A few potentially questionable business strategies in the news this week, plus more on the Amazon-Hachette dispute.
This WSJ article explores a movie theater industry practice known as “clearance” in which big theaters insist on exclusive rights to screen movies in their particular market. The big theaters insist the practice helps with costs and actually provides for increased competition, but smaller chains are upset. One such chain filed suit in Atlanta in January, and while not the subject of a formal investigation, the Journal reports that DOJ officials have been “seeking information on the issue.”
CVS, which recently stopped selling tobacco at its own stores, is “offering a prescription-drug plan that charges patients more if they buy their medications at pharmacies that sell tobacco products…” A group of smaller pharmacies is crying foul, calling the move an unfair competitive practice, and the WSJ articles quotes an antitrust attorney who sees potential merit in the claim. An FTC investigation into other CVS Caremark marketing tactics was closed in 2012 without action.
More on Amazon
As Amazon’s dispute with Hachette stretches on, the company continues to be the subject of media scrutiny. In the New Republic, Franklin Foer writes that Amazon must be stopped and laments the “trail of destruction” left by Amazon. Predatory pricing claims are of course very tough to win, a point Foer acknowledges by drawing a comparison to a time 100 years ago, when “the law was not up to the task of protecting the threats to democracy posed by monopoly…” In a similar vein, Paul Krugman’s column in Monday’s New York Times compares Amazon’s success to Standard Oil’s, and talks about Amazon’s monopsonist, “robber-barron-type market power.”
Taking the opposite view, Matt Yglesias writes that Amazon is doing the public a service by wiping out book publishers. Moreover, Yglesias argues that Amazon in fact faces quite a lot of competition in e-books from companies like Barnes & Noble, Apple, and Google.
Supreme Court Hears Arguments in Dental Case
On October 14th, the Supreme Court heard arguments in North Carolina Board of Dental Examiners v. Federal Trade Commission. The case arose when non-dentists in hair salons, spas, and shopping malls began offering teeth whitening services. The state’s Board of Dental Examiners ordered them to stop. When the FTC sued, the board claimed they were engaged in a type of state action immune from the Sherman Act under Parker v. Brown.
In an argument analysis posted at SCOTUSBlog, Eric M. Fraser writes that the Court seemed highly skeptical of the board’s argument. At the same time, the Court will be worried about ruling too broadly in this case, and thus potentially deterring knowledgeable professionals from serving on such boards by opening them up to antitrust liability.
Sysco Looks to Sell Assets to Secure US Foods Merger
Regulators are expressing “serious concerns” with a proposed $3.5 billion merger between Sysco and US Foods. The FTC worries that the merger between the #1 and #2 food distributors will serve to eliminate Sysco’s only national competitor. Sysco will attempt to sell some assets to smaller regional distributors in attempt to win regulatory approval.
Jean Tirole Wins Nobel Prize
French Economist Jean Tirole was awarded the Nobel Prize in Economic Science this week for his work on market power and regulation. Some of Tirole’s work focused on vertical integration and the problem of vertical foreclosure, and is credited by one former regulator with influencing the conditions put on Comcast’s acquisition of NBC Universal.
This week, we take a look at some recent happenings surrounding the proposed Comcast-Time Warner merger, and explore some arguments for and against.
Late last week, the FCC said it was stopping the “shot-clock” on its review of the Comcast-Time Warner merger, informally limited to 180 days. Public comments will now be received until October 29th. The FCC pointed to incomplete answers from Comcast and Time Warner in their submissions as a reason for the day, along with confusion about how to deal with the confidentiality of some agreements.
Time Warner Cable shareholders voted to approve the deal this week , leaving regulatory approval as the last remaining hurdle to the deal. Regulators from the Department of Justice, the FCC, and various state regulatory authorities, including those in California and New York are currently reviewing the proposal. Officials in New York recently pushed back their scheduled vote on the merger to November 13 after finding “deficiencies” with the proposal.
With the merger likely to be in the news for some time, here is a general and of course by no means comprehensive overview of some of the arguments for and against.
Geoffrey Manne at Truth on the Market lays out a number of arguments in favor of the merger. Manne points out that even now, Comcast and Time Warner “don’t compete directly for subscribers in any relevant market.” Moreover, even post-merger, Manne argues that Comcast will not be able, and will not want, to foreclose competition.
Fundamentally, Comcast benefits from providing its users access to edge providers, and it would harm itself if it were to constrain access to these providers. Foreclosure effects would be limited, even if they did arise. On a national level, the combined firm would have only about 40 percent of broadband customers, at most (and considerably less if wireless broadband is included in the market).
Finally, the companies argue that the merger will promote efficiencies and thus encourage continued improvements in quality and service.
A 2009 paper from Adam Thierer may also provide some reason to be cautious about giving too much weight to anti-merger claims. In the paper, Thierer collects some “apocalyptic predictions” made about big media mergers in the past, including AOL-Time Warner, NewsCorp-DirecTV, and Sirius-XM. In his conclusion Thierer writes:
The point here is not that media mergers are inherently good or always make sense. Indeed, as the examples discussed above illustrate, mergers sometimes prove to be huge blunders.But the hysteria sometimes heard before media mergers are consummated rarely bears any relationship to reality once the deals move forward. Media markets are extremely dynamic and prone to disruptive change and technological leap-frogging. Mergers are often one response to that turbulence.
At Vox, Timothy B. Lee concedes that Comcast and Time Warner’s service areas do not overlap in the traditional cable market. However, this is not the only market the two operate in.
[Cable companies] also negotiate with network owners and content providers on the “back end” of their networks. And here size has a huge — and problematic — impact on the competitiveness of the market.
Allowing a merger might therefore give Comcast too much power in negotiations with Netflix or other content companies, diluting the bargaining position of those companies.
The American Antitrust Institute also argues the merger should be blocked. In a white paper, the AAI–contra Geoffrey Manne–argues that the merger would actually increase Comcast’s ability and incentive to exclude its rivals. As for alleged efficiencies, the paper notes that for efficiencies to be cognizable under the Horizontal Merger Guidelines, they must be merger specific and not vague or speculative. If Comcast has already achieved efficiencies and already touts itself as an innovator, this seems to undermine claims that these efficiencies are merger specific. In something of a twist, the AAI cites Thierer’s 2009 paper in an effort to rebut a pro-merger argument. If a Comcast-Time Warner merger might turn out to be a “huge blunder,” is that not all the more reason to be suspicious of supposed efficiencies?
At this point, analysts expect the merger to be approved, likely with conditions, though there is enough to make it a “closer call” than some previous mergers.
Senators Threaten NFL Antitrust Exemption
This week, the Federal Communications Commission unanimously voted to end its sports blackout rule. For the moment, this vote may not have much practical effect, as the NFL has contracts with its network partners that will allow the league to keep games blacked out if a sufficient number of tickets are not sold.
In the wake of the FCC vote however, Senators Richard Blumenthal (D-CT) and John McCain (R-AZ) have sent a letter to the league urging them to voluntarily end their blackout policy. If not, the letter states that Congress “will be forced to act” by eliminating the NFL’s antitrust exemption. The exemption, granted by the Sports Broadcasting Act of 1961, was first put in place to shield the NFL from antitrust liability which they would otherwise have been subject to for pooling rights to broadcast games. This allows the NFL and the other major sports leagues to sell “packages” of games to broadcast networks.
Elsewhere, Senator Blumenthal has argued that at the very least, the exemption should not be permanent.
[Blumnethal] would revoke the permanent status of the antitrust exception and instead make it renewable every five years. A commission comprised of members of the sports world and other industries would create benchmarks and metrics for success in areas including health care, domestic violence and drug abuse that the league would have to meet in order to get the status renewed.
While such changes could strike quite a blow against the NFL’s dominant position, this is hardly the first time the idea has been floated. In 2007, Senators Patrick Leahy of Vermont and Arlen Specter of Pennsylvania threatened to reconsider the NFL’s exemption if progress was not made in making games televised on NFL Network available to more viewers. In 2011, the leading Democrat on the House Judiciary Committee, John Conyers, introduced a bill to end the exemption following the NFL lockout. The Committee’s Republican chairman showed little interest in the bill, not wanting to get involved in a “private dispute,’ and it is likely that current efforts will meet similar resistance. Even so, the situation bears watching moving forward.