The media-tech landscape is undergoing a generational transformation. A consumer revolution for a la carte programming was the rallying cry that kicked things off. Streaming first offered film, then TV series, and eventually original content. More recently, it has expanded to news, other live TV programming, and sports. Cord cutters now turn to an ever-growing patchwork of entertainment options from a increasingly shrinking cast of media and technology companies (the distinction between a tech and media company rapidly dissolving). Soon, perhaps accelerated by industry consolidation, that content will get re-bundled and consumers will find themselves subscribing to the digital equivalent of the cable package they were running away from.
The disruption, innovation, and jockeying for position in this new tech-media landscape is fueling a flurry of transactional and deal-making activity. The result are mergers, acquisitions, and collaborations by some of the largest tech companies in the world, internet service providers and mobile carriers, online publishers and content distributors, and the holders of the most storied catalogs of creative content. When it comes to the bigger among them, exclusive dealing, loss leader pricing, and early-to-market advantages also factor into who is winning and who is losing at this new game.
And right as the media and tech space experiences all of this tumult, the antitrust laws face a revolution of their own. A new brand of enforcers are trying to rethink what competition policy should be, with a more expansive vision for antitrust now guiding law enforcement in the US. Tim Wu, a top competition policy advisor for the White House, Line Khan, the new Chair of the FTC, and Jon Kanter, the new Chief of the DOJ’s Antitrust Division, and some influential state Attorneys General are rethinking how century-old antitrust laws should be enforced in today’s tech-based economy. The intersection of media and tech seems to be the early proving grounds for this “modern” form of antitrust.
Media-Tech Mergers & Acquisitions
The main question federal authorities ask when reviewing M&A is whether the transaction will eliminate competition between direct rivals with the potential to raise prices or decrease quality in the market. For example, the DOJ’s review of Disney’s acquisition of 21st Century Fox in 2019 looked at whether combining their catalogs would mean that buyers of the content (such as cable TV operators or streaming companies) would have a tougher time negotiating a deal with them combined than separately. For regional sports broadcasting, the Department of Justice (DOJ) determined that the merger would put content buyers at a disadvantage, and it required as a condition for clearing the deal that the merging companies divest Fox’s Regional Sports Network.
Agencies reviewing a media deal will also look at any “vertical relationship” between the merging companies. This usually applies when one company is a creator and seller of content (the programmer) and the other is a buyer of the content (the distributor) who then goes on to sell that content to viewers. Whether a vertical deal that combines a programmer and a distributor can harm competition turns on the complicated question of whether it results in an incentive for the merged entity to lock out rival distributors from a must-have catalog of content.
This is one of the main issues that came up when the DOJ investigated Comcast’s acquisition of NBCUniversal in 2011. The authorities were concerned that Comcast, a cable TV and internet service provider, might be able to throw its weight around against rival content distributors by preventing them from getting equal access to the programming catalog of NBCUniversal. So the DOJ and Federal Communications Commission (FCC) imposed certain conditions for clearing the deal (those conditions expired in 2018). Comcast was required to license NBCUniversal content on fair and non-discriminatory terms to rival cable, satellite, and online streaming service providers. It was also prevented from throttling internet speeds for subscribers accessing a rival content distributor’s service.
Notably, since that time, the DOJ has signaled that it will rely less on such “conduct” remedies when reviewing future deals, instead turning to structural remedies (requiring divestiture of a business division) or on an outright challenge of a transaction. In 2018, the DOJ challenged outright AT&T’s acquisition of Time Warner out of concern that AT&T could withhold or impose tough terms for licensing Time Warner’s large catalog of content and programming when it dealt with rival TV, satellite, or online streaming content distributors. It was the first DOJ challenge of a purely vertical deal in four decades. A federal court ruled in favor of AT&T/Time Warner, finding inadequate the government’s purported proof that the merger would bolster the combined entity’s negotiating leverage.
Currently, the agencies are reviewing two major deals in the media space. The Federal Trade Commission (FTC) is reported to be reviewing Amazon’s proposed acquisition of MGM. Amazon and MGM are not direct rivals in the traditional sense. Amazon Studios produces its own content, but it does so for its own streaming platform. MGM, on the other hand, creates content that it licenses out to various distributors, Amazon being one potentially, but also other online streaming services, movie theaters, and cable TV providers, among others. So reports do not signal that the government is concerned with whether combining the two could hurt companies that might consider Amazon and MGM as rival sellers of content.
But this does put Amazon and MGM in a potential vertical relationship, which is why some have speculated that the agency may be looking at issues surrounding rival distributors’ access to the MGM catalog or rival content producers’ access to Amazon’s streaming service. The now-Chair of the FTC previously came out publicly to call for a government challenge to Amazon’s acquisition of Whole Foods, another vertical deal that raised no issues related to head-to-head competition between the merging companies. Her concerns then included the deal’s potential to create “opportunities to abuse cross-market advantages and foreclose rivals.” Her exact theory of competitive harm was not clear then, but it probably is influencing the agency’s consideration of the latest deal.
Another sign of things to come in vertical deals, media or otherwise, is the FTC’s controversial decision this summer to withdraw its 2020 amendments to the Vertical Merger Guidelines. (Notably, its sister antitrust agency, the DOJ, did not follow suit.) The guidelines are an important policy statement that influences agency discretion and judicial decisions in challenges to vertical mergers. The FTC Chair and two other reform-minded Commissioners making up the 3-2 majority that voted to rescind the 2020 amendments explained that pro-competitive efficiencies generated by vertical mergers were given too much weight under the updated guidelines. For now, FTC policy in vertical deals remains in a state of flux, with stale guidelines from the first Reagan administration remaining in effect.
Other pending media mergers raise more traditional concerns surrounding the elimination of head-to-head rivalry. The DOJ’s investigation of the WarnerMedia/Discovery merger, like the Disney/21st Century Fox deal, is reported to be looking at the effect of combining two major producers of content. The analysis would likely focus on what the combined size of the catalog is compared to others, how similar the catalogs are to each other, and whether their combination creates a “must have” for distributors or licensors.
But it would not be a surprise to see the DOJ also looking at how the combination might impact those who sell or license their content (or other intellectual property rights) to WarnerMedia or Discovery. Such an inquiry would look at whether the combined entity has more “buyer power” and can extract lower prices from those “sellers” of content. Just about any content creator, writer, or intellectual property rights holder who depends on demand from big programmers could be thought of as a seller. If combining WarnerMedia and Discovery meant that those sellers had fewer places to turn to after the merger, the DOJ could ask whether this allows the merged company to offer them less favorable terms.
Buyer power (also known as “monopsony”) cases are not the normal way that antitrust authorities have investigated mergers. Almost all cases have focused on seller power, which is to say, the ability of a merger to increase prices to downstream customers. However, new leadership at the FTC and DOJ, as well as influential policy thought leaders, have been pushing for the antitrust laws to be wielded in defense of upstream buyers who could, as a result of a merger, be harmed by falling prices. This is a potentially significant expansion of how the antitrust laws are applied by the government authorities, and it will apply in the media-tech space as much as anywhere in the economy.
The best example of that is another merger, this one involving the publishing industry. The DOJ recently sued to block Penguin’s acquisition of Simon & Schuster. The DOJ alleges in its lawsuit that the deal would combine the #1 and #4 players in a market supposedly made up of the “Big Five” book publishers. What’s interesting is that the DOJ does not allege this will lead to higher prices charged to retailers. Instead it claims the competitive harm will be upstream, in the form of lower prices paid to authors for securing rights to their best-selling books. The government’s theory is that with fewer publishers to turn to, authors will have to agree to lower advances.
Challenging a tech or media merger because it would increase buyer power is not a significant departure in the case law or economic thinking that underpins antitrust. But it is a departure from the practice of the federal antitrust authorities who enforce those laws. One would be hard-pressed to find another recent example of a merger challenged solely on the theory that it would lead to lower prices paid to sellers. Challenging a purely vertical merger has been slightly more common, but with little success (for the government authorities) to show for it.
The reason buyer power and vertical challenges are uncommon is that the conventional wisdom surrounding antitrust has been that what’s good for the consumer is good for the economy. As long as the prices consumers pay and the output of products in the market remains competitive, antitrust stands aside. This has meant that, when a merger increased buyer power, it meant the merged companies paid less for something, and the going-in assumption was that some of these savings would be passed on to consumers in the form of lower prices.
As for vertical deals, regulators and courts have given significant weight to the efficiencies, synergies, and cost savings that can result from vertically integrating two companies that are upstream/downstream of each other in a chain of distribution. Again, the assumption has been that some of those cost savings would mean lower retail prices. At the same time there has been a reluctance, perhaps most pronounced in the tech and media space, among US regulators and courts to wield the antitrust laws to protect competitors if there is no clear indication that a merger has harmed the competitive process in a way that harms consumers. Put simply, tough rivalry has been assumed to be good for the health of free markets.
Combined, these conditions have created significant headwinds to any attempt by the government to challenge a merger based on a theory of competitive harm stemming from increased buyer power or a vertical overlap between the merging companies.
But a growing minority of academics and policymakers have chipped away at those assumptions. And now leadership at the two federal antitrust authorities seems more inclined than any in recent memory to test the limits of the law. They have argued that efficiencies are less common than has been alleged by merging companies, and that pass-on of cost savings to consumers in the form of lower prices does not always occur. Harm to upstream buyers alone, therefore, ought to be enough to justify stopping a merger. So should the potential for a vertical merger to lead to foreclosure of rivals.
On top of that, the progressive vanguard of antitrust has questioned the long-standing assumption that antitrust laws should not protect rivals for their own sake. Some now say that smaller rivals need to be protected in order to create a counterweight against larger players in a market. Skeptical that the efficiencies achieved by monopolists result in consumer savings, they are more apt to intervene in M&A to prop up a rival as a competitive check.
Tech-media deals such as Amazon/MGM, WarnerMedia/Discovery, and Penguin/Simon & Schuster seem to be some of the early proving grounds for this new antitrust vision. Buyer power, vertical theories of harm, and protecting rivals from being excluded from competing in the market all seem to be in play in the government’s reviews (and in the latter case, a challenge in court) of these mergers.
The Media-Tech Gatekeepers
The progressive swing in antitrust enforcement, in the US and abroad, was ushered in by the concern that “Big Tech” (the large tech and media platforms that people use to share and consumer content) had gained too much market power. The argument goes as follows. The two-sided online platforms responsible for connecting businesses (sellers) with users (buyers) have become gatekeepers to vast swaths of the online economy. These intermediaries, the theory continues, cannot be unseated by upstarts because the virtuous cycle that propelled the Big Tech platforms to their top positions has built a moat around them that has made it difficult for rival platforms to emerge.
The dynamics leading to a steady state of a few large gatekeeper platforms put policy makers and enforcers on high alert. But merely having a strong market position is not an antitrust violation, a principle that has shielded most of deal-making and other market conduct of the largest tech-media players. Monopoly can be the reward for winning the free market competition on the merits, the logic goes. Even the most enforcement-minded seem to accept that basic tenet of modern competition policy. Instead, the government has sought to intervene only where it thinks a dominant platform has engaged in strong-arm “exclusionary” market practices that make it even more difficult for rivals to compete on the merits to challenge the incumbent’s position.
Looking for monopolists engaging in anti-competitive conduct has been the formula for a wave of antitrust cases filed against the largest consumer-facing tech and media platforms in more recent years. For example, as I’ve previously written about, Google was sued by a group of state Attorneys General for allegedly conducting its near-instantaneous online ad auctions in ways that made it difficult for rival ad services to compete on equal terms with Google’s own ad products. (Reports indicate DOJ is considering its own lawsuit.) Online media companies, dependent on online advertising to market or monetize their content, as well as as rival ad tech services all have a stake in the government’s lawsuit against Google and the flood of private lawsuits that have followed. Over a dozen news media groups have already filed private lawsuits. The remedies sought are money damages to recover alleged lost revenue from suppressed advertising income. The cases also seek injunctive relief, which could have a bigger impact on Google’s practices and the business model of the “free” internet more generally.
Another wave of litigation has targeted online gatekeeper platforms that operate as walled gardens (also known as closed ecosystems). A walled garden is an online intermediary that, in addition to providing a platform to connect sellers and buyers, relies on tight controls over what sort of content or exchanges can occur on the platform that can have the effect of preventing third-party services from building over the top of the platform’s proprietary ecosystem. This often includes some restrictions on how business users price their products (or services) on the platform, screening what is offered by third parties, requiring the parties to use the platform’s own proprietary payment system for any transactions made on the platform, and restricting how sellers can distribute their products outside of the platform.
Until recently, the tech-media platforms operating as walled gardens flew under the antitrust radar. As long as a closed ecosystem’s tight controls were put in place to protect the user experiences–things like quality, security, data protection, and performance–then they were seen as pro-consumer and therefore pro-competitive. Even more so if they were one of several alternative platforms available to users, so that competition at the ecosystem-wide level ensured that each platform was kept in check by consumers who could switch to a rival platform. The classic example is competition between Apple’s iOS ecosystem and Google’s Android ecosystem. The result, in the case of Apple, was that its walled garden’s tight control over the apps that could run on its proprietary operating systems led to a consumer tech revolution, with some of the most popular and widely enjoyed products on the market.
But class actions filed on behalf of iPhone owners and app developers have alleged that Apple monopolized the iOS or App market by restricting the ability of developers to distribute their apps outside of the App Store. The consumer class action is being litigated but the developer case has settled, with Apple committing to allow developers to message users about alternative options for downloading their apps outside the App Store. A similar lawsuit filed by Epic Games, a videogame developer, has resulted in an injunction requiring Apple to go a step further by allowing Epic to direct app users (within the app) to alternative ways to pay for an app outside the App Store. (That order is paused pending an appeal.) And another lawsuit filed by a coronavirus app developer was dismissed, though the plaintiff’s lawyers plan to appeal.
Similar consumer and developer class actions have been filed against Google. Epic Games has filed its own lawsuit, tracking its case against Apple. Google’s ecosystem is more open than Apple’s—its open source Android mobile OS had historically distinguished itself as offering app developers more flexibility and fewer restrictions—but that has not been enough to avoid antitrust scrutiny. As with Apple, the allegations center on restrictions imposed on developers against “side-loading” apps (distributing them outside the Play Store) or offering in-app purchases through third-party payment services (sidestepping Google Play Billing). More recently, a state-led government lawsuit against Google has followed in the wake of the private lawsuits. (This is quite unusual, as private suits more often dovetail on public enforcement actions, not the other way around.)
The lawsuits against Apple (and now Google) seem to have opened the floodgates for bringing antitrust claims against other tech-media players that rely on a walled garden approach to how content is distributed and monetized on their platforms. Lawsuits by gamers and game developers against Valve, the operator of the Steam gaming platform, allege that overly tight pricing controls are preventing them from offering their games for less through alternative online channels of distribution. A PlayStation gamer class action against Sony raises similar claims, as well as adding allegations that sales of digital games (via download codes) through brick and mortar retail stores are being cut off.
The impact of these various gatekeeper lawsuits could extend well beyond mobile apps and games. Any major tech-media distribution platform that connects content sellers to content buyers, and which restricts transactions occurring among them outside of its proprietary platform, could potentially face similar charges under antitrust laws.
It remains to be seen how courts will rule on these cases on the merits. The plaintiffs face many hurdles, such as establishing standing (they need to be direct purchasers and also not subject to valid arbitration clauses in their user agreements), proving injury (higher prices paid by consumers or higher commissions charged to developers), and showing that there has been harm to the competitive process (as opposed to mere harm to a disgruntled rival).
Then there is the balancing of any potential anti-competitive effects caused by the conduct against its pro-competitive benefits, a necessary and weighty exercise that can derail a plaintiff’s case (I’ve previously written on its implications in the tech space here). This could be especially relevant in gatekeeper platforms cases, as closed ecosystems and walled gardens are often justified by improvements to the user experience. In the Epic Games / Apple case, for example, the court threw out the federal antitrust claims in part because of such pro-consumer arguments about the walled garden of the iOS. The court also seemed swayed by arguments that Apple was entitled to the fruits of its investments in the development of the technology (protected by intellectual property rights) that powers the app ecosystem.
The net, net of all this is that the antitrust laws would have to bend somewhat to accommodate the claims being made against the walled gardens operated by the internet’s tech and media gatekeepers. Private plaintiffs face the most challenges. Not only do they face additional evidentiary burdens when it comes to standing and injury, but they also don’t enjoy the deference that judges are more apt to give to federal or state enforcers. In the end, the government-led cases (and other ongoing investigations that may result in additional enforcement actions being pursue) might end up leaving the biggest mark on the antitrust landscape. The threat–financial and reputational–of such costly litigation can be a deterrent all of its own. Private litigation further amplifies that effect. In either case, smaller tech and media companies operating along the chain of distribution might be able to rely on antitrust to open up closed ecosystems, at least partially, to allow for more flexibility in how their content is distributed and paid for.
What Lies Ahead
There is more consolidation to come in the media and entertainment space. Scrutiny of many of those deals will center on vertical foreclosure theories of competitive harm. Downstream distributors or upstream suppliers of content may find enforcers more open to their complaints that a merger create the incentive to lock them out of the market. Traditional theories of harm based on elimination of head-to-head rivalry will also play a role, sometimes with a new spin: enforcers’ newfound interest in whether consolidation of buyers (of content, for example) enables them to squeeze sellers (the licensors of that content).
The larger media players, whether they get their by acquisition or by acumen, will turn to century-old, tried and tested strategies for making it more difficult for rivals to emerge in network markets. Antitrust authorities will look more seriously than they have in recent years at accusations of exclusionary market conduct committed by the tech and media gatekeepers of the means of distributing content online. At the same time, the importance of data and data analytics—as a competitive edge against rivals and in dealings with upstream or downstream partners—will put data privacy and protection concerns front and center in antitrust enforcement.
With an aggressive leadership in charge of the federal agencies and some of the major state law enforcement offices, some rough and tumble years lie ahead for the media-tech industry.