Studio Survival: AT&T-Time Warner Deal, Anti-Trust, and the Changing Entertainment Industry
This summer, Judge Leon wrote a 172-page opinion, allowing the proposed AT&T-Time Warner merger,[1] monumentally changing the functionality of the entertainment business. Big studios, such as Warner Bros., Paramount Pictures, Sony, and Universal no longer reign over the film and television industries. With the influx of direct-to-consumer platforms—such as Netflix, Hulu, and Amazon Prime—the traditional studios, with rich histories dating back to the early 1900s, need to find new ways to keep up.
Thus far, Bob Iger, the CEO of Disney, has been the only major studio head that figured out how to stay ahead of the game.[2] Disney has been able to compete with direct-to-consumer platforms through Iger’s strategy of expansion and focus on franchising.[3]. Acquiring Pixar, Marvel, and, recently, Fox allows Disney to have major control in almost every variety of content that viewers are interested in consuming. Since March, they have begun implementing a new initiative to get in on the direct-to-consumer phenomenon,[4] staying ahead of their studio counterparts.
The question now is, how can Warner Bros. and the other studios that used to rule the entertainment industry keep up as cord-cutting becomes the norm and fewer people are going to the theaters to see low and mid-budget films?
This is where AT&T came in. Yet what are the legal ramifications of this landmark decision? Is AT&T a monopoly by controlling not only a major telecommunications company, but also a major studio, a highly popular direct-to-consumer platform, HBO, and a major conglomerate of cable television networks,, Turner Broadcasting?[5]
Critics of the deal state that this will create an unfair advantage for AT&T, with the potential of wiping out competition. Advocates claim that the merger was necessary in order for Warner Bros. to survive.[6]
“In ruling for AT&T, Judge Leon was particularly persuaded by AT&T’s argument that the market for video distribution was being fundamentally changed by ‘cord-cutting’ or ‘cord-shaving’ and the growth of companies like Netflix, Hulu and Amazon Prime.”[7]
AT&T’s arguments about the changing market were not too far-fetched. We are witnessing the changes first hand. If you ask millennials whether they would get cable or opt for new subscription-based services, the latter would likely be chosen.[8] AT&T justified its anti-monopoly arguments by stating this was a vertical merger—when there are two different firms in the same industry, “but at different levels in the supply chain.”—rather than a horizontal merger.[9]
The major point of contention, for Judge Leon, was about the DOJ’s expert testimony. Judge Leon was unconvinced and felt that the DOJ’s expert’s opinion, “underestimated the rate of ‘cord-cutting,’ leading him to underestimate the number of subscribers who would divert to online distributors, rather than a traditional service.”[10] Judge Leon was overwhelmingly convinced by the revolutionary changes AT&T claimed was happening within the industry. He is not wrong as, “Judge Leon laid out statistics, reciting how traditional cable companies were losing millions of subscribers while ‘Netflix added 2 million subscribers in the last quarter alone.’”[11]
On the last day possible, the DOJ filed for an appeal. Time will tell whether or not Judge Leon’s decision will be reversed. However, legal experts have noted that “Judge Leon’s decision was specifically tailored for AT&T’s merger with Time Warner, limiting potential problems in an appeal.”[12]
Footnotes
