On Monday, March 19th, the U.S. Department of Justice faced off against Time Warner and AT&T in what is called the Antitrust Trial of the century. With the rise of direct-to-streaming companies such as Netflix and Amazon, Hollywood has seen aggressive content consolidation, such as Disney’s proposed purchase of 21st Century FoxThe Hollywood Reporter has reported that the outcome of this lawsuit could greatly impact the future of Hollywood.

In the brief filed by the U.S. government in early March, the Department of Justice alleged that the outcome of the case “will chart the course for the future of video-content delivery in the United States.” The case involves AT&T’s attempt to vertically integrate with Time Warner, a content company that owns the likes of HBO, Warner Brothers, CNN, and Turner. Though AT&T does not produce substantial content by itself, it owns DirecTV, which serves to distribute content to consumers. The DOJ argues that if AT&T is allowed to acquire Time Warner, this new conglomerate would own too many content properties, and would allow AT&T “the ability an incentive to substantially lessen competition” by withholding content and raising the price for subscribers.

The government argues that this impact subjects the proposed merger to the Clayton Act, which states that “[n]o person … shall acquire [assets] … where in any line of commerce … or in any section of the country, the effect of such acquisition may be substantially to lessen competition, or tend to create a monopoly.” The government contends in their brief that they just need to prove that the effect of the merger “will likely be anticompetitive.”

The government alleges that AT&T will either raise the cost of licensing out content like Game of Thrones to its competitors, as a way to lure subscribers to DirecTV, or stop licensing Games of Thrones altogether and then raise their subscription price. Because “the vast majority of American households still subscribe” to some form of cable and/or satellite access, this would have a widespread impact. Furthermore, the brief argues that with two vertically integrated conglomerates in the media space (the Comcast/NBCUniversal merger was approved by the government in 2011), AT&T/Time Warner and Comcast/NBCUniversal would coordinate their activities in order to block out emerging virtual rivals, like Dish Sling or Playstation Vue.

However, AT&T alleges that because of the economies of scale that would be garnered by this acquisition, it will actually lower subscription prices for consumers. Because AT&T no longer has to pay to license HBO shows, consumers will see a reduction in the prices they have to pay. Furthermore, AT&T contends that it would actually be against the interest of AT&T to limit their content on their platform. Content needs far more promotion to attract people than cable and satellite companies, and limiting Game of Thrones to DirecTV would hurt the popularity of the show. Lastly, on the question of coordination with Comcast/NBCUniversal, AT&T argues that Time Warner currently “receives substantial affiliate fees and advertising revenue” from the emerging virtual rivals. It is therefore in the interest of AT&T/Time Warner that consumers sign up for Playstation Vue over “non-network-based services like Netflix” that would not pay AT&T/Time Warner any fees.

The U.S. government has rarely blocked vertical integrations, but Hollywood has had a history with antitrust cases of this nature. In United States v Paramount Pictures, the Supreme Court in 1948 ruled that the major entertainment studios had to “divest themselves of ownership of movie theatres.” The Court found that these “giant producer-distributors” had too much control over the movie industry, and could control what films were played in the theatre, what prices the theatres were charging and pushing out independent producers from the industry. If the government prevails and the merger is blocked, it could raise questions of whether Comcast and NBC should be broken up, or if Disney should divest itself of its ownership in Hulu. More generally, tech companies like Amazon have adopted an aggressive vertical integration strategy (Amazon’s acquisition of WholeFoods is one example), and this decision could affect the technology sector moving forward.

Adele Zhang is the Online Content Chair and an Entertainment Highlight Contributor for the Harvard Journal of Sports and Entertainment Law and a current first year student at Harvard Law School (Class of 2020).

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