The cable TV business, for so long a gusher for the media business, is inarguably past its prime.
But does that mean a single company should be allowed to own more than 50 networks and control more than one-quarter of the total revenue pie?
That question, surprisingly, has become central to 12 states’ antitrust lawsuit seeking to block Paramount‘s pending $110 billion acquisition of Warner Bros. Discovery. Cable is one of three areas flagged as monopolies in the making by the state attorneys general, who have filed suit to try to block the deal. The Writers Guild of America has filed parallel litigation citing concerns about the merger’s impact on workers.
Judge Araceli Martínez-Olguín of the U.S. District Court for the Northern District of California, in granting a temporary restraining order lasr week that has paused the deal, said the cable part of the deal needs a closer look. Paramount’s argument that the merger would not give the company more negotiating power with pay-TV operators “fails because it rests on false assumptions regarding activity in the market for licensing basic cable channels to distributors,” Martínez-Olguín wrote in her ruling.
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The judge later extended the TRO and then Paramount opted to skip the next stage, which would have been a hearing on a preliminary injunction request, and instead proceed to a full trial. The trial date has not yet been announced.
The emergence in the merger fight of the much-maligned cable bundle, widely deemed (including by Paramount) as essentially irrelevant in a world of streaming and social media, is striking for many reasons. For one thing, the issue was never mentioned by the U.S. Department of Justice in its statement granting approval to the merger earlier this year. For another, the cash flow from cable networks is crucial to Paramount’s plan to pay down the large debt load the transaction will create.
Instead of cable, the theatrical movie business has been the object of industry and public scrutiny, dating back to when Netflix had a deal in place to buy Warner Bros. before being dislodged by Paramount. And indeed, two film markets – one for wide-release titles, and one for “anticipated top-grossing” (blockbuster) releases – are key elements in the states’ complaint. Media coverage for months has focused on the melding of two major studios into one, with a widely expected shrinkage of the release slate. Paramount, from CEO David Ellison on down, has pushed back repeatedly on that narrative, insisting the combined company would put out 30 films a year.
“Pay-TV may be declining, but it is still a market,” one senior TV executive told Deadline. “Especially with live sports being such a big draw, as we just saw with the World Cup, it isn’t going to go to zero.”
Cord-cutting has shown signs of moderating after years of acceleration, helped partly by more flexible packages offered by YouTube TV and other operators. Spectrum TV parent Charter Communications reported Friday it has shed 107,000 video customers over the past 12 months, which is less than 1% of its footprint of 12.5 million subscribers, in an improvement over comparable prior periods.
Paramount’s defense is being led by Chief Legal Officer Makan Delrahim, who previously headed the antitrust division of the DOJ and led the government’s suit aiming to block the AT&T-Time Warner deal. In a brief responding to the states’ request for the temporary restraining order, Team Delrahim sought to reframe the cable aspect of the deal.
“In Plaintiffs’ alleged market for the licensing of basic cable channels, the merging parties’ channel lineups are complements, not substitutes,” the brief said. “Cable providers and other distributors have licensed, and will license, all of these channels both before and after the merger. As a result, the merger will not increase the combined company’s bargaining power over the licensing of basic cable channels. The basic cable marketplace is declining in the face of increased cord cutting and reduced demand for packages of cable channels. In this environment, every programmer’s bargaining position is diminishing.”
Some watchers of the case from both the legal and financial arenas are skeptical of Paramount’s argument, which is known in case law as a “failing market” hypothesis. Sam Weinstein, a former DOJ antitrust attorney who is now a professor at New York’s Cardozo School of Law, said “it is common, and you can go back 50 years, for merging firms to say, ‘We’re not the big, bad guy – we need to merge in order to help rescue this industry.’”
Rich Greenfield of Lightshed Partners has been one of the few deal watchers from the financial sector to flag cable network concentration as a potential snag. “We honestly have no idea what Paramount’s attorneys are describing,” he wrote in a recent blog post. “Every horizontal cable network merger in history has been about increasing leverage with MVPD and vMVPD distributors. That’s the point. The entire rationale for combining CBS and Viacom into Paramount was to use CBS to protect the Viacom cable networks and ‘bend the curve’ on their decline. You cannot argue ‘complements, not substitutes’ in court while telling investors the combination makes the portfolio more of a must-have for distributors. Both cannot be true.”
Paramount is unlikely to prevail with a “failing market” defense, in Weinstein’s view. “The way the courts look at this is, ‘How concentrated is the market? What is the deal going to do to that concentration?’” he said. “All the rest is noise.”
Michael Morris, a media analyst with Guggenheim Securities, offered a different take in a recent note to clients. “Historical precedent provides Paramount a framework for rebutting the structural presumption in declining industries,” he wrote. “The controlling Supreme Court authority,” he added, is a 1974 case, United States v. General Dynamics Corp. In that case, the court opted not to block the merger of two coal producers.
That ruling “established the principle that structural market-share evidence can be rebutted when the underlying market is in decline and when the acquired firm’s future competitive contribution is materially smaller than its historical share suggests,” Morris wrote. A follow-on case that is widely cited is United States v. Baker Hughes, in which D.C. Circuit judge (and now Supreme Court justice) Clarence Thomas decided that current market-share stats “may give an inaccurate account of future competitive conditions.”
While the state AGs say Paramount-WBD would have 27% of total affiliate revenue, Morris calculated it as a bit higher, at 28.5%. The companies’ revenue from affiliate fees, though, keeps shrinking, as does cable’s overall share of TV viewing. The post-merger company would top YouTube’s share of viewing, with nearly 15%, but the overall market is fragmented, Morris notes.
Delrahim hammered away at that point during a recent appearance on The Town podcast. While Ellison and other execs have repeatedly affirmed plans to retain cable, as they did when Skydance and Paramount merged nearly a year ago, the company’s top lawyer insisted that the deal should be evaluated in a broader context. YouTube itself, not even pay-TV arm YouTube TV, should be included in that market analysis along with both subscription and free streaming services.
“MTV does not compete with TNT. CNN does not compete with Nickelodeon,” Delrahim said. “It’s not about the carriage fees, it’s about where that demand is. If you have two different products that are complements with each other, it’s actually efficiency-enhancing. They have to be substitutes for them to come together for you to have a competitive effect.”
