I Overview of agency review
Like mergers in other industries, mergers involving media companies are reviewed by the Antitrust Division of the Department of Justice (DoJ) and the Federal Trade Commission (FTC) under Section 7 of the Clayton Act. In addition to these antitrust agencies, the Federal Communications Commission (FCC) also plays an important role in reviewing media mergers. This chapter describes these agencies’ procedures and methods of analysis before turning to a summary of recent mergers in the media industry.
i Antitrust agency review
Under the Hart–Scott–Rodino (HSR) Act, parties to mergers and acquisitions that exceed specified thresholds must make premerger notification filings and wait for government review. The parties may not close their deal until the waiting period outlined in the HSR Act (typically 30 days) has passed or the government has granted early termination of the waiting period.
The agencies sometimes require additional time to review a transaction that raises serious competitive issues, in which case they will issue a formal Request for Additional Information, or ‘Second Request,’ at the end of the initial 30-day waiting period.2 A Second Request is a highly detailed and burdensome request for documents, data and written responses, and generally requires at least three months (and often much longer) to respond. The response process typically involves the collection, review and production of tens or hundreds of thousands of documents (including emails) related to the competing products; collection and analysis (typically with the help of an outside economist) of large amounts of data regarding the companies’ pricing and sales; and significant time from the parties’ management personnel.
The DoJ and FTC conduct a fact-specific review of whether a proposed merger would enable the merged entity to raise prices, reduce output, diminish innovation or would otherwise harm consumers, such as by facilitating collusion among the remaining market participants. These agencies have issued guidance on how they evaluate the likely competitive impact of mergers in the Horizontal Merger Guidelines (19 August 2010) (the Merger Guidelines), which outline the analytical techniques used to evaluate mergers. The DoJ has generally taken the lead in antitrust review of media mergers.
The first step in determining whether a proposed merger raises substantive antitrust concerns is usually defining the market. To define the market, the agencies will consider which product or group of products are reasonable substitutes for one another, and the geographic area in which customers may reasonably seek suppliers of the products.
Generally, the second step is to evaluate concentration in the market as a screen for the likelihood of possible anticompetitive effects. The US antitrust enforcement agencies measure market concentration by the Herfindahl–Hirschman Index (HHI). The HHI requires determining each market participant’s respective market share, squaring that share, and then summing the squares. According to the Merger Guidelines, mergers that result in an increase in the HHI of less than 100 points, or post-merger HHIs below 1,500, are unlikely to have adverse competitive effects and ordinarily do not require additional analysis. Markets with post-merger HHIs between 1,500 and 2,500 are regarded as moderately concentrated. Mergers resulting in moderately concentrated markets that involve an increase in the HHI of more than 100 points potentially raise significant competitive concerns and often warrant scrutiny.
Markets with post-merger HHIs above 2,500 are regarded as highly concentrated. If the HHI is over 2,500, and the increase from pre-merger would be between 100 and 200 points, such mergers may raise significant competitive concerns and often warrant scrutiny. If the increase would be more than 200 points, then the merger raises significant competitive concerns and will be presumed by the enforcement agencies to create or enhance market power unless consideration of qualitative factors militates against that conclusion.
When the enforcement agencies are concerned that a transaction may have anticompetitive effects, they will analyse the market carefully to determine whether the transaction is likely to result in injury to competition based on either unilateral effects (the ability of the combined entity to raise prices or reduce output unilaterally post-merger) or coordinated effects (including not only an increased likelihood of explicit collusion, but also a reduction in the incentive of market participants to undercut each other’s attempts to raise prices or reduce output).
ii FCC review
The Communications Act of 1934 provides a separate, but complementary, role for the FCC in reviewing transactions. The FCC’s review is informed by competition principles derived from the Clayton Act, but also focuses more broadly on whether the merger serves the public interest.3 This standard encompasses the goals of the Communications Act of preserving and enhancing competition in relevant markets, accelerating private-sector deployment of advanced services, ensuring a diversity of information sources and services to the public, and generally serving the public interest.4
The FCC also has issued detailed rules regarding permissible levels of multiple ownership of radio broadcast licences5 and television stations,6 as well as cross-ownership between radio and television stations7 or between daily newspapers and radio or television stations.8 The purpose of these rules, a full treatment of which is beyond the scope of this chapter, is to ensure a diversification of programming sources and viewpoints and prevent excessive concentration in the broadcasting industry.
Once an application to the FCC is complete, the FCC issues a public notice and sets a schedule for public comment.9 The FCC also may send requests for information to the applicants and third parties.10 The FCC may approve a transaction or approve it with conditions necessary to ensure that the public interest is served.11 Unlike the antitrust review process, in which the DoJ and the FTC bear the burden of proving in court (or, for the FTC, sometimes in an administrative proceeding) that a transaction is likely to have an anticompetitive effect, applicants before the FCC bear the burden of proving that the transaction is in the public interest.12 If the FCC is unable to approve a transaction, it designates the transaction for review by an administrative law judge (ALJ).13 Once the ALJ issues an initial decision, the full Commission will then vote on whether to approve the application.14
The FCC typically seeks to complete its review within 180 days.15 It endeavours to coordinate with the antitrust review by the FTC or DoJ to avoid creating duplicative work for the parties, or work that requires conflicting remedies.
II Recent Media Mergers
The FCC and the DoJ reviewed several very large proposed media mergers in 2015 and the first half of 2016, in addition to more modest-sized deals in the television and radio spaces. The most prominent deals included two proposed transactions involving Time Warner Cable – the first of which was abandoned by the parties in the face of opposition by the FCC and the DoJ but the second of which was approved – and AT&T’s US$49 billion acquisition of DirecTV. Most deals that posed competition issues closed, although in several instances only after the acquirer agreed to conditions (including divestitures) to address the regulators’ concerns.
i Comcast/Time Warner Cable and Charter Communications/Time Warner Cable transactions
In April 2015, Comcast Corporation abandoned its proposed acquisition of Time Warner Cable in the face of a prolonged review and opposition from the FCC and the DoJ.16 Shortly thereafter, Time Warner Cable entered into an agreement to merge with Charter Communications and Bright House Networks, which was approved with conditions by the DoJ on 25 April 2016 and by the FCC on 5 May 2016.17 Both the failed Comcast/Time Warner merger and the successful Charter/Time Warner merger involved FCC consideration of whether the transactions would serve the public interest, including growing consumer preference for cord cutting, namely, consumers cancelling traditional cable subscriptions in favour of more targeted viewing over the internet.18 The FCC’s reviews also highlighted its goal of geographic expansion of high-speed internet access to underserved areas of the United States.19 The DoJ’s review also focused on the concern that the new company could make it more difficult for online video distributors (OVDs) to obtain video content from programmers.
Comcast/Time Warner Cable merger
On 24 April 2015, Comcast and Time Warner Cable cancelled their proposed transaction after the FCC told the companies that it had ‘serious concerns that the merger risks outweighed the benefits to the public interest.’20 FCC Chairman Wheeler stated that the merger ‘would have created a company with the most broadband and video subscribers in the nation alongside the ownership of significant programming interests.’21 He added that the decision to abandon the merger was ‘in the best interests of consumers’, specifically noting that ‘an online video market is emerging that offers new business models and greater consumer choice[,]...especially given the growing importance of high-speed broadband to online video and innovative new services.’22
Charter/Time Warner Cable merger
On 23 June 2015, the FCC opened a docket for a proposed merger of Charter, Time Warner Cable and Bright House Networks. The proposed transaction would bring together the fourth (Time Warner Cable), seventh (Charter), and tenth (Bright House Networks) largest multichannel video programming distributors (MVPDs) in the country to create the third largest provider. The new company would also have 19.4 million broadband subscribers, creating the second largest broadband internet provider in the United States.23 The FCC sought public comments and made requests for information to the applicants and numerous third parties. Following nearly a year’s review, the FCC approved the merger, subject to certain conditions. The FCC’s approval order detailed the potential benefits and harms of the merger and also described the required conditions.
Potential harms and benefits
The FCC suggested that Charter and Time Warner Cable would have an incentive to harm OVD competition. OVDs are entities, such as Sling TV, that compete with more traditional television services by offering the same programming streaming online, often with more flexibility and consumer choice. As part of their applications, Charter and Time Warner submitted an economic study showing that it would not be profitable for the merged entity to foreclose competition from OVDs,24 but the study did not persuade the FCC. The agency found that:
[b]ecause of [the merged company’s] increased MVPD and broadband footprint, and its increased number of homes passed, it will capture a greater share of the benefits that would accrue to MVPDs should [the merged company] take actions that reduce the competitive viability of OVDs.25
Therefore, the FCC concluded, the merged company was likely to have a greater incentive to take actions negatively impacting OVDs following the merger.26
The FCC’s description of public benefits highlighted its goal of providing high-speed internet to more American consumers. The approval order noted that Charter and Time Warner committed to providing high-speed access to 1 million additional customers within four years of closing.27 The FCC found that this benefit was not specific to the transaction, however, because there would be a natural build-out to new customers within that time frame regardless of whether the transaction was approved. The FCC therefore modified the planned build-out, requiring the merged entity to build out high-speed internet access to at least two million additional customer locations within five years.28 Moreover, to increase competition, it required that at least one million of those customer locations be outside of the merged entity’s current footprint where any provider other than the merged entity offers 25 Mbps or faster broadband internet access service.29
Conditions for approval
Some of the conditions for approval of the Charter–Time Warner Cable merger reflect the FCC’s public interest goal of facilitating consumer preferences for cord-cutting. First, the FCC required the merged entity to adopt a free interconnection policy allowing OVDs to access its networks.30 Without such a policy, the merged company could arguably freeze out OVDs or charge them prices too high to allow them reasonable access to the merged entity’s networks, thereby depriving consumers of the option to use OVDs.
Another condition of approval was related to the disclosure of interconnection agreements (i.e., agreements regarding what internet traffic is exchanged between parties, over what route, and whether one party is compensated). The FCC noted that interconnection agreements are often subject to non-disclosure provisions. The FCC was concerned that, without a requirement that the merged company disclose all interconnection agreements to the FCC, it could deny or impede access to its networks. The disclosure requirement was designed to deter anticompetitive practices and to alert the FCC if they did occur.31
Some Commissioners believed that the FCC should have done more to protect consumers. Commissioner Mignon L Clyburn, for example, objected to the absence of a condition requiring a stand-alone broadband offering, stating:
Why does this matter? In a world in which consumers are increasingly cutting the cord and relying on [OVDs], a competitively priced, stand-alone broadband offering ensures consumers truly have a choice in where they get their video programming.32
The DoJ and FCC ‘consulted extensively to coordinate their reviews of the proposed merger and devise remedies that were both consistent and comprehensive’.33 The DoJ’s review, like the FCC’s, was animated by the concern that the new company ‘could make it more difficult for [OVDs] to obtain video content from programmers’.34 The DoJ imposed several conditions to address that issue. The DoJ prohibited the new company from entering into or enforcing any agreement with a programmer that forbids, limits or creates incentives to limit the programmer’s provision of content to OVDs.35 The DoJ also precluded the new company from taking advantage of other distributors’ most favoured nation provisions if they are inconsistent with this prohibition.36 Lastly, the DoJ barred the new company from retaliating against programmers for licensing to OVDs.37
ii Other media mergers
AT&T and DirecTV
In July 2015, the FCC approved the AT&T/DirecTV merger, with several conditions.38 AT&T was one of the largest phone and internet providers in the United States, while DirecTV was the largest satellite provider. The FCC found that the merged company would offer consumers more choices and lower prices. To ensure that those benefits would be realised, however, the FCC required the merged company to expand its broadband internet service and offer discounted rates on that service to low-income subscribers.39
US v. Gray Television, Inc and Schurz Communications, Inc
In March 2016, the DoJ entered into a consent order with Gray Television, Inc (Gray) and Schurz Communications, Inc (Schurz), to resolve the agency’s concerns about Gray’s proposed acquisition of Schurz.40 Gray and Schurz each owned television broadcast stations in various Designated Market Areas (or media markets), including South Bend, Indiana, and Wichita, Kansas,41 in which Gray and Schurz competed head-to-head in the sale of broadcast television spot advertising (which targets viewers in specific geographic areas).42 The DoJ distinguished this advertising from other types of advertising, such as national advertising on cable and satellite television (which has a more limited reach than broadcast television) and radio, newspapers, or billboards (which are less likely to create memorable advertisements because they do not combine sound and motion in the way television advertisements do).43
The DoJ alleged that the parties’ combined market shares were approximately 57 per cent in Wichita and 67 per cent in South Bend44 and that the acquisition would increase spot advertising prices in each of the two markets.45 The consent order required Gray to divest to pre-approved buyers one station in each of the Wichita and South Bend markets.
US v. Entercom Communications Corp and Lincoln Financial Media Company
In October 2015, the DoJ entered into a consent decree with Entercom Communications Corp (Entercom) and Lincoln Financial Media Company (Lincoln) to allay the DoJ’s concerns about Entercom’s proposed acquisition of Lincoln.46 Entercom and Lincoln each owned English-language radio stations in numerous metropolitan areas, including the Denver, Colorado area. After the acquisition, Entercom would have 37 per cent of advertising sales in the highly concentrated Denver market.47 The DoJ also alleged that the Entercom and Lincoln stations were particularly close substitutes that (among other things) targeted similar customers.48 For these reasons, the DoJ alleged that the acquisition’s likely effect would be to increase English-language broadcast radio advertising prices in the Denver area.49 To address these concerns, Entercom agreed to divest three of its Denver area radio stations.50
US v. Tribune Publishing Company
In March 2016, the DoJ sued to enjoin Tribune’s proposed acquisition, through a bankruptcy sale, of Freedom Communications, Inc. Tribune owns the Los Angeles Times,51 while Freedom owned local newspapers in Orange County and Riverside County, both of which are in the greater Los Angeles area.52 The key issue was whether the relevant market should be limited to local newspapers, as the DoJ asserted, or expanded to account for internet-based sources of local news (including Google News and Apple News), as Tribune contended.53 The court agreed with the DoJ, noting that local newspapers serve the unique function of creating local content.54 Using that market definition, the proposed acquisition would have resulted in Tribune’s share of local daily newspapers increasing to 98 per cent in Orange County and 81 per cent in Riverside County.55 The court held that ‘such a concentration clearly constitutes a threat to competition.’56 Accordingly, only one day after the DoJ sued and immediately before the bankruptcy court was to consider the proposed acquisition, the court issued a temporary restraining order enjoining the transaction.57 The bankruptcy court thereafter approved an alternative purchaser for the two newspapers.
In addition to the DoJ’s consideration of traditional antitrust concerns, the FCC’s review of media mergers involves broader considerations of the public interest. With the ever-growing necessity of using the internet for everyday life, the FCC has become increasingly sensitive to consumer desires for more flexibility from their internet providers. As seen in the FCC’s concerns and conditions in the Charter/Time Warner Cable merger, it is willing to use its power to ensure the ability of consumers to cord cut and to entice companies to expand high-speed internet access to new areas. It is unlikely that these consumer trends will change in the near future, and companies would be wise to consider these factors in any merger applications submitted to the FCC.
1 Gary W Kubek and Michael Schaper are partners at Debevoise & Plimpton LLP. The authors would like to thank Ethan D Roman, a former litigation associate in the New York office of Debevoise & Plimpton LLP, for his assistance in preparing this chapter.
2 In some circumstances the parties may decide to ‘pull and re-file’ to allow the agencies an additional 30 days to review the transaction without issuing a Second Request.
3 See Jon Sallet, ‘FCC Transaction Review: Competition and the Public Interest’, FCC, https://www.fcc.gov/news-events/blog/2014/08/12/fcc-transaction-review-competition-and-public-interest (12 August 2014, 12:39 PM); Mem Op & Order, Charter Commc’ns, Inc, 16 FCC Rcd 59 ¶ 28 (FCC 5 May 2016) [hereinafter In re Charter].
4 See Sallet, supra note 3; In re Charter, supra note 3 ¶ 27.
5 See 47 CFR § 73.3555(a) (2010).
6 See id § 73.3555(b), (e).
7 See id § 73.3555(c).
8 See id § 73.3555(d).
9 FCC, The Public and Broadcasting 11–12 (2008 ed).
10 ‘Overview of the FCC’s Review of Significant Transactions’, FCC (10 July 2014, 12:00 AM), https://www.fcc.gov/reports-research/guides/review-of-significant-transactions.
12 See Sallet, supra note 3.
13 ‘Overview of the FCC’s Review of Significant Transactions’, supra note 10.
14 See Sallet, supra note 3.
15 ‘Overview of the FCC’s Review of Significant Transactions’, supra note 10.
16 ‘Statement from FCC Chairman Tom Wheeler on the Comcast–Time Warner Cable Merger’, FCC (24 April 2015), https://apps.fcc.gov/edocs_public/attachmatch/DOC-333175A1.pdf.
17 ‘Justice Department Allows Charter’s Acquisition of Time Warner Cable and Bright House Networks to Proceed with Conditions,’ DoJ (25 April 2016), https://www.justice.gov/opa/pr/justice-department-allows-charter-s-acquisition-time-warner-cable-and-bright-house-networks'>https://www.justice.gov/opa/pr/justice-department-allows-charter-s-acquisition-time-warner-cable-and-bright-house-networks; ‘FCC Grants Approval of Charter–Time Warner Cable–Bright House Networks Transaction’, FCC (6 May 2016), http://transition.fcc.gov/Daily_Releases/Daily_Business/2016/db0506/DOC-339243A1.pdf.
18 FCC Chairman Tom Wheeler expressed his support for cord cutting and other forms of innovation in the television industry in an article he wrote for the influential tech blog Recode. See Tom Wheeler, ‘It’s Time to Unlock the Set-Top Box Market’, Recode (27 January 2016, 9:30 AM), www.recode.net/2016/1/27/11589108/its-time-to-unlock-the-set-top-box-market.
19 In addition to conditions in mergers, the FCC recently revamped its Lifeline programme to help low-income consumers afford access to high-speed internet. See ‘FCC Modernizes Lifeline Program for the Digital Age’, FCC (31 March 2016), https://apps.fcc.gov/edocs_public/attachmatch/DOC-338676A1.pdf.
20 See ‘Statement from FCC Chairman Tom Wheeler on the Comcast–Time Warner Cable Merger’, supra note 16.
23 Charter–Time Warner Cable–Bright House Networks, MB Docket 15–149, FCC, https://www.fcc.gov/proceedings-actions/mergers-transactions/charter-time-warner-cable-bright-house-networks-mb-docket (last visited 21 June 2016).
24 In re Charter, supra note 2 ¶ 37.
25 Id ¶ 47.
27 See id. ¶ 382.
28 Specifically, New Charter must provide access of at least 60 megabytes per second (Mbps). Id. ¶ 388.
30 See id ¶ 132.
31 See id ¶¶ 135–36.
32 ‘Statement of Commissioner Mignon L Clyburn Approving in Part and Concurring in Part, Charter Commc’ns, Inc’, 16 FCC Rcd 59 (FCC 5 May 2016).
33 See DoJ Press Release, https://www.justice.gov/opa/pr/justice-department-allows-charter-s-acquisition-time-warner-cable-and-bright-house-networks'>https://www.justice.gov/opa/pr/justice-department-allows-charter-s-acquisition-time-warner-cable-and-bright-house-networks (last visited 12 July 2016).
34 See id.
35 See [Proposed] Final Judgment, US v. Charter Communications, Inc et al., No. 1:16-00759 (DDC 25 April 2016).
36 See id.
37 See id.
38 Mem Op & Order, AT&T, Inc, 15 FCC Rcd 94 ¶¶ 7, 9 (FCC 24 July 2015).
39 Id ¶¶ 4, 8.
40 See Final Judgment, US v. Gray Television, Inc, No. 15-2232 (DDC 3 March 2016).
41 See Competitive Impact Statement at 1, US v. Gray Television, Inc, No. 15-2232 (DDC 22 December 2015).
43 See id at 4.
44 Id at 5.
45 See id at 1–2.
46 See Final Judgment, US v. Entercom Commc’ns Corp, No. 15-01119 (RC) (DDC 5 October 2015).
47 See Competitive Impact Statement at 5–6, US v. Entercom Commc’ns Corp, No. 15-01119 (RC) (DDC 14 July 2015).
48 See id at 6.
49 See id at 7.
50 See Final Judgment, supra note 41, at 3–7.
51 See Order Granting Application for a Temporary Restraining Order at 2, US v. Tribune Publishing Company, No. 16-01822 (CD Cal 18 March 2016).
52 See id.
53 See id at 5-7.
54 See id.
55 See id at 8.
56 See id.
57 See id.