Judge to weigh in on FAANG com­pa­nies’ im­pact on tra­di­tional me­dia con­gloms

Gov­ern­ment claims tra­di­tional me­dia firms aren’t play­ing in the same sand­box as their dig­i­tal ri­vals

Variety - - Contents - By TED JOHN­SON and JANKO ROETTGERS @ted­stew @jank0

IN THE SIX WEEKS of the AT&T-TIME Warner an­titrust trial, one theme emerged from the com­pa­nies’ de­fense of their merger: We’re get­ting left in the dust by big tech, and we need to bulk up to bet­ter com­pete.

Equally clear was what the Jus­tice De­part­ment thought about that ra­tio­nale: When it comes to an­titrust law, we don’t have a whole lot of sym­pa­thy.

The DOJ refers to the new threat posed by Face­book, Ama­zon, Ap­ple, Net­flix and Google as a straw man ar­gu­ment, be­cause it feels the so- called FAANG com­pa­nies are not nec­es­sar­ily play­ing in the same com­pet­i­tive mar­kets as tra­di­tional me­dia con­gloms like AT&T and Time Warner.

Much at­ten­tion will be paid to how U.S. Dis­trict Judge Richard Leon, a George W. Bush ap­pointee, weighs in on that ar­gu­ment when he an­nounces his de­ci­sion on June 12.

At the very least, the trial high­lighted that con­glom­er­ates seek­ing fu­ture com­bi­na­tions should take note: If the ra­tio­nale for a merger cen­ters on the ar­gu­ment that big tech needs big­ger ri­vals, an­titrust of­fi­cials will re­spond with a de­gree of scru­tiny and even skep­ti­cism.

Dis­ney is about to launch a sub­scrip­tion stream­ing ser­vice, and it could ar­gue that its com­bi­na­tion with many of Fox’s as­sets will cre­ate a much more ro­bust ri­val to Net­flix, not to men­tion a con­trol­ling stake in Hulu. But it also will have to ad­dress how the merger will im­pact more tra­di­tional op­tions — like the­atri­cal box of­fice and ca­ble network car­riage fees.

“It is not go­ing to be enough to just throw spaghetti at a wall, hop­ing some­thing sticks,” says Ke­tan Jhaveri, for­mer an­titrust at­tor­ney for the DOJ’S Telecom­mu­ni­ca­tions Task Force and CO-CEO of legal tech plat­form Bod­hala. “You have to go deeper than that.” He adds that what will be crit­i­cal in how Dis­ney and Fox need to ar­gue is how Leon de­cides and the Jus­tice De­part­ment re­acts.

In its post-trial brief, the Jus­tice De­part­ment claims that AT&T and Time Warner “seem to be ask­ing the court to find a new de­fense to an il­le­gal merger: ‘We are get­ting killed by new com­pe­ti­tion in dif­fer­ent mar­kets.’” The DOJ notes that rarely has that “fail­ing firm” de­fense been ac­cepted by courts.

Jhaveri says the fail­ing firm ar­gu­ment isn’t all that new. Dur­ing the 1990s, he says, ri­val com­pa­nies used it as Mi­crosoft gained strength.

Hal Singer, econ­o­mist and ad­junct pro­fes­sor at Georgetown Univer­sity, sums up the im­pli­ca­tions for the me­dia busi­ness if the

court adopts the DOJ’S view.

“The only ef­fi­cien­cies that are rec­og­nized [would be] those that could coun­ter­act a price ef­fect in the rel­e­vant mar­ket,” he says. In the DOJ’S view, that rel­e­vant mar­ket is the one for pay-tv ser­vices, not the Face­book- Google com­pe­ti­tion for ad­ver­tis­ing.

AT&T and Time Warner be­lieve the gov­ern­ment has fallen far short of prov­ing its case even from that stand­point, or in sug­gest­ing the idea that con­sumers will be harmed by their merger.

Even be­fore the trial, though, there had been a steady drum­beat of calls from the right and the left that the prob­lem isn’t in the DOJ’S in­ter­pre­ta­tion of an­titrust laws but in the laws them­selves. Given the rise of big tech, the think­ing goes, the time has come for a re­vi­sion.

For in­stance, Ap­ple’s mar­ket cap alone has nearly dou­bled over the past two years, and is quickly ap­proach­ing $1 tril­lion. That’s nearly four times as much as AT&T and Time Warner would be worth to­gether, based on their cur­rent mar­ket caps. Some even be­lieve that Ap­ple’s mo­bile app and con­tent sales could soon de­throne some of the en­ter­tain­ment in­dus­try’s most pres­ti­gious mon­ey­mak­ers. “As of this year, the App Store alone will over­take global box of­fice rev­enues,” fore­cast Ap­ple an­a­lyst Ho­race Dediu ear­lier in 2018.

A re­cent re­port by the World Economic Fo­rum on cre­ative dis­rup­tion notes that Google and Face­book to­gether con­trol more than half of all global mo­bile ad rev­enue. “Our con­cern is the sus­tain­abil­ity of the in­dus­try,” says the World Economic Fo­rum’s Farid Ben Amor.

The real threat may not be pres­sure on tra­di­tional me­dia but on new play­ers try­ing to en­ter the mar­ket, es­pe­cially as tech­nolo­gies like ar­ti­fi­cial in­tel­li­gence and aug­mented and vir­tual re­al­ity emerge, he says.

Larry Downes, project di­rec­tor at the Georgetown Cen­ter for Busi­ness and Public Pol­icy, be­lieves that the gov­ern­ment’s case in the trial will­fully turn a blind eye to mar­ket re­al­i­ties.

“If the gov­ern­ment loses, I ex­pect deal­mak­ing will ramp up even faster,” he says. “Had the DOJ sim­ply ne­go­ti­ated con­di­tions with AT&T and Time Warner, the state of the law wouldn’t have changed. But [with the gov­ern­ment] hav­ing gam­bled, the out­come may be a new an­titrust prece­dent that makes clear ver­ti­cal merg­ers con­tinue to be ben­e­fi­cial for con­sumers, and that the 1950s black-and-white view of me­dia the gov­ern­ment ar­gued is, as a mat­ter of law, dead and buried.”

Had the DOJ ne­go­ti­ated con­di­tions, the state of the law wouldn’t have changed. But [with the gov­ern­ment] hav­ing gam­bled, the out­come may be a new an­titrust prece­dent.” Larry Downes, Georgetown Cen­ter for Busi­ness and Public Pol­icy

Mak­ing His Case AT&T CEO Ran­dall Stephen­son (right) ar­rives at a U.S. Dis­trict Court.

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