By Graeme Taylor
On November 8th, reports came out that the Department of Justice (DOJ) is preparing to block a merger between AT&T and Time Warner. This merger, which involves AT&T acquiring Time Warner for $109 billion, was announced last year. The Economist reports that DOJ officials told AT&T executives if they wish for the merger to go through, they’ll have to sell off assets like DirecTV or Turner Broadcasting in order to shrink their potential market share. The DOJ has made the decision to intervene not because public opinion in the U.S. strongly opposes the merger, but based on concerns raised by rival business competitors such as Verizon. I suspect most Americans were unaware the merger was even happening, I myself didn’t know about it until I saw it reported earlier last week. In the name of promoting a “competitive market”, the DOJ is prepared to hurt consumers in its quest to satisfy a select group of producers.
This isn’t the first time the DOJ has applied antitrust law following cries for help from moneyed industry interests, famously prosecuting Microsoft in the late 1990’s at the request of rival computer companies. At that time, a group of 240 economists wrote an open letter to President Clinton, saying that “Consumers did not ask for these antitrust actions – rival business firms did”. That was true in the Microsoft case, and it is true now. This intrusion into private business on the part of the government can only benefit one group: Wealthy business executives.
The DOJ bases its antitrust law policy (which deals with mergers and market share) on the idea that they can create firms with excessive market share, who can become monopolistic producers. The reasoning for their prosecution of Microsoft in United States vs. Microsoft Corp was because of complaints raised by Microsoft’s competitors after Microsoft started packaging Internet Explorer with its personal computers. Microsoft’s competitors, like Netscape, sold their internet browsers as costly packages that had to be bought at a store. Microsoft, having the capability to produce an internet browser and sell it for free, was able to create a product that its competitors had no chance of competing with. The desire to deprive consumers of this free, innovative good came on the part of the business executives that competed with Microsoft, not on the part of consumers themselves. While consumers displayed their preferences by flocking to Microsoft, the rival computer companies engaged in rent-seeking practices, lobbying politicians to protect them in the face of losing their market share.
The following prosecution of Microsoft led to an initial ruling to break up the company, but this was appealed and they settled for what amounted to a slap on the wrist. Following this, Robert X. Cringely wrote that “now the only way Microsoft can die is by suicide”: The feeling in the industry was that Microsoft was now going to capture a monopolistic market share, as they could not be competed with.
Today, over 80% of the computer operating system market share is Windows based OS — but would one characterize Microsoft has having monopolistic power? This is hardly the case, as their competitor Apple eclipsed them in net worth through their market innovations such as the iPod, iPhone, and Cloud file sharing space. The inherent market mechanisms of innovation and choice prevent monopolistic market share by facilitating a process of rise and fall amongst producers. After all, only 12% of the 500 companies listed in the first “Fortune 500” list are still in existence today. Despite the DOJ failing to break-up Microsoft, it still saw its market power checked by competition– something that is not without historical precedent. Kodak, the film and photography company that created the term “Kodak moment”, saw itself controlling over 80% of its industries market share by the mid-1990’s. However, because it failed to see the new trend of digital photography, it saw its market share crash, and filed for bankruptcy in 2012. Despite being an unregulated giant within its industry, Kodak failed as soon as it wasn’t able to create value for its consumers. When left to its own devices, the market will filter out even the largest of uninnovative giants.
Ostensibly, the DOJ had failed in its goal of creating a more competitive market, but in reality, competition remained in the computer market. The end result of the prosecution of Microsoft was a classic case in the power of market forces: The preference of the consumer, if allowed to choose freely, will always choose the producer that creates the most value for society.
The DOJ justifies its market interventions on the grounds of creating a more competitive market: they believe that by ensuring multiple competitors can exist in an industry, the industry will experience competition amongst them rather than monopolistic domination by one firm. On the surface, this appears to be a pro-free market policy. The truth is, it is entirely the opposite, the blocking of mergers only benefits inefficient producers who would otherwise be put out of business: the nature of a competitive market means consumers gravitate towards producers that create the most value products at the lowest cost. This rewards them for the optimal allocation of societal resources. When the government prevents the growth of efficient firms in the interest of preserving the existence of inefficient firms, consumers are hurt in the form of higher prices, and firms don’t internalize the costs of their undesired products.
Even if we ignore the market distortions created by the government propping up inefficient businesses, the fact of the matter is that the decision to block the merger between AT&T and Time-Warner would be a deviation from general regulatory practices. As noted in The Economist, the DOJ usually concerns itself with horizontal mergers that could lead to market dominance by one firm within an industry. The AT&T-Time Warner merger is a vertical type merger, involving the combination of content and content-distribution.
Some have theorized that the reasoning for the DOJ’s interference may be due to President Trump: While on the campaign trail, Trump criticized the merger as an unfair combination of media power, as apart of his wider criticism of the media. Trump has characterized CNN, which is a subsidiary of Time Warner, as “fake news”. If the merger is indeed being blocked for political reasons, then it is evident that the DOJ only takes action to stop mergers in two cases: 1) When rival business executives lobby for protection when they fear being outcompeted or, 2) When political actors want to exact vengeance on the firm for personal reasons. The intervention of the DOJ to block mergers does not seem to come from a desire to ensure a competitive market, but rather from the concerns of moneyed businesses interests and powerful politicians. We could ignore the fact that blocking mergers is an anti-free market policy, but the problem still remains that the DOJ is not intervening on the basis of market competition but on the basis of appeasing powerful moneyed interests. Whether you support or oppose the idea that mergers harm a competitive economy, you must agree the DOJ’s policy regarding the AT&T-Time Warner merger reflects the desires of powerful interests such as corporations and politicians rather than the desires of American consumers and thus, the reasoning for this intervention should be called into question.
Given the fact that we consistently find the motivation for the DOJ’s application of antitrust laws to be on the basis of responding to powerful interests groups, the argument for basing antitrust policy on the interests of consumers rather than the interests of producers becomes more potent. If antitrust policy is to favor consumers, then it follows that it should be generally approving of mergers. Consumers tend to benefit from the mergers of large corporations, for example, the merger of Benz and Chrysler allowed for Benz to access markets in both Europe and North American, lowering prices and increasing product variety for consumers. Inversely, the prevention of mergers results in higher prices for consumers, as inefficient corporations are protected from the market effects of competition. The DOJ represents the American public, not corporations, so it is logically sound that the DOJ should be representing their interests, and not the interests of corporations and politicians. After all, the DOJ ends its mission statement by saying that it exists “to ensure fair and impartial administration of justice for all Americans.” If the DOJ wishes to administer justice in a way that is fair and impartial, then it should focus its attention on the concerns of the consumers that make up the American public, rather than the concerns of a small group of elite businessman and the angry desires of the President. If economic policy under the DOJ is going to be wrongheaded and misguided, it should at least represent the interests of the public, rather than the interests of corporations that would otherwise fail.