Multiple antitrust experts told Business Insider federal regulators will almost certainly have their eye on any deal for Rupert Murdoch’s 21st Century Fox to buy Time Warner.
“I’m sure regulators will take a close look at this,” said Scott Hemphill, a professor at Columbia specializing in antitrust and intellectual property.
Hemphill said the main issue for regulators would be the potential the “increased concentration” of television programmers and movie studios created by merging the two companies could lead to “higher prices” for distributors, consumers, and advertisers. He cited two major elements of the deal regulators were likely to focus on.
“I think as an initial matter, the main antitrust question here is whether the firms are combining competing assets. And the reason you would care is the standard antitrust concern, which is that, by reducing competition among rivals, you might end up with higher prices,” Hemphill said.
Hemphill explained the long roster of networks Fox would own if it bought Time Warner could give it greater leverage to demand higher fees in negotiations with TV distributors. In turn, those costs could be passed along to consumers. He pointed out this was likely why Fox reportedly plans to spin off CNN if it purchased Time Warner.
“The most obvious concern that it seems like the folks at Fox anticipated is the probable combination of CNN and Fox News,” said Hemphill. “As indicated in the press reports, they would divest CNN to head off that concern.”
Hemphill noted there could “potentially” be similar concerns about sports programming in addition to the two cable news outlets owned by Fox and Time Warner.
Along with the potential the deal would lead to higher prices for distributors, Hemphill also said regulators would want to examine whether a merger would affect prices for advertisers in areas of the television landscape “where the advertiser doesn’t have alternative choices” outside of the company.
In addition to television programming, Hemphill said there could be antitrust issues with the pair of movie studios owned by the two companies — Warner Bros. Entertainment and Twentieth Century Fox.
“I think the other piece here is the combination of movie studios. As I understand it, there are currently six main movie studios. This would bring it to five,” Hemphill said. “As a rough rule of thumb, six to five combinations tend not to raise eyebrows. So, I think that’s a second area that regulators would likely focus on, but maybe the less important of the two.”
Maurice Stucke, a professor of law at the University of Tennessee and former Department of Justice antitrust division attorney, said he would be “really cautious about saying six to five is not a problem,” though he noted it can be a general “rule of thumb.” He argued antitrust laws are aimed at preventing both express collusion where the businesses who dominate an industry fix prices as well as passive collusion where there is no direct communication, but a small enough number of companies control the market for a given product that they are able to effectively fix prices together.
“Is six to five sufficient to prevent either form of collusion from occurring? ” Stucke asked. “You can see that cartels happen in industries with very few competitors, but cartels also happen in industries with many competitors.”
Stucke agreed the potential acquisition could be a concern for the DOJ — and he argued the Clayton Act, a major component of federal antitrust law, is aimed at stopping increased concentration “in its incipiency” rather than after it has already occurred.
“You’re supposed to nip it in the bud,” he said.
Stucke also argued the fact media companies are involved, could make it an issue for the Federal Communications Commission.
“You’re dealing with important news and entertainment sources and there the question is, well, if we get it wrong here, the stakes are much higher than just getting it wrong with ordinary commodities,” explained Stucke. “When you get it wrong with media companies, it just doesn’t affect the prices that are paid, it can also affect the marketplace of ideas and getting important voices out.”
Because of Fox and Time Warner’s role in that “marketplace of ideas,” Stucke said the FCC might weigh in because of the “public interest standard that they have.”
“It’s going to be a concern for at least one of the agencies,” he predicted.
Overall, Stucke said federal regulators would get it “wrong” if they solely focused on financial concerns rather than Fox and Time Warner’s roles as media companies.
“The key point here is, if you focus only on price in these matters, particularly advertising rates, you’re likely to get it wrong. That’s one of the lessons from the consolidation in the radio industry that came about after the 1996 Telecom Act,” said Stucke. “If you look at the radio mergers, DOJ only looked at ad rates, they didn’t look at quality of formatting, quality of competition, and the like. And they got it wrong twice. As the FCC studies showed, advertising rates went up because of the concentration. Secondly, they got it wrong on the quality competition for listeners because of the complaints about homogeniety of radio.”
Stuckey suggested the “linchpin” for federal approval of a potential acquisition of Time Warner by Fox would be another major media deal — the merger between two television distributors, Comcast and Time Warner Cable. That merger is currently being reviewed by the FCC and DOJ.
“The Time Warner Cable and Comcast deal plays an important part because there they’re saying, ‘We need to get bigger in order to negotiatewith the studios,'” Stucke said. “If the DOJ says, We’re going to agree and allow that merger to go through,’ the studios are going to say, ‘Look, you allowed Comcast, look how many homes they control. Our deal is not going to be bigger than that, we’re just trying to offset.'”
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