MoffettNathanson analyst Craig Moffett says that AT&T-Time Warner's court victory should not be seen as a green light for vertical mergers (ones combining distribution with content), particularly ones involving an ISP and a content company, say Comcast-Fox for instance.
Moffett argues in a report to clients Thursday (June 21) that Justice tried the wrong case by focusing its argument on the combination of the Turner linear networks and distributor DirecTV (owned by AT&T) and the alleged impact on Turner's independent distributors--increased consumer prices to consumers.
Had DOJ instead drilled down on the potential foreclosure harm from the combination of Turner programming assets and an ISP, he suggests, the outcome could have been very different.
"The DOJ focused entirely on the risks that would arise from joint ownership of DirecTV and Turner’s cable networks (recall that they even proposed divestiture of one or the other as a preemptive remedy)," said Moffett. "And, therefore, so did Judge [Richard] Leon. Neither ever even raised the issue of whether there might be a more material competitive harm arising from the combination of Turner programming and an ISP."
He said that was even more surprising given that the ruling came down the same week the FCC's network neutrality rules were rolled back--activist groups certainly suggested a combined AT&T-Time Warner was a net neutrality threat.
"The theoretical harm here is obvious," he says. "A wireless or wired ISP, now unfettered by net neutrality regulations, could, in theory, advantage its own content over the content of others, either by zero rating (that is, not counting owned-and-operated content against monthly data caps), by prioritizing (the old fast lanes/slow lanes chestnut), or even by adopting a regime of content exclusivity."
That "competitive foreclosure" threat is arguably a more serious antitrust risk than the consumer price increases DOJ argued were the risk. It didn't help any that DOJ's own witness overestimated that increase.
So, says Moffett, the risk of DOJ making such a case against a Comcast-Fox combo could tilt Fox stockholders toward a Disney deal.
"Obviously, there is no guarantee that the DOJ would win if they were to bring such a case against Comcast-Fox," Moffett says. "But the risk that they would try, and that if they did they might win, is undeniable. Remember, the AT&T ruling was silent on this issue. That risk alone would likely be sufficient for the Fox Board to conclude that a Disney bid, so long as it is in the vicinity of Comcast’s, is the better (safer) choice."