietary and public-source data in his possession to test whether it is “true that content prices are higher on a network when it’s sold by someone who’s vertically integrated.”
A lesson: Get yourself an expert who is thorough. Judge Leon has high praise for AT&T’s lead economic expert, Dennis Carlton—an economist from the University of Chicago’s Booth School of Business and a former deputy assistant attorney general in the DOJ’s Antitrust Division—who, in Judge Leon’s opinion, performed a thorough analysis of third-party pricing data, plus a regression analysis, using a variety of statistical techniques.
•Page 108: “The Government seems to believe that any ‘postmerger’ testimony given by Time Warner executives should be ‘discount[ed]’ as potentially biased because it was given by interested employees of a defendant company. Poppycock!”
Poppycock! Judge Leon notes here that the executives’ testimony “doesn’t involve promises or speculations” about the merger, but is instead based on their “prior experiences,” testimony supported by Mr. Carlton’s analysis.
•Page 111: “With that, I will now turn to my own evaluation of Professor Shapiro’s expert testimony.”
“First, I will explain why the evidence is insufficient to support Professor Shapiro’s conclusion that this Nash bargaining theory will accurately predict an increase of Turner’s postmerger bargaining leverage in affiliate fee negotiations with distributors. Second, I will examine Professor Shapiro’s economic bargaining model, concluding that the evidence is also insufficient to support the input values upon which he relied to generate his predictions of harm.”
•Page 114-115: “The Court accepts Professor Shapiro’s (and the Government’s) argument that, generally, ‘a firm with multiple divisions will act to maximize profits across them.’…That profit-maximization premise is not inconsistent, however, with the witness testimony that the identity of a programmer’s owner has not affected affiliate negotiations in real-world instances of vertical integration. Rather, as those witnesses indicated, vertically integrated corporations have previously determined that the best way to increase company wide profits is for the programming and distribution components to separately maximize their respective revenues.”
Here, as during the trial, Judge Leon shows preference for historical evidence rather than theory. He’s not interested in how companies might act in the abstract but rather how companies in the past have acted under comparable circumstances.
•Page 131: “The last piece of evidence upon which Professor Shapiro based his long-term subscriber loss rate is an internet survey. The internet survey was·conducted by another of the Government’s testifying experts, Professor John Hauser, who heads the marketing department at the Massachusetts Institute of Technology. The survey generated a long-term Turner blackout subscriber loss percentage of 12% and a 30-day Turner blackout subscriber loss percentage of a whopping 8.2%…Although once at the forefront of the Government’s presentation. Professor Hauser’s survey now finds itself in the background, with even Professor Shapiro minimizing his reliance on it. Professor Shapiro however had good reason to unhitch his analysis from Professor Hauser’s internet survey wagon: cross-examination and real world evidence alike revealed that the survey was inherently unreliable and produced inflated results!”
This paragraph memorializes another low point for the government’s case—a government witness whose internet survey on subscriber loss was roundly and apparently persuasively criticized by AT&T’s experts.
•Page 149: “After hearing Professor Shapiro’s bargaining model described in open Court I wondered on the record whether its complexity made it seem like a Rube Goldberg contraption. Professor Carlton agreed at the trial that that was a fair description. But in fairness to Mr. Goldberg, at least his contraptions would normally move a pea from one side of a room to another. By contrast, the evidence at trial showed that Professor Shapiro’s model lacks both ‘reliability and factual credibility,’ and thus fails to generate probative predictions of future harm associated with the Government’s increased-leverage theory.”
There you have it. Judge Leon thought the government’s lead witness didn’t bring the goods. When a judge likens an economist’s model to a cartoonist’s depictions of absurdly overcomplicated machines, you have to suspect the judge isn’t going to rule your way.
•Page 153: The entire premise of the proposed merger—allowing AT&T to go mobile with video content—provides yet another reason to reject the Government’s unilateral merger theory.
Here, Judge Leon sets up a theoretical point that, nine pages later, he drives home with evidence from the trial. If the point of the merger is to allow AT&T to capitalize on growing demand for video content, why would the company harm competing distributors?
•Page 162-163: AT&T has plainly positioned itself to ride industry tailwinds in support of mobile consumption of video. As John Stankey explained, AT&T acquired DirecTV in 2015 not in order to double down on the satellite business, a concededly mature and declining asset, but to ‘pick up a lot of new customers that we could work on migrating’ to new products.…Indeed, as soon as the merger closed, AT&T began renegotiating DirecTV’s contracts to allow for a mobile, direct-to-consumer option, DirecTV Now…Nowhere does the Government explain why AT&T would deploy valuable Time Warner content to prop up a rival’s business model, while harming its own. Go figure! This fundamental problem of incentives and profitability buries the Government’s claim.
Judge Leon says there can be no “risk of coordination” unless the parties have the “incentive or interest to collude in the first place.” Later on page 163, Judge Leon calls the idea that AT&T and Comcast would have the will or ability to coordinate “exceedingly implausible!”
•Page 168: FOOTNOTE 61: The Government appears to suggest that incentive to engage in anticompetitive conduct—without any demonstration as to the probability of acting on that incentive—is sufficient reason to block a proposed merger…This proposition seems impossible to square with the legal standards governing Section 7 actions, which require a probability of anticompetitive effects.
Judge Leon again drawing a line between “incentives” and probabilities, as he refutes the government’s argument that the new entity might have the incentive to withhold HBO promotional rights—a “gossamer thin claim” he says the government failed to prove anyway.
•Page 170: CONCLUSION…The parties have waged an epic battle, under extremely restricted deadlines, to litigate and try this historic vertical merger case…It has been a herculean task for all the parties and the Court. Each side has had its proverbial day in Court. The Court has now spoken and the defendants have won. But, the process is not quite over yet!
Epic! Historic! Herculean! Finally, in the concluding paragraphs below, Judge Leon urges the government to consider the “irreparable harm” that would result should they seek a stay of the court’s order, through an appeal of his decision.
First, it would effectively prevent the consummation of the merger by the June 21, 2018 breakup date for the deal. Second, it would cause AT&T to have to pay the $500 million breakup fee it will owe to Time Warner if the deal is not consummated by that date. Those two consequences, of course, would occur regardless of whether this Court’s decision were later upheld following appellate review. In this Court’s judgment, a stay pending appeal would be a manifestly unjust outcome in this case.
The Government here has taken its best shot to block the merger based on the law and facts, and within the time allowed. The defendants did their best to oppose it. The Court has spoken. To use a stay to accomplish indirectly what could not be done directly—especially when it would cause certain irreparable harm to the defendants—simply would be unjust. I hope and trust that the Government will have the good judgment, wisdom, and courage to avoid such a manifest injustice. To do otherwise, I fear, would undermine the faith in our system of justice of not only the defendants, but their millions of shareholders and the business community at large.