Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

United States v. AT&T Inc.

United States District Court, District of Columbia

June 12, 2018

UNITED STATES OF AMERICA, Plaintiff,
v.
AT&T INC., et al., Defendants.

          MEMORANDUM OPINION

          RICHARD J. LEON UNITED STATES DISTRICT JUDGE.

         If there ever were an antitrust case where the parties had a dramatically different assessment of the current state of the relevant market and a fundamentally different vision of its future development, this is the one. Small wonder it had to go to trial!

         On November 20, 2017, the U.S. Department of Justice's Antitrust Division brought this suit, on behalf of the United States of America ("the Government" or "the plaintiff), to block the merger of AT&T Inc. ("AT&T") and Time Warner Inc. ("Time Warner") as a violation of Section 7 of the Clayton Act, 15 U.S.C. § 18. The Government claims, in essence, that permitting AT&T to acquire Time Warner is likely to substantially lessen competition in the video programming and distribution market nationwide by enabling AT&T to use Time Warner's "must have" television content to either raise its rivals' video programming costs or, by way of a "blackout, " drive those same rivals' customers to its subsidiary, DirecTV. Thus, according to the Government, consumers nationwide will be harmed by increased prices for access to Turner networks, notwithstanding the Government's concession that this vertical merger would result in hundreds of millions of dollars in annual cost savings to AT&T's customers and notwithstanding the fact that (unlike in "horizontal" mergers) no competitor will be eliminated by the merger's proposed vertical integration.

         Not surprisingly, the defendants, AT&T, Time Warner, and DirecTV, strongly disagree. Their vision couldn't be more different. The video programming and distribution market, they point out, has been, and is, in the middle of a revolution where high-speed internet access has facilitated a "veritable explosion" of new, innovative video content and advertising offerings over the past five years. Trial Tr. ("Tr.") 1397:1-4 (Montemagno (Charter)). Vertically integrated entities like Netflix, Hulu, and Amazon have achieved remarkable success in creating and providing affordable, on-demand video content directly to viewers over the internet. Meanwhile, web giants Facebook and Google have developed new ways to use data to create effective - and lucrative - digital advertisements tailored to the individual consumer.

         As a result of these "tectonic changes" brought on by the proliferation of high-speed internet access, video programmers such as Time Warner and video distributors such as AT&T find themselves facing two stark realities: declining video subscriptions and flatlining television advertising revenues. Id. at 3079:18 (Bewkes (Time Warner)). Indeed, cost-conscious consumers increasingly choose to "cut" or "shave" the cord, abandoning their traditional cable- or satellite- TV packages for cheaper content alternatives available over the internet. At the same time, Facebook's and Google's dominant digital advertising platforms have surpassed television advertising in revenue. Watching vertically integrated, data-informed entities thrive as television subscriptions and advertising revenues declined, AT&T and Time Warner concluded that each had a problem that the other could solve: Time Warner could provide AT&T with the ability to experiment with and develop innovative video content and advertising offerings for AT&T's many video and wireless customers, and AT&T could afford Time Warner access to customer relationships and valuable data about its programming. Together, AT&T and Time Warner concluded that both companies could stop "chasing taillights" and catch up with the competition. 2/16/18 Hr'g Tr. 34:16 [Dkt # 67]. Those were the circumstances that drove AT&T, a distributor of content, and Time Warner, a content creator and programmer, to announce their historic $108 billion merger in October 2016 (the "proposed merger" or "challenged merger"). Those are the circumstances that cause them to claim today that their merger will increase not only innovation, but competition in this marketplace for years to come.

         Section 7 of the Clayton Act assigns this Court the "uncertain task" of weighing the parties' competing visions of the future of the relevant market and the challenged merger's place within it. United States v. Baker Hughes Inc., 908 F.2d 981, 991 (D.C. Cir. 1990). Nothing less than a comprehensive inquiry into future competitive conditions in that market is expected. And the Government has the burden of proof to demonstrate that the merger is likely to lessen competition substantially in that uncertain future.

         Since announcing the transaction in late October 2016, defendants have delayed closing on the merger agreement for about 18 months as a result of the Government's investigation and suit. The deal is now set to expire if not consummated on or before June 21, 2018 - a turn of events that would require AT&T to pay Time Warner a "break-up fee" of $500 million. The parties have engaged in a highly accelerated discovery schedule to prepare themselves to try this case in March and April of this year. The trial itself lasted nearly six weeks. Both sides put on a case-in-chief and the Government put on a rebuttal case as well. At the conclusion of the trial, I advised the parties I would issue a ruling, if not an opinion, no later than June 12, 2018 so that the losing side would have the agreed-upon time remaining to pursue its appellate rights before the merger or the $500 million break-up fee went into effect.

         The following is the Court's Opinion. Initially, I provide context for this suit by reviewing the background of the video programming and distribution industry, the proposed merger, and the procedural history of this case. Thereafter, I discuss the legal standards governing a suit under Section 7 of the Clayton Act, emphasizing in particular the considerations at play in evaluating vertical mergers. With that in place, I next analyze each of the Government's three theories of harm to competition, balancing, as appropriate, the conceded proconsumer benefits of the merger with the consumer harms alleged and the evidence offered to support them. Ultimately, I conclude that the Government has failed to meet its burden to establish that the proposed "transaction is likely to lessen competition substantially." Baker Hughes, 908 F.2d at 985.

         As such, based on that conclusion, and for all the reasons set forth in greater detail in this Opinion, the Court DENIES the Government's request to enjoin the proposed merger.

         TABLE OF CONTENTS

         BACKGROUND............................................................................................................................7

         I. The Video Programming and Distribution Industry....................................................................7

         A. Video Programing and Distribution.....................................................................................8

         1. Programmers.......................................................................................................................8

         2. Distributors.......................................................................................................................11

         3. Affiliate Negotiations and "Blackouts"............................................................................14

         B. Industry Trends...................................................................................................................18

         1. Rise and Innovation of Over-the-Top, Vertically Integrated Video Content Services.....18

         2. Declining MVPD Subscriptions Resulting from an Increasingly Competitive Industry Landscape.....................................................21

         3. Shift Toward Targeted, Digital Advertising.....................................................................25

         II. The Parties and Proposed Merger............................................................................................28

         A. AT&T.................................................................................................................................28

         B. Time Warner.......................................................................................................................30

         1. Turner Networks...............................................................................................................31

         2. HBO..................................................................................................................................34

         C. The Proposed Merger.........................................................................................................36

         III. Procedural History..................................................................................................................40

         A. The Investigation................................................................................................................40

         B. Pretrial Proceedings............................................................................................................40

         1. The Complaint..................................................................................................................40

         2. Turner's Arbitration Commitment....................................................................................41

         3. Pre-Discovery Timeline....................................................................................................42

         4. Discovery..........................................................................................................................42

         5. Discovery Disputes...........................................................................................................44

         6. Evidentiary Disputes.........................................................................................................46

         C. The Trial.............................................................................................................................47

         IV. Legal Standard........................................................................................................................50

         A. The Clayton Act.................................................................................................................50

         B. Baker Hughes Burden Shifting Framework.......................................................................53

         C. Antitrust Analysis of Vertical Mergers..............................................................................55

         ANALYSIS...................................................................................................................................59

         I. Market Definition.......................................................................................................................61

         II. Conceded Consumer Benefits of Proposed Merger.................................................................66

         III. The Government Has Failed to Meet Its Burden to Show That the Proposed Merger Is Likely to Substantially Lessen Competition by Increasing Turner's Bargaining Leverage in Affiliate Negotiations............................................................................................................68

         A. Background of Increased-Leverage Theory of Harm.........................................................71

         B. The Government's So-Called "Real-World Objective Evidence" Is Insufficient to Support Its Increased-Leverage Theory of Harm............................................................................74

         1. Evidence Regarding the Popularity of Turner Content Is of Limited Probative Value in Evaluating the Contention That Turner Will Gain Increased Leverage Due to the Proposed Merger...............................................................................................................75

         2. Defendants' Own Statements and Documents Provide Little Support for the Contention That Turner Will Gain Increased Leverage Due to the Proposed Merger........................79

         3. Third-Party Competitor Witness Testimony Provides Little Support for the Contention That Turner Will Gain Increased Leverage Due to the Proposed Merger........................91

         4. Real-World Evidence Indicating That Prior Vertical Integration of Programmers and Distributors Has Not Affected Affiliate Fee Negotiations Undermines the Government's Increased-Leverage Theory of Harm................................................................................99

         C. The Government's Expert Testimony Is Also Insufficient to Support Its Increased-Leverage Theory of Harm................................109

         1. The Evidence Is Insufficient to Support Professor Shapiro's Conclusion That the Merger Will Increase Turner's Bargaining Leverage and, in Turn, Affiliate Fees.....................111

         2. The Evidence Is Insufficient to Support the Inputs and Assumptions Incorporated into Professor Shapiro's Bargaining Model...............118

         IV. The Government Has Failed to Meet Its Burden to Show That the Proposed Merger Is Likely to Substantially Lessen Competition on the Theory That AT&T Will Act to Harm Virtual MVPDS Through Its Ownership of Time Warner Content.................................... 150

         V. The Government Has Failed to Meet Its Burden to Show That the Proposed Merger Is Likely to Substantially Lessen Competition on the Theory That AT&T Will Restrict Distributors' Use of HBO as a Promotional Tool...............................................................165

         CONCLUSION...........................................................................................................................170

         BACKGROUND

         I. The Video Programming and Distribution Industry[1]

         The structure of the video programming and distribution industry generally resembles the "three-stage chain of production comprised of manufacturers, wholesalers, and retailers that typifies the distribution of many, if not most, physical goods in the U.S. economy." Christopher S. Yoo, Vertical Integration and Media Regulation in the New Economy, 19 Yale J. Reg. 171, 220 (2002). Here, that three-stage chain of production and distribution involves "content creation, content aggregation, and content distribution." Proposed Findings of Fact of the United States ("Gov't PFOF") ¶ 8 [Dkt. # 128].[2]

         Television content begins at the manufacturing level. Although video programming is often created by studios (such as Time Warner's Warner Bros.), some networks or distributors "produce content for themselves" or, in the case of live sporting events, license the rights to broadcast the events from the various sports leagues. See Tr. 80:12-16 (Fenwick (Cox)). At the second level, programmers (such as Time Warner's Turner or Home Box Office ("HBO")) aggregate content into a network or network group and then license those networks to video distributors, like AT&T's DirecTV. See, e.g., Id. at 80:4-9; Plaintiffs Exhibit ("PX") 456-4 to 10. At the third level, distributors bundle and distribute networks to their subscribers. Tr. 80:4-9 (Fenwick (Cox)).

         Some subscription-based video programming services are "vertically integrated, " meaning, in this context, that those services create or aggregate their content offerings and then distribute those offerings directly to consumers. Id. at 3081:18-25 (Bewkes (Time Warner)); see Defs.' Proposed Findings of Fact ("Defs.' PFOF") ¶ 12 [Dkt. # 120]. Examples of those services include Netflix, Hulu, and Amazon Prime. Tr. 3155:22-23 (Bewkes (Time Warner)). Traditional video programmers, such as Turner, generally lack such "soup to nuts" integration of content creation and distribution; they are instead reliant upon video distributors to deliver their content offerings to consumers. Id. at 3388:6-7 (Stephenson (AT&T)); see Id. at 485:1-486:6, 612:17-20 (Martin (Turner)). Because the Government's claims center on the proposed combination of Time Warner's video programming with AT&T's video distribution, my background review focuses on those facets of the video programming and distribution industry.

         A. Video Programing and Distribution

         1. Programmers

         Traditional programmers, such as Turner, acquire and aggregate video content. Id. at 80:4-16 (Fenwick (Cox)). Generally, programmers do not offer their content directly to consumers. See, e.g., Id. at 485:1-486:6, 612:1-20 (Martin (Turner)). Instead, they package video content into networks - in Turner's case, networks such as TNT, TBS, and CNN -and then license the rights to display those networks to video distributors. PX459-18; Tr. 80:6-9 (Fenwick (Cox)). As such, Turner and its programming competitors may be thought of as content "wholesaler[s]" in that they are typically reliant upon third-party video distributors to get their offerings to consumers in the downstream market. Tr. 612:3-4, 17-20 (Martin (Turner)).

         Most programmers make money in two primary ways, and Turner is no exception. First, programmers receive payments from distributors, known as "affiliate fees, " in exchange for granting distributors the rights to display the programmers' content. See, e.g., id. at 604:21-23, 610:20-23. Affiliate fees are memorialized in affiliate agreements, which specify the "net effective rate" a programmer charges for a network on a per-subscriber, per-month basis. Id. at 987:5-17 (Breland (Turner)). Rates typically increase year-over-year, pursuant to what are called "escalator" clauses. Id. at 91:6-10 (Fenwick (Cox)); id. at 2728:19-23 (Katz). Affiliate fees have been "going up" over the past decade industrywide, due at least in part to rising costs of making "higher quality" content. Tr. 2562:9-2563:25 (Carlton); cf. Id. at 1495:12-16 (Sutton (HBO)) ("So the cost it takes to make shows, shows like the shows we make, has escalated significantly."). Affiliate fees vary, however, based on the size of the distributor; specifically, in order to incentivize and reward wide distribution, programmers typically provide distributors with "volume discounts" on affiliate fees, meaning that the more subscribers a distributor has, the more a programmer's net effective rates will decline. See, e.g., Id. at 987:25-988:13 (Breland (Turner)) (explaining variance in rates between "small, " "medium, " and "large" MVPDs and virtual MVPDs); id. at 2911:21-23 (Holanda (RCN)) (describing "volume discounts" of larger distributors); PX127-2 (showing rate differentials).

         Second, and as any television viewer can attest, programmers sell advertising slots on their networks to advertisers. See Tr. 3179:23-3181:6 (Bewkes (Time Warner)). For decades, television advertising has followed the same playbook. See Id. at 3086:9-10. During each hour of television, there are roughly eighteen minutes of advertisements. See Id. at 609:23-610:4 (Martin (Turner)). Distributors sell advertisements for only two of those minutes; the programmer sells ads for the remaining sixteen minutes. See Id. Advertising fees vary by the channel and the time of day an ad airs. Id. at 625:4-11. As with affiliate fees, the broader a program's audience, the more advertising revenue for Turner: as Chairman and CEO John Martin explained with regard to Turner's advertising strategy, "our goal is to have our networks in front of as many eyeballs as possible." Id. at 605:7-8.

         The classic model of television advertising is limited in two ways. First, in deciding the placement of commercials to be seen by a wide audience, programmers generally must rely on general demographic data, such as age range, about the typical audience for a given program. See Id. at 625:4-6. Second, and as a result, programmers have no choice but to saturate all viewers of a program with the same, undifferentiated ads - despite knowing that the selected ad will be of little interest to some number of those viewers. See Id. at 3087:1-8 (Bewkes (Time Warner)).

         In the past, Turner's total revenues have been split roughly equally between affiliate fee revenues and advertising revenues. See Id. at 3088:10-12; PX456-8. For present purposes, however, the key point is this: both the affiliate fee and advertising revenue streams depend upon broad distribution of programmers' networks to consumers. See, e.g., Tr. 604:17-18 (Martin (Turner)) ("I believe that distribution is the most important variable for success for any programmer."); id. at 3078:17-20 (Bewkes (Time Warner)) ("Q: What are the key drivers of the Turner business? A: Well, the Turner business, first, we need to get it on every distribution platform so that we can have subscriber fees and advertising revenues."). For that reason, Turner executives aim to "'achieve wide distribution" of their networks. Post-Trial Brief of the United States ("Gov't Post-Tr. Br.") 6 [Dkt. #126]; see also, e.g., Tr. 3120:3-7 (Bewkes (Time Warner)); ("So we try everything to stay on all of our channels, Turner, HBO, everything, to keep them on there. And that's very important to us. If they're not on there, we're not only losing the subscriber fees; we're losing the advertising revenues."); cf. Id. at 90:1-2 (Fenwick (Cox)) ("We are dealing with network groups where their goal [is] a hundred percent distribution.").

         2. Distributors

         Today, there are three categories of key players in the distribution of professionally produced video content: (1) "traditional" multichannel video programming distributors ("MVPDs"); (2) "virtual" MVPDs; and (3) subscription video on demand services ("SVODs"). See Tr. 485:1-487:13 (Martin (Turner)); Gov't PFOF ¶¶ 9, 14, 19.

         First, there are traditional MVPDs. Those distributors include direct broadcast satellite providers, such as DISH or AT&T's DirecTV; cable television providers, such as Comcast, [3] Charter Communications ("Charter"), or Cox Communications ("Cox"); "overbuilders, " such as RCN; or "telcos, " such as AT&T's U-verse or Verizon Fios. See Gov't PFOF ¶¶ 9, 43-45; Defs.' PFOF ¶ 34. All of those services offer live - or -'linear" -television content as well as libraries of licensed content available for viewing on demand, typically in exchange for a monthly subscription fee. See Tr. 81:1-82:8 (Fenwick (Cox)); id. at 471:12-16, 638:16-22 (Martin (Turner)); id. at 1185:22-1186:1 (Warren (Turner)). Satellite distributors such as DirecTV and DISH operate nationally, whereas cable companies, telcos, and overbuilders distribute video content regionally; in any given local area, however, the incumbent cable operator is typically the dominant MVPD. See Id. at 408:1-3 (Schlichting (DISH)). Consumers' choices of traditional MVPDs are therefore dictated by geography. See Id. at 2187:3-23 (Shapiro); Gov't PFOF ¶¶ 43-46. Consumers often subscribe to traditional MVPDs as part of a "bundle" of various services, which may include, for example, a single price offering for cable, wireless internet, and home or mobile phone services. See Tr. 2784:21-25 (Rossi). Of the approximately 90 million American households that still receive television content from providers in the pay-TV industry, a substantial majority do so through traditional MVPDs. See Gov't PFOF ¶¶ 9, 13. That number is steadily declining, however, as consumers shift towards lower-cost virtual MVPDs or SVODs. See Tr. 3450:7-14 (Stephenson (AT&T)); id. at 3157:5-13 (Bewkes (Time Warner)).

         Second, there are virtual MVPDs, which began to arrive in the marketplace in early 2015. See Id. at 235:18-22 (Schlichting (DISH)). Like traditional MVPDs, virtual MVPDs distribute linear channels and on-demand content to subscribers for a subscription fee; unlike traditional MVPDs, virtual MVPDs offer their services over the internet, rather than through proprietary infrastructure such as satellite networks or cable lines. Gov't PFOF ¶¶ 14, 15. Because they offer their services over the internet, virtual MVPDs offer service nationwide, either via the web or mobile apps. See PX8-18. Examples of virtual MVPDs include DirecTV Now, DISH's Sling, Sony's Playstation Vue, Hulu Live, Google's YouTube TV, FuboTV, and Philo. See Id. at 18-19; Defs.' PFOF ¶ 8. As their names suggest, some virtual MVPDs are associated with companies that operate traditional MVPDs. Each virtual MVPD competes with traditional MVPDs for subscribers and, increasingly, virtual MVPDs are gaining market share on traditional MVPDs due in part to their ease of use and lower-cost offerings. See, e.g., Tr. 448:24-449:2 (Schlichting (DISH)); Id. at 607:17-20 (Martin (Turner)); id. at 1829:3-12 (Merrill (AT&T)). Therefore, despite their relatively recent vintage, virtual MVPDs already have millions of subscribers. See Id. at 2019:20-2020:18 (Bond (NBCU)).

         Third, there are SVODs, a category that includes Netflix, Hulu, and Amazon Prime. SVODs generally do not offer live, linear programming such as live sporting events or live news. See Id. at 487:1-16 (Martin (Turner)). Instead, they have large libraries of original and acquired content, accessible by a viewer on demand at any time. See Id. at 486:12-17. The leading SVODs are vertically integrated and invest billions of dollars in creating original programming. See Id. at 3081:13-25 (Bewkes (Time Warner)); id. at 3388:8-9 (Stephenson (AT&T)). By way of example, Netflix alone spends more on content than all of Time Warner. See Id. at 2456:13-14 (Carlton); see also Id. at 1053:2-7 (Breland (Turner)) (Netflix will spend "almost $8 billion" on content "[t]his year"). As with virtual MVPDs, SVODs offer low-cost subscription plans as compared to traditional MVPDs and continue to gain market share in the video programming and distribution industry. Indeed, while traditional MVPDs are losing subscribers at a steady clip, Netflix added 2 million subscribers in the last quarter alone. See Id. at 3450:11-12 (Stephenson (AT&T)).

         3. Affiliate Negotiations and "Blackouts"

         As previously discussed, the schemes under which programmers extend licensing rights to MVPDs and virtual MVPDs are governed by detailed contracts known as affiliate agreements. See PX456-8; Tr. 80:4-9 (Fenwick (Cox)); id. at 485:1-486:6 (Martin (Turner)). Those agreements describe the precise rights granted by the programmer, and contain numerous terms and conditions. See, e.g., PX4O9. Although the "rate" or payment amount is an important feature of any affiliate agreement, Tr. 90:5-10 (Fenwick (Cox)), "these deals are complicated" and "start with a hundred plus open issues, " id. at 459:24-25. (Schlichting (DISH)); see also Id. at 1690:23-25 (York (AT&T)) ("There's literally hundreds of items that go on kind of a priority list on what's the right deal.''). Those issues can include digital rights, "windows" (i.e., limitations on when certain content can be aired), "TV Everywhere" rights (i.e., the rights for subscribers to access content away from home on an authorized device), volume discounts, and penetration rate requirements, among others. See, e.g., Id. at 90:5-14, 101:19-23 (Fenwick (Cox)); Gov't PFOF ¶¶ 11, 105; PX409-14. At least in the case of Turner, affiliate agreements also include most-favored-nation ("MFN") clauses, which generally require the programmer to extend to the distributor certain types of terms given to another distributor. See Tr. 1024:6-14 (Breland (Turner)) (describing MFNs). Affiliate agreements run "between five and eight years on average." Id. at 87:9-11 (Fenwick (Cox)).

         Because wide distribution maximizes programmers' two income streams - affiliate fees and advertising revenue - programmers like Turner bargain for terms aimed at promoting that distribution. To start, Turner seeks to license "every network" it owns. Id. at 606:6-8 (Martin (Turner)).[4] In addition, Turner negotiates for guarantees of particular "penetration rates" - the percentage of a given distributor's subscribers who receive a given channel. Id. at 1023:10-16 (Breland (Turner)).

         Given the duration of the contract and the rights at issue, a single affiliate agreement can dictate the transfer of upwards of a billion dollars between programmer and distributor. See, e.g., PX144-21, 48. It is thus no surprise that witnesses described affiliate agreement negotiations as "very tough'" and "intense and aggressive." Tr. 1022:25-1023:2 (Breland (Turner)); id. at 3251:24-25 (Stankey (AT&T)); see also Gov't PFOF ¶ 104. Although the negotiations themselves typically last several months, closing a deal often "come[s] down to the last day and sometimes the last handful of minutes." Tr. 1093:14-16 (Breland (Turner)); see also Id. at 87:14-19 (Fenwick (Cox)). Negotiations involving programmers with multiple networks, such as Turner, are particularly "time consuming." Id. at 87:17 (Fenwick (Cox)).

         Affiliate negotiations are also idiosyncratic, varying from programmer to programmer and distributor to distributor. The Government's chief economic expert, Professor Carl Shapiro, recognized as much at trial. Noting that "bargaining is a dark art in many ways, " Professor Shapiro acknowledged that negotiations may turn on myriad "unpredictable factors, " including the "personalities" at the table and other "hairy stuff." Id. at 2213:12, 2294:18-2295:6 (Shapiro). This dynamic flows from the "multitude" of considerations that inform each negotiation. Id. at 1690:15 (York (AT&T)). With so many factors and priorities, and with such high stakes, it should be no surprise that terms and conditions vary across affiliate agreements. See, e.g., Id. at 1681:16-17 ("[W]e do hundreds of deals, and we have hundreds of flavors of most favored nations."). In short, as Professor Shapiro explained, "the real world is messy and it's imperfect." Id. at 2210:22-23 (Shapiro).

         Sometimes, negotiations between programmers and distributors reach an impasse. If a negotiation is ultimately unsuccessful, the distributor will lose the rights to display the programmer's content to its customers - a situation known in the industry as a programming "blackout, " or "going dark." See Id. at 129:4-9 (Fenwick (Cox)). Blackouts have negative consequences for programmers and distributors alike. On the programming side, a blackout causes a programmer to suffer immediate (and unrecoverable) losses of both advertising and affiliate fee revenue. See, e.g., Id. at 1094:21-1096:18 (Breland (Turner)). On the distributor side, a blackout may lead a distributor to lose subscribers or may prevent the distributor from attracting new subscribers. See Gov't PFOF ¶ 119; see also, e.g., Id. at 864:12-23 (Rigdon (Comcast)); id. at 1348:3-7 (Montemagno (Charter)) (discussing PX373). Because blackouts are almost always negative events for both programmers and distributors, "at the end of the day . . . [t]here's no benefit for anyone to walk away" without an affiliate agreement. Tr. 89:23-90:4 (Fenwick (Cox)). Therefore, bargains between programmers and distributors are almost always struck in order to avoid long-term blackouts. See Id. at 138:13-15; id. at 1027:4-7 (Breland (Turner)); id. at 1359:14-15 (Montemagno (Charter)); id. at 3124:4-7 (Bewkes (Time Warner)).

         That is not to say, however, that blackouts are irrelevant to the negotiating dynamic. Rather, in what can best be thought of as an elaborate and stylized Kabuki dance, the evidence shows that "almost every negotiation" involves both programmers and distributors threatening blackouts, especially when one side is seen as demanding terms that are out of line with the market. Id. at 1026:17-20 (Breland (Turner)); cf. Id. at 376:22-377:11 (Schlichting (DISH)). To better understand how to assign the "right value" to a particular deal, programmers and distributors might perform "drop" or "go dark" analyses to estimate the potential impact of a blackout on the programmer's advertising or affiliate fee revenues or on the distributor's customer base. Id. at 1343:11-16 (Montemagno (Charter)); see also Id. at 1348:3-10 (discussing PX373); id. at 862:19-863:3 (Rigdon (Comcast)); id. at 1029:10-1030:11 (Breland (Turner)) (discussing PX144).

         Nevertheless, given the negative consequences for both sides from a blackout, "the reality" is that "virtually every" bargaining impasse between a programmer and distributor "is resolved after requiring either no blackout or a short-term blackout." Id. at 2396:1-5 (Shapiro). Indeed, in recent memory, Turner networks have been blacked out only twice, both for roughly one-month periods. See Id. at 2357:15-23; Defs.' PFOF ¶¶ 139-143. Permanent blackouts, the evidence shows, are a vanishingly rare occurrence; the record indicates that Turner has never engaged in a long-term blackout with a distributor. See Tr. 2394:8-11 (Shapiro) (acknowledging that "in the real world there has never been a permanent blackout of the Turner networks").

         B. Industry Trends

         In recent years, traditional programmers, including Turner, and MVPDs, including DirecTV, have been faced with a number of interrelated industry trends that are particularly relevant to the challenged merger. I will review three of those trends in turn.

         1. Rise and Innovation of Over-the-Top, Vertically Integrated Video Content Services

         Traditional programmers and distributors are experiencing increased competition from innovative, over-the-top content services, including virtual MVPDs and SVODs. See infra p. 24 n.5. Those web-based companies are harnessing the power of the internet and data to provide lower-cost, better-tailored programming content directly to consumers. The dramatic growth of the leading SVODs in particular, including Netflix, Hulu, and Amazon Prime, can be traced in part to the value conferred by vertical integration - that is, to having content creation and aggregation as well as content distribution under the same roof. See, e.g., Tr. 3080:8-3085:21 (Bewkes (Time Warner)).

         As relevant to the video programming and distribution market, vertical integration provides two notable advantages to content services. First, vertical integration reduces the ''bargaining friction" inherent in the arm's-length affiliate negotiations that govern the exchange of rights between traditional programmers and distributors. See, e.g., Id. at 3104:18-3107:13; id. at 1684:25-1685:13 (York (AT&T)). As numerous witnesses discussed, bargaining friction refers to the difficulty inherent in assigning value to and negotiating over new, innovative content rights, like "TV Everywhere, " download rights, and "4K" high resolution. See Id. at 1685:22-1686:7, 1688:6-13 (York (AT&T)); id. at 3104:18-25 (Bewkes (Time Warner)); id. at 3222:4-3223:2 (Stankey (AT&T)). AT&T executive Daniel York testified, for example, that DirecTV has attempted, with limited success (and considerable delay), to obtain such rights from programmers through arm's length-negotiations. See Id. at 1685:24-1686:22 (York (AT&T)). RCN CEO Jim Holanda joined York in discussing the way in which bargaining friction hindered RCN's negotiations over TV Everywhere rights. See Id. at 2968:25-2971:14 (Holanda (RCN)). Further, DirecTV Now's affiliate agreements require it to restrict the number of viewers who can stream or access programs simultaneously on its platform. See Id. at 1687:10-14 (York (AT&T)). And when DirecTV floated the concept of "'DirecTV mobile" - a pay-TV subscription exclusively for mobile devices - that was "dead on arrival." Id. at 1687:15-25. By contrast, with control over the creation and use of large amounts of original content, SVODs have driven much of the recent innovation in the video programming and distribution industry. See Id. at 1685:7-13; id. at 639:1-8 (Martin (Turner)). These companies have, for example, developed download rights, allowing users to view their content anywhere without wireless access. See Id. at 1688:16-18 (York (AT&T)).

         Second, and relatedly, SVODs' ability to distribute their content directly to consumers over the internet gives them superior access to customer data. SVODs are able to use that customer data to inform their strategy and improve the customer's experience in a number of ways. See Id. at 3081:21-25 (Bewkes (Time Warner)); see also Id. at 3388:6-3389:8 (Stephenson (AT&T)). SVODs can use data about viewing habits to determine what programs are popular, and create more of that type of content. See Id. at 2452:21-2453:3 (Carlton); id. at 3245:16-20 (Stankey (AT&T)). In addition, data informs marketing decisions, and allows SVODs to recommend content to users based on their revealed preferences, i.e., the shows they have watched in the past. See Id. at 3080:19-3081:12 (Bewkes (Time Warner)). Even more, data can inform scheduling choices, and enhance efforts at recapturing consumers who disconnect. See Id. at 3245:16-20 (Stankey (AT&T)); id. at 3081:4-12 (Bewkes (Time Warner)). Finally, and as discussed in more detail below, to the extent SVODs incorporate advertising into their platforms, data allows those ads to be more targeted and thus more lucrative.

         2. Declining MVPD Subscriptions Resulting from an Increasingly Competitive Industry Landscape

         At trial, witness after witness acknowledged that MVPD subscriptions are on the decline. See, e.g., Id. at 633:5-15 (Martin (Turner)); id. at 891:18-22 (Rigdon (Comcast)); 2229:21-22 (Shapiro); 3369:13-16 (Stankey (AT&T)); id. at 3450:15-3451:1 (Stephenson (AT&T)); see also PX63-36. Those declines "started faster" than many in the industry anticipated. Tr. 3369:13-16 (Stankey (AT&T)) (discussing the "inflection change'" where the "decline of the traditional pay-TV bundle started faster than [AT&T] assumed"). To illustrate, in 2016 AT&T's traditional MVPDs lost 133, 000 customers; last year, DirecTV alone lost 1.2 million subscribers. See Id. at 3004:6-8 (Christopher (AT&T)); id. at 3450:7-9 (Stephenson (AT&T)).

         The decline in traditional MVPD subscriptions is just one symptom of the increasingly competitive nature of the video programming and distribution industry. Indeed, several witnesses testified that competition in the industry is more intense today than ever before. See, e.g., Id. at 1398:24-25 (Montemagno (Charter)) (video distribution business is "more competitive now than I've ever experienced in my career"); id. at 2134:1-3 (Sejen (Cable ONE)) ("Q: In your 31 years in the industry, have you ever seen it more competitive at the distribution level? A: No."); id. at 2950:2-6 (Holanda (RCN)) ("Q: And so in the course of this 30 years that you have been in the business, the video distribution market today is more competitive than at any point that you can recall, true? A: True."); id. at 3213:9 (Stankey (AT&T)) (competition in industry is "at an all-time high"); id. at 2476:1-9 (Carlton) ("new entrants" in market such as "Netflix" are "making the market more competitive").

         More specifically, the decline of traditional MVPD subscriptions reflects the growing popularity of virtual MVPDs and SVODs. See, e.g., PX153-3. On that score, two rising trends are worth noting: cord-cutting and cord-shaving. A household "cuts the cord" when it discontinues MVPD services altogether, whether traditional or virtual MVPDs. See Id. at 605:23-606:4 (Martin (Turner)); id. at 2505:10-20 (Carlton). As Professor Carlton relayed, SNL Kagan estimates that roughly twenty percent of American households have cut the cord, discontinuing traditional MVPD services. Id. at 2505:12-20. This number, high as it is, continues to grow. See Id. at 2466:4-10; see also Id. at 891:18-22 (Rigdon (Comcast)); cf. Id. at 2948:20-2949:3 (Holanda (RCN)). That said, those households have not exited the entertainment field altogether. See Id. at 3450:2-6, 12-14 (Stephenson (AT&T)). Instead, many have gravitated to vertically integrated SVODs. See PX153-3; see also Tr. 3449:12-24, 3450:7-12 (Stephenson (AT&T)). Consumers, particularly young people, find SVODs attractive, with their improved user interfaces, premium content, and lower price points. See, e.g., Tr. 639:1-8 (Martin (Turner)); id. at 3449:12-18 (Stankey (AT&T)). On a similar note, a household "shaves the cord" when it departs a traditional MVPD for one of the many virtual MVPDs, which, again, typically carry smaller bundles of networks at lower price points. Gov't PFOF ¶ 16; Defs.' PFOF ¶ 21. Many other consumers have shaved the cord, reducing, but not eliminating, their consumption of MVPD services. See, e.g., Tv. 606:2-4 (Martin (Turner)). Consumers intent on shaving the cord have an increasing array of virtual MVPD services from which to choose - services that operate nationwide over the internet. See Id. at 2949:15-18 (Holanda (RCN)). Consumers may choose to subscribe to a less expensive, "skinny bundle, " i.e., one with fewer networks, and then supplement that bundle with subscriptions to SVODs like Netflix and Hulu. Cf. Id. at 2984:13-20 (SEALED); id. at 3506:24-3507:2 (Stephenson (AT&T)).

         Of course, when a household departs a traditional MVPD, whether for an SVOD or a virtual MVPD, that subscriber loss affects the traditional MVPD in the form of lost margins on subscription fees. See, e.g., PX456-56; Tr. 3450:7-14 (Stephenson (AT&T)); id. at 2219:13-21 (Shapiro). Such losses may also affect programmers in the form of declining affiliate fee revenues as well as stagnating or declining viewership. See, e.g., Id. at 3088:22-3089:1 (Bewkes (Time Warner)) (SVODs and other new competitors are "bleeding away our viewers"); PX153-3. Turner, for example, projects that its domestic subscription revenue growth will decrease to low single digits in each year from 2018 to 2022. See Tr. 647:3-11 (Martin (Turner)) (discussing Defendants' Exhibit ("DX") 781-21). Increased competition from SVODs also means that more original, high-quality programming is being produced - a trend that increases the costs of securing the talent and rights necessary to make such programming. See Id. at 1494:15-21, 1495:12-16 (Sutton (HBO)) ("There was a time when very few people were making the kind of shows we make. Now, it seems that almost every week, there's an announcement of somebody else making it. . . . [A]s I've mentioned, Netflix; Hulu makes shows and so does Prime Video. ... So the cost it takes to make shows, shows like the shows we make, has escalated significantly" because "more people are bidding for the talent involved."); PX153-6; cf. Tr. 633:16-18 (Martin (Turner)) ("[T]he number of professionally produced television shows in the United States has doubled in the last five years alone.").[5]

         It is therefore no surprise that programmers and distributors alike have noted the competitive threat posed by SVODs. After all, as Nobel laureate Bob Dylan correctly observed: "You don't need a weatherman to know which way the wind blows." Subterranean Homesick Blues. At trial, numerous witnesses from defendants testified that SVODs present a broad-range of competitive challenges. See, e.g., Tr. 3088:22-3089:25 (Bewkes (Time Warner)) (over-the-top companies are "bleeding away our viewers, because they're offering competitive video that has these advantages, because they know what to put in front of you individually, and we don't"); id. at 3213:3-9, 3214:8-10 (Stankey (AT&T)) ("The time-and-attention competition now from the likes of Facebook, from the likes of Google, from the likes of Netflix .... I started asking myself, what should the business do to respond to the changing environment that we've heard about in this courtroom, the dawn of these new services coming from the likes [of] Netflix and Google?"). Third-party witnesses from AT&T's competitor distributors also testified to the role of SVODs in the increasingly competitive industry landscape. See Id. at 860:24-861:9 (Rigdon (Comcast)) ("[A]n SVOD service like in Netflix provides a wide array of entertainment choices. So people have limited time in the day. So where they're going to spend their time for entertainment in that respect Netflix competes with traditional TV providers."); id. at 1395:12-21 (Montemagno (Charter)) (Charter's competitors include "the Googles and the Amazons and the Netflix"); see also DX921-35 (DISH "face[s] significant competition" from other companies, including, among others, "Netflix, Hulu, Apple, Amazon, Alphabet. . . .").[6]

         3. Shift Toward Targeted, Digital Advertising

         Finally, and again as a result of the rising influence of innovative, web-based competitors, the advertising landscape has shifted away from reliance on television advertising offered by programmers to highly-targeted digital advertising. See Tr. 3088:3- 6 (Bewkes (Time Warner)) (noting that advertisers are shifting their "ad budgets, which are finite, to the digital platforms at Google and Facebook" and "away from television advertising in general"); PX456-56 ("The advantages of digital advertising . . . have resulted in advertisers shifting more of their advertising budgets from traditional television advertising to digital advertising."). The share of U.S. spending on digital advertising exceeded spending on television advertising in 2016. See DX746A-2; Tr. 3092:15-19 (Bewkes (Time Warner)). Digital advertising revenue is expected to further eclipse television advertising revenue in the coming years. See Tr. 3092:22-3093:1 (Bewkes (Time Warner)).

         Why the rush from television ads to digital ones? Simply put, digital ads are more efficient. Through their access to and use of consumer data, Google and Facebook are better able to discern the purchasing preferences and interests of individuals viewing particular online content. See Id. at 623:2-13 (Martin (Turner)); id. at 3087:16-3088:2 (Bewkes (Time Warner)); id. at 3243:5-10 (Stankey (AT&T)). They can use that information to infer what types of ads would most interest those users. See Id. at 3087:16-3088:2 (Bewkes (Time Warner)). And they can tailor digital advertisements to those users based on those preferences. See Id. at 623:8-13 (Martin (Turner)). Best of all from an advertiser's perspective, Google, Facebook, and other entities engaged in digital advertising have confirmatory data that demonstrates whether particular ads were effective. See Id. at 623:14-22.

         Although traditional programmers like Turner maintain "massive inventories of advertising, " they lack the type of fine-grained data necessary to generate targeted ads. Id. at 3392:10-13 (Stephenson (AT&T)). Under the "spray and pray" approach, programmers instead sell ads based on "broad demographic data" about the viewers of a particular program. Id. at 3760:20-24 (Athey). As a result, consumers regularly see ads for things that do not interest them, and advertisers pay to show ads that they know will be ineffective in motivating many in the audience. See Id. at 3087:1-8 (Bewkes (Time Warner)). As Turner CEO John Martin put it, "there's been a long saying in the advertising industry where the advertiser would always say, I know I'm wasting half of my money, I just don't know which half." Id. at 685:20-23 (Martin (Turner)).

         The shift toward digital advertising has been extremely profitable for the tech giants - Google and Facebook, in particular. Indeed, those two entities account for roughly 60% of U.S. digital advertising. See Id. at 3746:16-22 (Athey). And they are growing at a rapid pace: Google's advertising revenue has "almost tripl[ed]" between 2012 and 2017, while Facebook's advertising revenue went from $4 to $40 billion in the same period. Id. at 3097:2-11 (Bewkes (Time Warner)) (discussing DXD122).

         By contrast, the rise of digital advertising has been costly to Turner and other programmers that rely on television advertising as a major source of revenue. See Id. at 3088:3-21; cf. PX456-25. In 2017, for example, Turner's advertising revenue declined by 2% relative to the previous year. See Defs.' PFOF ¶ 31 (citing PX456-65); Tr. 3097:14-20 (Bewkes (Time Warner)). In light of the dual-revenue-stream business model of programmers, witnesses testified that declines in television advertising revenue will produce a predictable result: it will place more pressure on affiliate fees, meaning that programmers will increase the fees charged for their content. See, e.g., Tr. 3088:16-21 (Bewkes (Time Warner)). For that reason, Jeff Bewkes, CEO of Time Warner, explained that the explosion of digital advertising is "actually bad for" video distribution consumers, "because it means that the financial support for all this programming on all these different channels gets pushed over toward subscription prices. And that's a problem, because we think consumers are up to here with subscription prices." Id. at 3089:6-11.

         11. The Parties and Proposed Merger

         A. AT&T

         AT&T is a "leading provider of communications and digital entertainment services in the United States and the world." PX455-7. As a distribution company, AT&T is in what its Chairman and CEO Randall Stephenson calls "the connectivity business." Tr. 3378:23-24 (Stephenson (AT&T)). Although originally known for its "voice telephone" service, AT&T also provides wireless service, broadband service, and pay-TV service to consumers. See Id. at 3377:23-25, 3379:12-15. AT&T, however, does not create any significant television or movie content. See Id. at 3245:24-25 (Stankey (AT&T)).

         AT&T has two traditional MVPD products: DirecTV and U-verse. Defs.' PFOF ¶34. DirecTV, acquired by AT&T in 2015, is a "satellite-based MVPD service that operates by transmitting programming from satellites to rooftop dishes installed at the customers' homes." Id.; see Tr. 3206:21-22, 3207:21-23 (Stankey (AT&T)); PX455-11 to 12. U-verse, by contrast, is a "telco" MVPD service that operates "[o]ver the same line that [] deliver[s] your telephone service." Id. at 3384:1-2 (Stephenson (AT&T)); Defs.' PFOF ¶ 34. Between DirecTV and U-verse, AT&T has approximately 25 million video distribution subscribers today, making it the largest provider of traditional MVPD services. See PX455-1 l;Tr. 3384:13-14 (Stephenson (AT&T)).

         Despite that substantial traditional MVPD subscriber base, AT&T witnesses testified that they believe the company's future lies in the use of online and mobile wireless connections to access premium video. As John Stankey, the AT&T executive who will be tasked with running Time Warner should the merger proceed, explained, AT&T acquired DirecTV in 2015 not in an effort to double down on the satellite business - a concededly mature and indeed declining asset - but to "pick up a lot of new customers that we could work on migrating" to new, innovative products necessary to compete in the future. Tr. 3207:18-3208:2, 3209:4-7 (Stankey (AT&T)). In late 2016, AT&T launched one such product, DirecTV Now. See, e.g., Id. at 1824:23-24 (Merrill). DirecTV Now is a virtual MVPD and, as such, carries fewer channels than DirecTV or other traditional MVPDs; is offered at a lower price-point; and is delivered over the internet. See Id. at 1825:1-3; id. at 3385:5-3386:10 (Stephenson (AT&T)). Today, and in large part due to significant promotional efforts and high-level support for the product's launch, DirecTV Now has grown to more than one million subscribers. See Id. at 3386:2-3 (Stephenson (AT&T)); id. at 1825:12-1826:8, 1827:18-1828:2 (Merrill (AT&T)).

         AT&T Chairman and CEO Randall Stephenson testified that DirecTV Now plays to AT&T's strong suit, namely its 100-million plus wireless subscriber base. See Id. at 3379:19-20, 3385:9-14 (Stephenson (AT&T)). With customers increasingly turning to cell phone and mobile devices to access video content, fully "[h]alf of the volume on [AT&T's] network is video." Id. at 3382:5-6. Stankey noted that AT&T welcomes this trend, as it results in users purchasing larger data plans and acquiring more devices. See Id. at 3254:15-22 (Stankey (AT&T)). AT&T's next major initiative, fifth generation or ''5G" wireless, is calculated to increase video consumption even more. See Id. at 3383:3-14 (Stephenson (AT&T)). As Stephenson explained to the Court, "[w]hat we're all working towards is creating [$]35 and $15 bundles. And that's where the world is moving . . . ." Id. at 3506:23-25. To that end, Stephenson continued, AT&T has plans to launch a new product called AT&T Watch, through which customers will be able to receive "real skinny bundle[s]" of programming for $15 per month or, in the case of "AT&T wireless unlimited customers, ] ... for free." Id. at 3434:12-3435:4.

         B. Time Warner

         Time Warner, by contrast, is in the entertainment business. It has three distinct units: Warner Bros., Turner, and HBO. See PX459-18 (Turner), -22 (HBO), -24 (Warner Bros.). Turner operates, among other things, ten linear cable networks that televise scheduled video programming around the clock. See Id. at 18; Defs.' PFOF ¶ 7.[7] HBO is a premium, subscription-based video service that offers movie and television shows, including a significant amount of original content. See PX459-22. Unlike Turner, which collects both programming fees and advertising revenue, HBO relies solely on subscription payments to operate. See Id. at 23; PX456-67; compare Tr. 604:21-23 (Martin (Turner)), with Id. at 1450:12-17, 1493:15-17 (Sutton (HBO)). Warner Bros, operates a studio that creates movies, television programs, and other kinds of video content that are licensed both to Time Warner's other businesses and to third parties. See PX459-24.

         The Government's claims in this case implicate Turner and HBO. Those business units are therefore discussed in more detail below.

         1. Turner Networks

         The Turner networks are central to the Government's primary theory of harm, and thus warrant the greatest attention here. Turner's business model is simple: distribute its content as broadly as possible in order to maximize the dual income streams of affiliate fees and advertising revenue. See Tr. 3078:17-20 (Bewkes (Time Warner)). Historically, Turner has relied on unaffiliated third parties to distribute its content to consumers. See Id. at 485:1-18, 612:3-4 (Martin (Turner)). Those include traditional MVPDs, such as cable companies and satellite companies. See Id. at 485:1-18. In recent years, Turner has distributed its content to consumers through virtual MVPDs as well. See Id. at 485:19-486:6; Gov't Post-Tr. Br. 6.

         Industry participants view Turner content as popular and valuable, primarily for Turner's broadcast rights to live sports and for CNN's live news. See, e.g., Tr. 2112:24-2113:12 (Sejen (Cable ONE)) (agreeing that "sports programming" is "[t]he only thing that was unique" to TBS and TNT); id. at 245:7-23 (describing TBS and TNT's "important sports" and CNN's "news"). CNN is the second-rated news network, and a top-seven ranked network by viewership. PX8-35; Tr. 717:5-8 (Hinson (Cox)). In the sports domain, Turner has long-term contract rights to show portions of NCAA March Madness, the NBA Playoffs, and certain games of the Major League Baseball Playoffs. See PX8-35; Tr. 533:3-12 (Martin (Turner)); see generally Gov't PFOF ¶¶ 82-86, 88 (reviewing Turner's sports rights). TBS and TNT are "by far and away" the two most popular Turner networks due to their sports content. Tr. 471:17-20 (Martin (Turner)). Not surprisingly perhaps, TBS and TNT rank in the top ten most profitable cable networks. Id. at 471:21-24; see also Gov't PFOF ¶¶25, 27.

         Reflecting that popularity, Turner enjoyed rate increases from every major MVPD in the last five years. See Tr. 998:20-22 (Breland (Turner)); see also Gov't PFOF ¶ 97. Turner executives testified that those rate hikes were due in part to a multi-year plan to "catch up" to competitors' price increases after years of below-market increases. Tr. 644:1-18 (Martin (Turner)). As such, Turner projects that its rate increases will slow to the low single digits from 2018 to 2022. See Id. at 647:3-11 (discussing DX781). That slowing rate-increase trend is consistent with Turner's declining viewership numbers. See Id. at 2458:5-8, 22-24 (Carlton); see also PX153-3 to -4; PX456-22. Turner networks account for only 8% of pay-TV viewership, down from 10% in 2011. See Tr. 2458:22-24 (Carlton) (discussing DXD109). When internet-based distribution is added to the mix, Turner's share shrinks to 6% of viewership for 2017. See Id. at 2458:13-15.

         The growth in digital advertising has also posed a particular challenge for Turner. Today, "advanced advertising" makes up less than 5% of Turner's ad revenue - and it shows. Id. at 680:4-7 (Martin (Turner)). Turner's ad revenues have flatlined. See PX456-65. This is because, as a "stuck in the middle wholesaler, " Turner for the most part lacks customer relationships, which supply critical data concerning consumer preferences - data that can be used to tailor advertisements to the end user. See Tr. 641:13-25 (Martin (Turner)); id. at 3087:16-3088:2 (Bewkes (Time Warner)). Without such data, Turner cannot tailor ads to particular consumers, making its ads less valuable than those carried on Google or Facebook. See Id. at 623:5-16 (Martin (Turner)); cf. Id. at 3771:12-23 (Athey).

         At trial, the Court learned that Turner has attempted workarounds to improve its data and sharpen its advertisements. Turner has tried, for example, to purchase data from third parties, but that data was not sufficiently granular. See, e.g., Id. at 3100:2-4 (Bewkes (Time Warner)). Time Warner also considered buying technology companies, but concluded that the companies' data was insufficient, and came without any guarantee of long-term access. See Id. 3102:9-3103:6. Finally, Turner has attempted to obtain rights to customer information through affiliate negotiations. See Id. at 3100:16-22; cf. Id. at 92:19-24 (Fenwick (Cox)). The record reflects, however, that such efforts generally have been unsuccessful due to the bargaining friction of hotly contested affiliate negotiations and the fact that distributors consider their customer data proprietary. Id. at 955:10-18 (SEALED); cf. Id. at 1022:2-20 (Breland (Turner)); Defs.' PFOF ¶ 16.[8]

         In an effort to break out of its "trapped wholesaler' role, Turner has made recent efforts to launch its own direct-to-consumer content offerings. The most notable of those offerings are Film Struck, Boomerang, and Bleacher Report Live. See Tr. 588:8-16, 666:10-12 (Martin (Turner)). FilmStruck, which allows viewers to access classic movies as well as independent films, has approximately 100, 000 subscribers; Boomerang, which offers a library of children's content and cartoons, has around 150, 000 subscribers. Defs.' PFOF ¶ 15. Those figures are of course microscopic in comparison to Netflix"s 125 million subscribers and Amazon's 100 million Prime subscribers with access to video content. See Tr. at 3099:6-12 (Bewkes (Time Warner)); id. at 3389:22-25 (Stephenson (AT&T)).[9]

         2. HBO

         HBO has a different business model than Turner. As a premium network, HBO offers high-quality programming that is supported by subscriber fees rather than advertising. Tr. 1450:12-17 (Sutton (HBO)); see also PX456-67. Indeed, HBO has no advertising inventory at all. Id. In addition, and unlike the Turner networks, which appear in base cable or satellite packages, HBO is typically an "add-on." Id. at 3073:14-15 (Bewkes (Time Warner)); see Id. at 1451:16-18 (Sutton (HBO)).[10] HBO offers popular movies and television shows, including a significant amount of original content. See PX459-22.

         Without advertising, HBO's business model is even more reliant on broad distribution: "the more, the better, " according to Time Warner CEO Jeff Bewkes. Tr. 3070:3-8 (Bewkes (Time Warner)). HBO content reaches consumers in four ways: (i) through MVPDs; (ii) through virtual MVPDs; (iii) through SVODs; and (iv) through HBO's proprietary over-the-top product, HBO Now. Id. at 1494:1-8, 1451:13-23 (Sutton (HBO)). In each case, the end-customer accesses HBO by way of a distributor - even for HBO Now, which is sold by digital distributors like Apple and Amazon. See Id. at 1491:6-11. As with Turner, the fact that HBO relies on third parties to distribute its programming means that Time Warner lacks critical data about the preferences and viewing habits of HBO's subscribers. See Id. at 3084:14-24, 3098:13-16 (Bewkes (Time Warner)).

         HBO faces an array of competitors in the field of premium content creation and programming. There are premium television networks, like Showtime, Starz, and Epix, and online offerings, such as Netflix, Amazon Prime, and Hulu. See Id. at 1492:20-23 (Sutton (HBO)). What's more, Disney has launched, and Apple appears poised to launch, a premium, direct-to-consumer service. See Id. at 1492:22-24; id. at 1396:21-25 (Montemagno (Charter)). All of those rivals feature high-quality, premium content, and thus compete directly with HBO. See, e.g., Id. at 1494:16-23 (Sutton (HBO)). Indeed, Netflix's programming budget alone is more than twice the size of HBO's. Id. at 3099:13-15 (Bewkes (Time Warner)).

         In this highly competitive environment, and lacking direct relationships with its viewers, HBO "[a]bsolutely" depends on MVPD promotions to maximize its distribution. Id. at 1496:16-17 (Sutton (HBO)); cf. Id. at 1528:25-1529:4 (Patel (AT&T)). As HBO President Simon Sutton explained, "our whole business is relying on our affiliates to promote us. If we can't do that, then our entire business model is destroyed." Id. at 1508:14-16 (Sutton (HBO)). For that reason, HBO seeks to structure its affiliate agreements so as to "incent" distributors to maximize HBO's distribution. Id. at 1456:8- 10. Specifically, as distributors add HBO subscribers, "they generally pay less on the increment." Mat 1455:18-19.

         C. The Proposed Merger

         On October 22, 2016, AT&T announced its plan to acquire Time Warner. Answer 18 [Dkt. # 20]. Inclusive of debt, the transaction is valued at approximately $108 billion. Id.

         At trial, the evidence showed that defendants view the proposed merger as an essential response to the industry dynamics described above - that is, the increasing importance of web- and mobile-based content offerings; the explosion in targeted, digital advertising; and the limitations attendant with AT&T's and Time Warner's respective business models. See generally Defs.' PFOF ¶¶ 49-62 (discussing various proconsumer rationales for the proposed merger). The proposed merger would do so, defendants' executives asserted, through vertical integration of the companies' complementary assets: Time Warner's popular content and significant advertising inventory, and AT&T's consumer relationships, customer data, and large wireless business.

         As a traditional programmer, Time Warner generally lacks access to valuable information about its viewers - it is, as mentioned, akin to a "stuck in the middle wholesaler." Tr. 641:13-25 (Martin (Turner)). That is because it is the video distributors - not Turner - that own the customer relationships and, therefore, the customer data. See supra pp. 20, 25-28. Although Time Warner has "massive inventories of advertising, " it does not "know who the customer is. ... They don't know who they are, they don't know what they're watching." Id. at 3392:10-13 (Stephenson (AT&T)). Without information about who its customers are and what their content preferences may be. Time Warner is disadvantaged vis-a-vis SVODs, such as Netflix. Hulu, and Amazon Prime, and web companies, such as Facebook and Google, when it comes to its ability to cater programming or advertisements to viewers. See supra pp. 20, 25-28. As AT&T CEO Randall Stephenson explained, without consumer relationships and access to data, Time Warner's "large load of advertising inventory [is] being under utilized." Tr. at 3394:1-2 (Stephenson (AT&T)); see also Id. at 3771:12-23 (Athey) (confirming that AT&T's digital, data-driven advertising prices are 60% higher than Nielsen-based ads because the former have "finer demographics that are offered for targeting").

         As a video distributor, AT&T generally lacks control over the video content it offers. See Id. at 3219:1-3 (Stankey (AT&T)) ("What we don't have is, we didn't have programming. We didn't have the flexibility to change the product, and that's what the guys on the other side had."). AT&T also has access to only limited advertising inventory. Cf. Id. at 3393:1-11 (Stephenson (AT&T)); id. at 609:23-610:4 (Martin (Turner)). When AT&T seeks to negotiate with programmers for rights to provide or experiment with innovative content offerings, it typically encounters significant bargaining friction that renders those efforts unsuccessful. See supra pp. 19-20.

         By acquiring Time Warner, AT&T executives testified, the company will immediately gain access to high-quality content and an extensive advertising inventory. See Tr. 3408:3-10 (Stephenson (AT&T)). Using its wireless network, AT&T intends to distribute Time Warner content through mobile devices. With such strong industry tailwinds in favor of mobile video consumption, this strategy will increase viewership, making Time Warner content "worth far more." Id. at 3393:24-25; cf. 891:23-25 (Rigdon (Comcast)) (confirming "increasing trend in the consumption of video over mobile devices"). At the same time, AT&T will bring to bear its consumer relationships and data to begin to tailor Time Warner's advertising and increase its value. See Id. at 3394:3-18 (Stephenson (AT&T)).

         As the Government concedes, that access will inure right away to the benefit of AT&T's current video distribution subscribers. In particular, the Government's own expert predicts that, due to a standard benefit of vertical integration, AT&T's DirecTV and U-verse customers will pay a total of about $350 million less per year for their video distribution services. See infra pp. 66-68. AT&T executives testified about the other efficiencies that would redound to the benefit of AT&T subscribers should the merger be approved. Of most relevance here, with the Time Warner assets, and without the interference of bargaining friction, AT&T will be able to deliver content to its customers in more innovative ways. The merged entity could, for instance, gather and edit individual news clips from CNN throughout the day - all tailored to a given user's interests - and deliver that news to the wireless customer for viewing on his or her fifteen-minute break. See Tr. 3220:21-3221:9 (Stankey (AT&T)). According to AT&T executive John Stankey, that opportunity represents "a new customer at a new moment doing something that wasn't being done otherwise." Id. at 3221:13-14. Stankey testified that the absence of bargaining friction will also enable AT&T and Time Warner to pursue broader introduction of new technologies, such as "4K" high-resolution programming. See Id. at 3222:4-22.

         AT&T will also, with their customers' permission, use consumer data to develop targeted ads, thereby increasing the value of Time Warner's ad inventory. See Id. at 3391:12-22, 3393:4-9 (Stephenson (AT&T)). AT&T witnesses testified that, in their view, the Time Warner ad inventory is of sufficient scale to warrant the development of a ''programmatic advertising platform" through which AT&T can deploy its data to create a marketplace of data-informed advertising inventory for use by Time Warner and third-party programmers alike. Id. at 3243:14-3244:8 (Stankey (AT&T)). At the same time, new, tailored forms of mobile content delivery - like the CNN clips teased above - will create additional advertising opportunities. See Id. at 3221:10-11. Those opportunities, Time Warner and AT&T witnesses testified, will lead to higher ad revenues that will alleviate pressure on the programming side and lower the price of video distribution to consumers. All of those steps, defendants asserted, will allow AT&T to imitate the highly successful, data-driven entities in the video programming and distribution and advertising markets.

         In addition, ownership of Time Warner content will allow AT&T to more efficiently pursue what it sees as the future of the video programming and distribution industry: increased delivery of content via mobile devices, such as cell phones. See Id. at 3381:24-3382:2, 3393:13-25 (Stephenson (AT&T)). AT&T's vast wireless business - a business that, if taken separately, "would be number 37 in the Fortune 500" - has over 100 million subscribers. Id. at 3379:20-24; see Id. at 3208:21-23 (Stankey (AT&T)). AT&T executives testified about their vision for using those wireless connections to "transform the way we deliver video to customers, [to] make the video far more portable." Id. at 3208:20-22 (Stankey (AT&T)); see Id. at 3393:13-25 (Stephenson (AT&T)). To sum it up, in the words of AT&T Chairman and CEO Randall Stephenson, defendants view the proposed merger as a "vision deal" reflecting a belief ''that distribution of [Time Warner's] content to wireless will drive the value of the content up, " and that "the ability to pair our data with [Time Warner's] advertising inventory will drive value." Id. at 3402:24-3403:6.

         III. Procedural History

         A. The Investigation

         Following the announcement of the deal in October 2016, the Department of Justice's Antitrust Division conducted an investigation of the proposed merger's competitive effects. Defs.' PFOF ¶ 2. The investigation lasted more than one year. Id. During that investigatory phase, the Government took approximately 20 depositions and received roughly 25 million pages of documents. Despite the investigation's vast scale and obvious importance, defendants had scarce visibility into the process. They could not access the Government's materials during the course of the investigation. See 12/21/18 Hr'g Tr. 12:1-12 [Dkt. # 56]. Nor could they attend, let alone ask questions during, the depositions that took place during the investigation. See id.

         B. Pretrial Proceedings

         1. The Complaint

         On November 20, 2017, the Government, acting through the Department of Justice, filed this lawsuit against AT&T, DirecTV, and Time Warner to enjoin the proposed merger under Section 7 of the Clayton Act, 15 U.S.C. § 18. See Compl. ¶ 48. Thirty-seven members of the Department of Justice, including Assistant Attorney General for Antitrust Makan Delrahim, signed the Complaint. Id. at 23. In its prayer for relief, the Government asked that defendants AT&T and Time Warner "be permanently enjoined from carrying out the proposed merger and related transactions" or "carrying out any other agreement, understanding, or plan by which AT&T would acquire control over Time Warner or any of its assets; or merging." Id. ¶ 48.

         2. Turner's Arbitration Commitment

         About one week after the Government filed its Complaint, Turner sent a letter and an accompanying list of terms and conditions to approximately 1, 000 video distributors. See, e.g., PX490; PX491; Tr. 1181:11-16 (Warren (Turner)). In the letter, Turner represented that it was "irrevocably offering to you this agreement to engage in AAA arbitration, subject to the conditions below." PX490. "This agreement, " the letter continued, "also provides you with the right to continued carriage of the Turner Networks . . . pending the arbitration in the event of a failure to agree upon renewal terms." Id. The agreement specifies that once arbitration is invoked by a distributor, Turner must continue to provide carriage on the same terms and conditions in effect at the expiration of its existing contract with the distributor, subject to the right to receive a "true-up" - make-up payments, in essence - based on the arbitrator's award. PX491-3 to -4, §§ B.1-.3. In other words, the commitment guarantees that no blackout of Turner content can occur once arbitration is invoked. See, e.g., Tr. 2653:21-23 (Katz). The proposed arbitration agreement incorporates by reference the choice-of-law provisions in the underlying affiliate agreements. PX491-2, ¶ 7.

         3. Pre-Discovery Timeline

         Defendants filed their answer on November 28, 2017. See generally Answer. AT&T and Time Warner also announced that they had agreed to extend the merger agreement through April 22, 2018. See PX456-2. Defendants swiftly moved for a trial date and, along with the Government, for a protective order. See Defs.' Mot. to Set Trial Date [Dkt. # 22]; Defs.' Mot. to Enter Protective Order [Dkt. # 23]; Pl.'s Mot. to Enter Protective Order [Dkt. # 24]. On December 8, 2017, 1 issued a protective order governing the designation and use of confidential information. See Protective Order [Dkt. #37]. On December 21, 2017, I issued a Case Management Order ("CMO") [Dkt. # 54] and Scheduling Order [Dkt. # 55], which, among other things, set the trial for March 19, 2018 and stated that there would be no dispositive motions. That same day, to allow for the possibility of the March 19, 2018 trial and the ruling to follow, AT&T and Time Warner extended yet again the drop-dead date of the merger from April 22, 2018 to June 21, 2018. See PX456-2. If the deal is not consummated by then, the merger agreement specifies that AT&T will be required to pay Time Warner a break-up fee of $500 million. See PX451-87. In the event of a favorable judgment, defendants agreed "not to consummate or otherwise complete the challenged acquisition until 12:01a.m. on the sixth calendar day following entry of such judgment." CMO ¶ 3.

         4. Discovery

         Given the stakes and the June 21, 2018 drop-dead merger deadline, the parties proceeded through discovery on an expedited basis. Fact discovery began in late December, and concluded in mid-February. The Government began producing third-party documents collected during the investigation to defendants before the New Year. The parties exchanged preliminary fact witness lists in early January, and final fact witness lists one month later. They spent the intervening time on a forced march of depositions. The exchange of initial expert reports took place in early February, with rebuttal reports due at the end of that month. Supplemental discovery closed on February 28, 2018, and expert discovery did so on March 9, 2018. The Scheduling Order set additional deadlines for pretrial motions, Daubert motions, and pre-trial submission of final exhibit lists, just before the March 19 start date for trial.

         I provided detailed prescriptions concerning discovery in this compressed time period. The CMO limited each side's final trial witness list to 30 fact witnesses. CMO ¶ 12. The Government and defendants each had a maximum of 15 interrogatories and seven requests for admission. Id. ¶ 14(d), (e). The CMO restricted each side to 150 hours of party-depositions, plus 100 hours of non-party depositions. Id. ¶ 16. The CMO did not preclude the taking of a deposition of someone already deposed during the investigation phase. Id. There were no limits on the number of requests for production. Id. ¶ 14(a).

         The parties achieved herculean feats during that time. Beyond the 25 million pages of documents produced during the Government's investigation, an additional 7.5 million pages of documents were produced during discovery. 2/2/18 Hr'g Tr. 13:10-13 [Dkt. # 66]. Dozens of third parties received Rule 45 subpoenas. See 1/5/18 Hr'g Tr. 7:18-21 [Dkt. # 61]. The Government noticed more than 40 depositions of defendants' witnesses. Id. at 9:13-15.

         5. Disco ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.