Op-Ed

Why the AT&T/Time Warner merger makes sense and the Justice Department lawsuit doesn't

Department of Justice officials announced Monday that they were swooping in to protect Americans from economic predators by fighting for our right to watch “Game of Thrones.” The prosecutors’ target is AT&T’s proposed merger with Time Warner. But like “Game of Thrones,” the government’s lawsuit is set in a world of ancient fantasies, rather than current law and the real economics of Hollywood.

The department argues that if AT&T consummates its $85-billion purchase of Time Warner, the combined firm would “use its control of Time Warner’s popular programming as a weapon to harm competition … [which would] result in fewer innovative offerings and higher bills for American families.”

The argument is remarkably out of touch. Old Hollywood players and entrants like Hulu, Amazon and Netflix are erecting studios, signing up talent and working at a furious pace to create new programs for consumers. By invading the traditional entertainment market, they have upended its power structure as they chase after the eyeballs of fickle viewers. We imagine more than a few dinosaur cable and studio executives have rushed to the emergency room at Cedars-Sinai complaining of chest pains and “cord-cutting.”

Consider: In 1970, the NBC “Bob Hope Christmas Special” attracted nearly two-thirds of television viewers, and his jokes were stale even then. When the president of the United States gave a speech, you could not escape it — every channel showed his face because only a handful of channels existed. In 1983, 77% of televisions tuned in to a single show — the last episode of “MASH.” These days a big hit like “The Big Bang Theory,” grabs 11% of the audience.

We are living in a “Golden Age of Television” precisely because of the explosion of talent, platforms and venues for consuming entertainment. The number of scripted series has jumped more than 40% since 2010. Some consumers complain of too many choices; channel surfing is difficult with 500 to choose from. And this Golden Age must compete with non-television offerings. The “League of Legends” video game championships attracted 43 million streaming viewers last year. That’s why, for all the critical acclaim “Game of Thrones” garners, cable companies earn only about $7 a month per subscriber when they offer HBO, which distributes it.

In this climate, is it likely that AT&T would be able to jack up the price of viewing Time Warner shows? If the programming were so singularly valuable Time Warner would have already raised prices to maximize profits. Merger economics teaches us that monopolists curb their output in order to boost prices. For example, when an airline dominates a city, it can cut back the number of available seats or flights in and out. But why would AT&T want lower ratings for television programming? Would fewer viewers allow it to raise prices?

In an era of fragmented and fickle audiences, talent, not the name of the cable company, is what commands a premium. Brilliant writers and showrunners like Shonda Rhimes, Greg Berlanti and Tina Fey have more choices than ever, as Rhimes’s recent “totally open road” deal (her words) with Netflix suggests. Compare this to the era when Jack Warner called writers “schmucks with Underwoods.” Actors have more choices, too. Remember the iconic 1943 MGM photo of 65 famous contract players, including Jimmy Stewart, Katharine Hepburn and Gene Kelly. MGM claimed to have “more stars than the heavens,” but those stars had little power to sign new deals with new studios.

The government’s case against the AT&T merger is so weak we wonder whether officials made an innocent mistake. Are the deal’s critics mixing up Time Warner Cable (already sold to Charter Communications in 2016) with Time Warner programs? Had AT&T bought the cable company, it would have been a “horizontal merger,” a marriage of direct competitors that decreased competition and could have pushed up consumer prices. But AT&T actually wants to buy programs, which would be a “vertical merger.” For the last 30 years, the government has approved such mergers (including Comcast’s purchase of NBC), and a wide-ranging Journal of Economic Literature study of merged businesses — from motels to soft drink companies to shoemakers — concluded that vertical combinations seldom injure consumers.

The Justice Department’s suit makes no sense in today’s world. Its antitrust attorneys should step out of the past and leave the fantasies to television.

Victoria J. Buchholz is a corporate and intellectual property attorney in Los Angeles. Todd G. Buchholz is a former director of economic policy at the White House and the author of “The Price of Prosperity: Why Rich Nations Fail and How to Renew Them” (HarperCollins, 2016).

Follow the Opinion section on Twitter @latimesopinion and Facebook

Copyright © 2017, Los Angeles Times
EDITION: California | U.S. & World