Federal district court judge Richard Leon’s approval of AT&T (T, Financial)'s takeover of Time Warner Inc. (TWX, Financial) clears the way for the formation of a formidable media corporation that will be poised well to take on the current media and entertainment behemoth Netflix (NFLX, Financial). One of the aspects that makes this decision notable in the rapidly changing 21st century internet economy is that the result might have been very different if the Department of Justice had brought its anti-trust case 20 years ago in a Netflix-free era.
The ruling is also noteworthy in that it is the first vertical merger anti-trust case that went to trial. In most other similar cases, the DOJ entered into consent decrees with the defendant corporations by way of settlement agreements.
The moral of this “trust-buster” story is that it is not size alone that matters, but market share. For purposes of anti-trust enforcement, especially in a high-tech business environment, absolute size isn’t as relevant as a company’s relative position within one or more of the markets or industries in which it competes.
The decision should not be construed as license for the FANG stocks to continue conducting business as usual. These companies may or may not be vulnerable in the future on anti-trust grounds. That very much depends on whether these Goliaths encroach on other horizontal markets for the purpose of stifling competition.
Indeed, Judge Leon admonished those who may be quick to make sweeping generalizations from his ruling, which was limited to the facts and circumstances of this particular case: “The temptation by some to view this decision as being something more than a resolution of this specific case should be resisted by one and all!” Leon wrote.
It is the omnipotence of today’s Netflix that was one of the reasons the DOJ faced an uphill battle. One of the reasons for the merger was the unheralded rise of a former mail-order company that has evolved into a digital streaming giant that is beginning to dominate the entertainment and media market leaving the traditional players behind. The idea that the merger would harm consumers or hamper competition was resoundingly rejected by the court as the merger was between complementary companies that do not directly compete. As noted by the Wall Street Journal, “AT&T is entering a crowded market. The Dallas company will be fighting Comcast Corp. and Netflix Inc. for popular shows while battling Alphabet Inc.’s Google and Facebook Inc. (FB, Financial) for advertising dollars.”
The provisions of the Clayton and Sherman anti-trust laws were enacted in a different era, when the threat was from industrial giants whose merger would eliminate competition. But Standard Oil didn’t evolve into a petroleum conglomerate overnight. In today’s economy, the high-tech market can be unforgiving; the life span for companies can be brief and evanescent. Who remembers MySpace? CompuServe? AOL? Even for established tech giants, unexpected challenges to their dominance could occur in the future.
Apple (AAPL, Financial)'s recent attack on Facebook’s ability to gather private data from users to sell to advertisers has now, in a fortnight, disrupted that company’s essential and heretofore lucrative business model. A prominent company’s earlier advantages can always be rendered obsolete by an unforeseen new technology introduced by a competitor.
By way of contrast, a merger between Google and Facebook would present an entirely different paradigm from a legal and economic perspective. With the exception of Netflix, the potential difficulty for the remaining FANG stocks is that most of them cross over into other industries or markets. Facebook has evolved into more than just a social media company; it is rapidly becoming a dominant publishing platform that already exerts undue influence over acesss to the public square in its filtering of which books, magazines and video it will permit to be made available in cyberspace. The same potential cross-industry problems exist for Amazon and Google.
In this case, AT&T CEO Randall Stephenson refused to be muscled by the DOJ into a consent decree that may have hampered the benefits of the original merger strategy. He bet the farm on the merger and Judge Leon handed him a victory yesterday. Based on the decision, other companies will be emboldened to follow his lead.
I have no position in any of the securities referenced in this article.
