Anti-Trust Hurdles Awaiting 'Warnermount'
Consider: FOUR major deals just fell apart in the last two weeks after being challenged
Matt Stoller works at the American Economic Liberties Project. He is the author of Goliath and writes the monopoly-focused newsletter BIG.
Hi, I’m Matt Stoller, a Washington D.C.-based political hack who thinks about antitrust law.
Since the early 1980s, not just in Hollywood but across the economy, business leaders have focused on consolidation as ‘inevitable,’ aka a core business strategy. That era, for a variety of reasons, is ending, but it isn’t over yet. With that in mind, here are some quick thoughts on rumors of the Paramount-Warner merger.
In this column, I will get into:
How the government reviews mergers.
Whether the merger is likely to be approved.
Why David Zaslav and Bob Bakish may be thinking they can roll the dice.
What happens if Donald Trump is elected president again.
The four mergers that fell apart in the last two weeks due to challenges, and why one should sound a warning for those trying for more consolidation in Hollywood.
First, here’s how any merger process is likely to work.
What does the law say about mergers?
When big companies merge, they undergo a legal review to ensure that the merger doesn’t violate the Clayton Act, a law that bars mergers that “may be substantially to lessen competition, or to tend to create a monopoly.” These words are vague. One way to understand them is to recognize that if two companies are combining so they can have more bargaining power instead of being able to produce better products and services, then a combination is probably unlawful.
So if Paramount and Warner Discovery are merging because they think they can make better TV shows or movies, that’s legal. But if they are merging because they think they will be able to raise prices or pay suppliers less, that’s illegal.
If you want more specifics, the government has a set of guidelines around how they think about mergers, and they just released a new version last week. You can read them here. These guidelines have been drafted over the last two years, and incorporated thousands of comments from ordinary people, including many people from Hollywood.
Who does the legal review?
There are generally two agencies in the Federal government that enforce the Clayton Act. There’s the Department of Justice Antitrust Division, and there’s the Federal Trade Commission. The two agencies informally divide up industries based on expertise. The Department of Justice traditionally has reviewed Hollywood studio mergers, so it will likely conduct a review if this merger happens. (There’s a possibility the Federal Communications Commission could be involved, as it has some jurisdiction over some media mergers.) In addition, state attorneys general have Clayton Act authority, so, for instance, California Attorney General Rob Bonta, as well as other state AGs, will be able to conduct a review. There are also enforcers abroad who look at deals for multi-nationals.
In this review, enforcers will spend about a year looking at documents, doing interviews, and then deciding whether the merger is legal. If they think it is illegal, they will file a complaint and go to trial, after which a judge will decide on the merits of the case. At any point the parties can settle, which means that the merging parties can make promises or sell off parts of the business in order to persuade the government to drop the case.
Is it a good time politically to try and do a merger?
Doing mergers right now, especially in concentrated industries, is much more difficult than it used to be because there’s an increasingly widespread understanding among policymakers that consolidation is upstream from a whole host of social problems, such as high prices, low wages, and less innovation and creativity. In 2022, Congress enacted a modest change to antitrust law, the first strengthening of merger law since the 1970s. This was a bipartisan accomplishment, led by moderate Democrat Senator Amy Klobuchar, who is extremely smart, but with support from conservative Utah Senator Mike Lee, and a host of others from both parties. And there’s an appetite to do more over the next few years.
The Biden administration has picked two aggressive officials to lead the agencies, Lina Khan at the FTC and Jonathan Kanter at the Antitrust Division. They have pursued a historically aggressive policy. In the last two weeks alone, design software firm Adobe abandoned a $20 billion deal with Figma, pharma giant Sanofi abandoned a deal with Maze Pharmaceuticals, John Muir abandoned a deal with Tenet health care to buy a hospital near Oakland, and genetics sequencing machine firm Illumina lost a high-profile court case and will abandon its merger with cancer test maker Grail. (This one is particularly significant since it’s ‘vertical,’ aka Illumina is trying to do in its industry what Netflix did in changing Hollywood to a streaming model.)
The most relevant precedent here is when book publisher Penguin tried to buy Simon and Schuster last year, and the Antitrust Division challenged it. Enforcers argued that reducing the number of major trade publishers from five to four would reduce payments to authors and cut the diversity of published materials. Traditionally, antitrust cases are about consumer prices, so making a case about worker or supplier compensation was historic. And the government won. There have also been a number of important victories for companies seeking to merge, the most relevant being when the government challenged and lost versus Microsoft’s acquisition of video game maker Activision. That case is on appeal.
But even having to go to court makes a merger much more challenging, even if you win. It takes longer, the financing has to last longer, there is the possibility of paying a big break-up fee, and you have to spend multiple years with tremendous business uncertainty. The CEO often has to take the stand and get cross-examined, and there’s a lot of dirty laundry that gets aired in public. In several cases, such as Illumina and Penguin, the CEOs ended up resigning (and Penguin paid a break-up fee of $200 million). It didn’t used to be this way. Since the 1980s, it has been rare for enforcers to challenge deals. Disney-Fox and Warner-Discovery, for instance, went through without a hitch because the government didn’t think the deals were illegal. But the Biden regime is skeptical of mergers in concentrated industries, and I suspect they’d be skeptical of legacy studio mergers.
If it’s so hard, why does David Zaslav or Bob Bakish in Hollywood think they can get a deal done with a direct rival?
First of all, the story is just a rumor (neither studio will confirm any talks on the record), so I’ll hold off being judgmental about decision-makers.
One reason might be that CEOs are willing to litigate and think they can win in court. The argument here would be along the lines of “Streaming is a scale business, we’re relatively small fish in a big pond, and we have to join forces so we can ward off big tech and Netflix.” Indeed, in 2018, AT&T said something like that, telling a judge it should be allowed to buy Time Warner so that the combined firm could compete with Google and Facebook. The judge bought it. It didn’t work out for them, and enforcers will make sure to point that out. But to be fair to pro-merger proponents, the streaming market is very different today.
In addition, antitrust lawyers have been telling their clients for years that Biden enforcers are lunatics and don’t understand the law. I’m guessing that’s the kind of advice Zaslav and Bakish are getting. It’s very risky to listen to that kind of counsel. Last week, the most conservative circuit court in America, the Fifth Circuit, upheld an FTC decision on a complex merger. It is quite possible for merging firms to litigate and win, but it’s no sure thing.
Another possibility is simply habit. For 40 years, consolidation was the business strategy, to the point where we have half as many public companies as we did in the late 1990s. It seems crazy to most people in the board room that mergers are just off the table, and they will have to find a way to do business that just involves making better products and services. After all, their rival got to merge or engage in unfair forms of competition just a few years ago. And now they’re being told me the rules are different now when their company wants to do it.
They imagine that this situation is temporary, and courts and enforcers will come to their sense and return to the good old days. They somehow think Americans didn’t notice the Too Big to Fail banking crisis, and as such, believe that what is in fact widespread populist anger is just Elizabeth Warren and a few crazy regulators who will eventually calm down and return to their sense. It isn’t, but they don’t really believe that.
Finally, there’s politics. These deals can take awhile to investigate, so if Biden loses to Trump, then the ultimate decision to challenge the deal will be made by a different Federal official. Trump is unpredictable, but CEOs and Wall Street think he will be better for them on mergers. Of course, state officials and foreign enforcers can still act, and Hollywood unions are not going to lie down for another merger. With a big enough outcry, I could even see Congress recognizing the need for new rules in the industry and beginning the process of restoring competition through statutory changes.
There are other factors at work. For instance, national security hawks like Congressman Mike Gallagher and the U.S. China Security Review Commission recognize how the Chinese government has manipulated a highly concentrated Hollywood system, which has traditionally been understood as a national asset. Then again, I could be wrong, maybe no one will care if Hollywood continues to consolidate. But it’s a risky proposition.
But shouldn’t there be consolidation? Consumer don’t want five different streaming services, right?
Consumers want a bundle of content. But there’s a difference between integrating services so it’s easy for a consumer to find what he or she wants to watch and having it all owned by one entity. A cable package is a consumer watching one service but being able to pick among different channels owned by different entities. The internet is an even better example. It’s a hugely scalable system, and a consumer looks at one screen, but the browser and the website or service don’t have to be owned by the same entity. It’s possible to get the advantages of scale without having to deal with the monopolization that putting all ownership under one legal entity implies.
Most proponents of consolidation want to persuade the industry that legal and operational scale are the same thing. They claim to want to be more efficient, but in truth just want more bargaining power.
That said, there’s something odd about this whole merger mania situation. As Barry Diller has noted, the legacy studios like Paramount and Warner shouldn’t be trying to mimic Netflix, Amazon, and Apple, but that is what they are doing. That’s a losing game, you’re never going to become genuinely competitive if you’re up against firms like Amazon or Apple who don’t need to make money in the industry, or if you’re up against the biggest service that can scale its capital costs against a much bigger customer base. Indeed, what Netflix ultimately is trying to do is monopolize the industry, and offshore as much of it as possible. There’s little room for thriving legacy studios in that world, and frankly, Hollywood’s star overall would dim. I mean, we can see that streaming as a business model isn’t very good and has genuinely harmed Hollywood.
The right solution is to return to the historic Hollywood separation between distribution and creation, the analogy being the Paramount Decrees or the financial syndication rules for TV. We need a new ‘Streaming Decrees’ to force Netflix and Amazon to become utility-like distributors and buy their content from studios, who would then compete over making quality content. That strategy would require a different form of politics, not getting the government to let them merge, but getting the government to move the market away from being based on unfair pricing or coercive behavior. We’re seeing that starting to happen in other sectors; Fortnite maker Epic Games just won an antitrust suit against Google over Google’s refusal to let them have their own app store on Android phones.
But my guess is there’s a belief in the executive suite that they have no choice but to merge, since it usually doesn’t occur to business leaders to de-consolidate an industry that is clearly not working well. There’s a lack of imagination and a lack of leadership skill in corporate America in general. But they should try to build a business model based on living and dying on the success of TV shows and movies, because it’s a way more fun way to do business, and you can make a lot of money doing it. And people won’t hate you for it. It’s a much better legacy to be the leader who saved Hollywood, instead of the guy who got a big bonus selling their studio to a rival or to a private equity giant for scraps.