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As the hearing on the Department of Justice’s challenge to the proposed merger between AT&T and Time Warner grinds on, it is timely to revisit the remarkably similar New Zealand Commerce Commission case decided just over a year ago, when major telecom company Vodafone and dominant pay television provider Sky Television were denied permission to merge.
Strategic foreclosure in vertical mergers
While there are many differences between the US and New Zealand legal environments, the key question in both cases is whether a vertical merger between a major content provider and a distributor will sufficiently reduce competition in at least one relevant market so that consumer welfare will be materially harmed. Normally, mergers between firms providing products in adjacent markets that are not actually competing with each other ex ante (termed “vertical mergers”) are relatively uncontroversial. The merger typically allows cost savings to accrue without reducing the number of firms supplying products in each of the relevant markets. The merged firm can sell the two products to end consumers in bundles at lower prices without harming its own profits. Consumers and total welfare therefore benefit from the merger proceeding.
But when one of the merging firms supplies products in one market (content) to firms selling services in the other market (internet access), and those products are resold to consumers, there is a risk that the merged firm can act strategically by raising its prices for the resold products. As rivals’ costs are raised by such strategic behavior, they can be foreclosed from competing in the relevant market. Competition and ultimately end consumers are harmed. The potential for such an outcome sits at the core of the Department of Justice’s case against AT&T.
What are the relevant markets?
A crucial consideration for such mergers is defining the relevant market(s) where competition could be harmed. With the AT&T–Time Warner merger, the Department of Justice has proposed HBO programming as an essential product that rivals must have access to in order to compete; in New Zealand, it was live Sky Sport content. Post-merger, prices for these types of content could be increased, making it more expensive for rivals to offer bundles of content and internet access in competition with those of the merged firm.
However, both cases presume the relevant content will continue to be available in the future only in the traditional manner. That is, the relevant market(s) are defined as bundles of programs (channels) sold together in pay television packages, which in turn may be tied to the provision of a particular distribution method (cable or satellite).
A changing market
In practice, the market for video content is undergoing phenomenal change. Digitalization (the internet) has broken the monopoly held by a specific television distribution technology. “Cable” content can be distributed using any internet technology (cellular, wireless and DSL, as well as satellite and cable/fiber). The owners of content rights are no longer constrained to using a traditional television content bundle distribution model dominated by large aggregators to get their content to consumers. Channels and even individual programs can be “unbundled” and sold using a variety of different models. While selling bundles of classical television content was important in increasing the number of people with internet access, now that internet access is near ubiquitous, the relationship between content and distribution technology is changing.
Increasingly, consumers are eschewing the traditional pay television bundle and accessing their video entertainment content from multiple sources (Netflix, YouTube, Spotify, etc.). Rather than paying one large fee for access to content curated by a single operator, consumers appear to prefer paying several smaller (or even no) fees to a wide range of content providers to curate their own personalized content bundles. As consumers’ preferences for content are inherently heterogeneous, the bundles of content actually purchased vary greatly.
There will always be some content preferred by larger numbers of consumers than others. But as long as those types of content are sold in mixed bundles — where consumers can pick and choose according to their own preferences and are not forced to buy “tied” content they don’t value or purchase their internet access from a specific provider to access a specific content — then a merger between content and internet providers need not pose a competitive threat. So long as content is able to be accessed via multiple technologies, it is not in the interests of providers to limit its access to one technology (e.g., cable) or provider, where substantial numbers of potential consumers obtain their internet access from other sources. And if the price of internet access is increased to make an access and content package more attractive to some consumers, the firm risks losing a significant number of other internet access consumers who have no desire to buy that content in the first place.
The implications for antitrust from this change in consumer demand is material. The relevant markets looking forward are not the pay television products or the internet access plans of the past, determined by producer preferences, but the new personalized bundles of the future, constructed by consumers. It is to be hoped that the US case will give due consideration to this matter.
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