Communication Breakdown:
Mergers and acquisitions are back. 2 Through the third quarter of 1995, corporate marriages had already totaled over $564 billion, 3 and surged to an astounding $866 billion by year-end. 4 Compared to the 1980s' high of $311 billion set in 1988, 5 the staggeringly high level of recent merger activity shatters all records set in the past decade. 6 Of particular interest is the unabated pace of consolidation within American industry that has resulted from such transactions. Industries as diverse as technology, defense, health care, transportation, utilities, financial services, and media are all ex periencing an ever-accelerating stream of transactions. 7 Moreover, the size of such deals are soaring at an equally breathtaking rate: this past year saw Disney's $19 billion acquisition of Capital Cities/ABC, Chemical Banking's $10 billion merger with Chase Manhattan Corporation, and Hoechst AG's $7 billion p urchase of Marion Merrell Dow. 8 Driven not only by across-the-board competition 9 and rising stock prices, 10 but also by dramatic and far-reaching regulatory and marketplace changes, 11 corporate America is scrambling to assemble ideal strategic fits, capture market share, and control the points of product distribution. 12 As a result, the billion dollar deal in today's mergers and acquisitions scene is becoming commonplace. 13
Despite the cheers and exhilaration of Wall Street investors that inevitably follow each mega-deal, 14 an increasing number of commentators are concerned with the antitrust implications of many of these corporate consolidations. 15 Left unattended, critics argue, such transactions could result in unfairly maintained market power by a few industry giants. 16 Critics further speculate that, at a minimum, mergers and acquisitions result in dwindling consumer choices and higher fees and prices paid by the public. 17 Consequently, many critics argue that economic efficiency should be subordinate to the decentralization of social, political, and economic power. 18
Understandably, no industry receives such anti-merger scrutiny as incessantly as media does. 19 Besides the danger that newly-wed media mega-companies will take fewer risks in programming, news, and information, resulting in an arena of bland content, 20 such mega-companies could also threaten the "marketplace of ideas." 21 As noted by Robert Pitofsky, the chairman of the Federal Trade Commission ("FTC"), "too much power in too few hands will impair freedom of expression." 22 Moreover, the potential for manipulation by the media is especially ripe today, as the mergers come in an era when, as one commentator notes, "antitrust enforcement has become as loose as the language in movies." 23 Also, with a deregulated telecommunications 24 industry that has resulted from startling congressional legislation, 25 allowing television studios to own and resell programming and permitting television and radio station owners to control multiple outlets in each market, 26 the public may soon find that four or five companies control nearly all the information delivered into its homes over television airwaves, cable, or computer modems. 27
This Note argues that a new antitrust model is necessary to analyze multimedia mergers and acquisitions. Part I provides a brief introduction to mergers and acquisitions, including the primary benefits and adverse competitive effects of such transactions. Part I also explains the fundamentals of antitrust merger law and economics, and reviews the practical steps in an antitrust merger analysis. Part II examines how courts have historically ruled in media antitrust cases. Part III argues that previous cour t decisions are ineffective for analyzing the rapidly changing multimedia industry, and proposes a new antitrust model for analyzing multimedia mergers and acquisitions. Finally, this Note concludes that the proposed model should be adopted, because it ad dresses both First Amendment and economic-based concerns.
Against this background, an increasing number of mergers and acquisitions are raising significant antitrust concerns. 30 Nevertheless, the law that restrains anticompetitive mergers is often inconsistent and unpredictable. 31 According to the late Phillip Areeda, a leading commentator on antitrust law, 32 "contemporary vitality of a precedent is often affected less by what it says than by present perceptions of the problem." 33 This is not to say, however, that there are no settled antitrust doctrines, approaches, or policies. 34 In contrast, while relatively few, there are established standards for applying the law. 35 This part introduces those standards and describes the underlying framework for antitrust merger analysis.
First, this part examines merger and acquisition theory, including the economic benefits and potential adverse competitive effects of corporation consolidation. Second, this section discusses federal antitrust merger law and the economic principles that guide its application. Finally, this section analyzes the practical steps in the antitrust merger analysis.
Second, a merger or acquisition allows two previously unrelated companies to achieve "economies of scale" 45 or "synergies." 46 Under economic theory, two entities, when combined, may be worth more than if they had remained independent. 47 This is especially true where a merger allows the companies to either eliminate overlapping cost centers 48 or reduce transaction costs between the two firms. 49 As a result, the unified firm may reduce costs, improve quality, and boost output. Synergies also result where the combined enterprise is less risky than the constituent corporations. 50 Consider, for example, the union of two companies whose revenues are seasonal, 51 or the integration of a manufacturing firm with its sole supplier, which merely breaks even every year. 52 In either scenario, merging the firms creates value, because the combined entity is more economically stable. 53
Thus, mergers and acquisitions may yield substantial economic benefits to both the investor and society. 54 The investor, on the one hand, recognizes a profit for its superior managerial or technical skills, or its ability to create economies of scale. 55 On the other hand, society also gains. 56 To understand this, one must turn to "welfare economics," 57 the branch of economic theory that is concerned with the optimal allocation of resources. 58 According to the theory of optimal resource allocation, economic resources should be shifted to their most efficient and productive uses. 59 By redeploying resources in this manner, one of an economic system's major goals is reached: to make anyone better off, as long as someone else is not made worse off. 60 This shifting of resources to their most productive uses is known as allocative, or Pareto, efficiency, 61 and ultimately betters an economy as a whole. 62 Thus, it follows that "in a competitive market, buying out competitors is not merely permissible, it contributes to market stability and promotes the efficient allocation of resources." 63
Vertical integration, 84 by tying a customer to a supplier, threatens to "act as a clog on competition,'" 85 and "deprive[s] . . . rivals of a fair opportunity to compete," 86 because it forecloses the competitors of either party from a segment of the market otherwise open to them. 87 For at least a time, "[e]very extended vertical arrangement . . . denies to competitors of the supplier the opportunity to compete for part or all of the trade of the customer-party to the vertical arrangement." 88 In other words, while a vertical merger does not reduce the total number of firms operating at any single level in the market, it does pose the danger that the merged entity will internalize all business. 89 Consequently, other firms at either market level may suddenly find themselves without customers or suppliers. 90
Just as a vertical merger may impede a firm's current competitors from operating in a market, it may also frustrate potential new competitors from entering that market. 91 In some circumstances, firms already in the market may view the "acquiring firm" 92 as a potential entrant, 93 and may have maintained competitive prices in order to deter the acquiring firm's entry into that market. 94 With the elimination of the acquiring firm's threat of entry, however, other firms may have the opportunity to increase prices to excessive levels 95 --especially where potential entrants are few and where the acquiring firm had unique advantages over other potential entrants. 96 Thus, a vertical merger between a firm already in a market and a potential entrant to that market may remove "perceived potential competition," 97 resulting in anticompetitive behavior. 98
Similarly, a vertical merger may still provoke anticompetitive conduct--even if the market does not perceive the acquiring firm as a potential entrant--where the acquiring firm is, in fact, "actual potential competition." 99 While losing an actual potential entrant will not change immediate pricing decisions by market firms, the loss eliminates a future competitor's entry into the market in a "more procompetitive manner." 100 Consequently, the merger results in a lost opportunity for improving market performance that would have resulted from adding a significant competitor. 101
Some commentators find Section 7 most striking for its "ambiguous language" and "enigmatic generality": 122 "any line of commerce ;" " substantially to lessen competition;" " tend to create a monopoly." 123 These commentators add that a reader will not find clarification of such phrases elsewhere in the statutory language. 124 Moreover, as noted in Chief Justice Warren's majority opinion in Brown Shoe v. United States , 125 "[a] review of the legislative history of [Section 7 and its amendments] provides no unmistakably clear indication of the precise standards the Congress wished the Federal Trade Commission and the courts to apply in judging the legality of particula r mergers." 126 Therefore, with no definitive standards to apply, courts and enforcement agencies have broad power in determining the scope of Section 7. 127
This is not to say, however, that there is no guidance available for evaluating mergers. The Supreme Court, in Brown Shoe , constructed a framework for antitrust analysis, using the congressional fears of "a rising tide of economic concentration" that prompted the Clayton Act and its subsequent amendments. 128 As originally stated in the legislative history surrounding the original Clayton Act and its subsequent amendments, 129 it was this dynamic force of economic concentration that Congress sought to halt "at its outset and before it gathered momentum." 130
In addition to evaluating a merger comparatively, a court or agency must concentrate on the relevant economic and business facts of each individual case. 136 Such "facts," however, need not be unequivocal--Congress was concerned with probabilities, not certainties. 137 As the Court in Brown Shoe reasoned, other statutes proscribed "clear-cut menaces to competition." 138
Determining the relevant product market also requires considering whether certain products are usually bought or sold as a group. 152 In such cases, the "cluster market" doctrine requires that the products, although not substitutes for one another, be grouped together into a single product market. 153 For example, in United States v. Philadelphia National Bank , 154 a leading case concerning the cluster market doctrine, the Supreme Court ruled that commercial banking services, including checking accounts, commercial loans, and savings accounts, constitute a single cluster market. 155 As such, the services should be evaluated separately from the markets for the services of savings banks, commercial loan companies, and other financial institutions. 156 Thus, while various commercial banking services are not substitutes for each other, the fact that they are usually purchased in a group justifies treating them as a single product market. 157
Finally, drawing the relevant "line of commerce" also requires examining the market's competitive performance and supplier conduct. 158 This approach focuses on the supplier's ability to price discriminate, which is the capacity to manipulate a product's price. 159 Price discrimination is typically accomplished by either charging different prices for the same product at different times, 160 or by "bundling" 161 the products and selling them as a group for a price lower than the sum of the individual products' prices. 162 Generally, where a producer can sell the same product to consumers at different prices, either through temporal price discrimination or through bundling, the product market definition must be narrowed to include only that product. 163 This is because persistent price discrimination indicates a lack of effective competition in the market. 164 As a result, antitrust law narrows the product market to protect "diehard consumers" 165 from discretionary exercises of market power. 166 Ultimately, the consequence of including products that are not subject to price discrimination in the same market as those that are is that the investigating court or agency will perceive the price discriminator as having less market power than it actual ly has, resulting in a skewed antitrust analysis. 167
Once a court or enforcement agency has determined the product market, it must delineate the relevant geographic market. 168 In general, the concerns behind geographic markets parallel those of product markets: both definitions ultimately turn on product substitutability, the clustering doctrine, and market behavior. 169 Regarding the geographic market, the "area of effective competition" 170 is either the area in which consumers reasonably turn to obtain substitute products or the area defined by actual sales patterns and consumer convenience and preference. 171 The geographic area may be as small as a city and its environs, 172 or as large as the entire nation, 173 depending on the nature of the product in question. 174 Finally, where a merger has both horizontal and non-horizontal elements, there may be more than one geographic market for each aspect of the transaction. 175
The second ministep, computing market shares, is equally straight-forward. Market shares for all market participants are based on the total sales or capacity currently devoted to the relevant market, together with what would be devoted to the relevant mar ket in response to a "small but significant and nontransitory" price increase. 185 In addition, the market shares can be expressed either in dollar or physical terms, through measurement of sales, shipments, or production. 186
In contrast to the first two ministeps for estimating the merging firms' strength in the relevant market, the third--calculating market concentration--is often an abstract and inexact process. 187 Generally, market concentration is "a function of the number of firms in a market and their respective market shares." 188 Nonetheless, there is no structural test or methodology for carrying out this general rule that is consistently reliable. 189 In fact, in many of the earlier antitrust decisions, courts determined market concentration and the corresponding market power of the merging firms on an ad hoc basis. 190 For example, in United States v. Aluminum Company of America , 191 the court held that the defendant, the Aluminum Company of America ("Alcoa"), possessed monopoly power, based simply on the company's massive 90 percent share of the relevant market. 192 Similarly, in United States v. Grinnell 193 and Amplex of Maryland, Inc. v. Outboard Marine Corporation , 194 87 percent of a national market, 195 and 60 percent of a relevant market, 196 respectively, were held to constitute monopolies. In contrast, the Supreme Court in United States v. United States Steel Corporation 197 and United States v. International Harvester Company 198 held that there was no monopoly power where the defendant firms controlled 50 percent 199 and 64 percent 200 of their respective markets. 201
In an attempt to move away from such ad hoc decisions and to allow corporations to better anticipate when an agency might challenge a particular merger, 202 the trend for determining market concentration has been toward applying the Herfindahl-Hirschman Index ("HHI"), 203 which is calculated by summing the squares of the individual market shares of all the market participants. 204 Because the HHI calculation squares the market shares, it gives proportionately greater weight to larger firms, in accord with their relative importance in the market. 205 As a result, a lack of information about a market's smaller firms is generally not critical, because such firms do not affect the HHI calculation significantly. 206
Both the FTC and the DOJ have adopted the HHI as a useful framework for antitrust analysis. 207 According to those agencies, a post-merger market that has an HHI of below 1000 is generally regarded as "unconcentrated." 208 Ordinarily, neither agency challenges mergers in such markets, because the transactions are unlikely to pose adverse competitive threats. 209 In contrast, a post-merger HHI between 1000 and 1800 is a "moderately concentrated" market. 210 Still, mergers in such markets usually go unchallenged where the mergers increase the HHI less than 100 points. 211 The FTC and the DOJ will, however, further analyze transactions in "moderately concentrated" markets where the HHI increases more than 100 points. 212 According to the enforcement agencies, this is because mergers in such markets pose "significant competitive concerns." 213
Finally, the FTC and the DOJ broadly categorize those markets that have an HHI above 1800 as "highly concentrated." 214 Yet, neither enforcement agency is likely to investigate mergers in highly concentrated markets where the HHI increases less than 50 points. 215 If, however, this HHI increases more than 50 points, a merger will raise "significant competitive concerns." 216 Moreover, where the transaction increases the HHI 100 points or more, the FTC and the DOJ each presumes that the merger will likely create or enhance market power or facilitate its exercise. 217
Similarly, both the FTC and the DOJ might permit an otherwise anticompetitive merger where the transaction may be reasonably necessary to achieve significant net efficiencies. 224 Such efficiencies may include economies of scale, better integration of production facilities, plant specialization, lower transportation costs, and similar efficiencies relating to specific manufacturing, servicing, or distribution operations of the mer ging firms. 225 The FTC or the DOJ may also consider, although to a lesser degree, claimed efficiencies resulting from reduction in general selling, and administrative and overhead expenses. 226
In addition to entry and efficiency analyses, many commentators argue that antitrust enforcement should consider the social and political implications of the proposed transaction. 227 This argument, which is one of the most controversial issues affecting antitrust jurisprudence, 228 gained significant prominence with Congress' passing of the Celler-Kefauver Amendment 229 to Section 7 in 1950. 230 While such concerns subsequently guided many antitrust decisions during the Warren Court era, 231 they have remained relatively dormant since the 1970s. 232 Nonetheless, the recent trend toward consolidation in the media industry, 233 and the alleged corresponding threat to the marketplace of ideas, 234 has prompted many antitrust experts in academia, industry, and government to reopen for debate the role of social and political concerns in the antitrust analysis. 235
At the center of this controversy are contrasting concerns in the legislative history surrounding the Celler-Kefauver Amendment and the actual language of Section 7 regarding the role of non-economic factors in the antitrust analysis. 236 While the legislative history of the Celler-Kefauver Amendment emphasizes the social and political effects that would result from an unbridled accumulation of economic and political power within our country, 237 the actual statutory language of Section 7 does not refer to any such considerations. 238 This distinction has led to two conflicting approaches to merger enforcement policy: 239 the Chicago School Approach and the Multivalued Approach. 240
According to the Chicago School, "the major goals of antitrust relate to economic efficiency--to avoid the allocative inefficiencies of monopoly power, encourage efficiency and progressiveness in the use of resources, and perhaps, on fairness grounds , to maintain price close to cost in order to minimize unnecessary and undesirable accumulations of private wealth." 242
Thus, proponents of the Chicago School emphasize the potential benefits that accompany merger activity, rather than stressing the potential non-economic dangers of such transactions. 243 These proponents argue that merger policy should seek to encourage efficiencies resulting from economies of scale, technological and product-related synergy, superior management, coordinated research and development, lower transportation and transaction costs, and the reduction of excess capacity. 244
Ultimately, advocates of the Chicago School argue that the free market should be permitted to regulate itself, and that the primary--if not exclusive--evil that antitrust jurisprudence is to protect against is the creation or exercise of market power. 245 Consequently, followers of the Chicago School argue that mergers should be analyzed purely in terms of their economic impact, irrespective of non-economic considerations. 246
As a general rule, the Multivalued Approach expands the definition of "competition" beyond mere "prices, costs, and product innovations," 250 to include a strong "socio-political" connotation. 251 Many proponents of the Multivalued Approach justify this broadened definition by arguing that Congress wished to avoid not only economic, but also social losses from mergers. 252 These proponents maintain, for example, that Congress sought to protect small businesses, 253 prevent the loss of communities' local economic independence to large, absentee corporations, 254 and preserve the social and civic ties that bind communities together. 255
Some proponents of the Multivalued Approach also argue that Congress considered the danger to political institutions that accelerated economic concentration threatened. 256 In addition, these proponents suggest that a firm's political influence grows as a function of its size, creating political economies of scale and reducing the number and diversity of political decision-makers. 257 Therefore, Multivalued Approach advocates insist that political and social concerns are an integral part of the antitrust analysis. 258
This part examines the historical application of Section 7 to media mergers and acquisitions. In particular, it focuses on a consumer's ability to substitute media and how courts have defined the product market for four media sub-categories: newspapers, m otion pictures, television, and radio.
In Times Mirror , the government challenged the $15 million 272 acquisition by the publisher of the largest daily newspaper in Southern California (the Los Angeles Times ) of the largest independent 273 daily newspaper publisher in Southern California (The Sun Company). 274 The acquiring company, Times Mirror, was a highly diversified holding company with large interests in newspaper publishing, book publishing, and commercial printing. 275 Between 1960 and 1964, the earnings after taxes of the Times Mirror Company had more than doubled, its total assets had increased from $81 million to $165 million, and its revenues had risen from $113 million to $197 million. 276 The company's principal enterprise, the Los Angeles Times , 277 was "a newspaper with special focus on the interpretation of news and issues and specialization in financial news, entertainment, art, sports and special interest subjects." 278 In terms of circulation, the Los Angeles Times was the largest daily newspaper published in California for the prior 19 years and the largest Sunday paper in California for the prior 16 years. 279 In addition, it led all others nationwide in total annual daily and Sunday advertising lineage 280 for the prior 12 years, and in total annual editorial and feature matter lineage for the prior 16 years. 281
In contrast, the acquired company, the Sun Company, with its three newspapers, the morning Sun , the evening Telegram , and the Sunday Sun-Telegram , dominated the daily newspaper business in California's San Bernardino County. 282 Both the morning Sun and the Sunday Sun-Telegram carried a substantial amount of state, national, and international news, complete stock reports of the New York and American Stock Exchanges, national sports news, nationally known columnists, comics and other syndicated features, and Los Angeles televis ion and radio logs. 283
In analyzing the government's claim that the combined Times Mirror and Sun Company violated Section 7, the court's first step was to develop the relevant market definition. 284 Regarding the product market, the court held that the daily newspaper business was a distinct line of commerce, 285 based on a number of peculiar characteristics and uses that made it distinguishable from all other products. 286 According to the court, the daily newspaper had achieved industry and public recognition and utilized unique methods of production, distribution, and pricing--all practical indicia for determining a product market. 287 In particular, the court emphasized the fact that the daily newspaper provided a cluster of services in one unique package, 288 and that the business had its own trade associations, 289 societies, 290 and journals. 291 In determining the product market, the Times Mirror court also recognized that while daily newspapers compete with other media, such as radio and television, for both news and advertising, "all competitors of any service provided by a daily newspaper should not be lumped into the same line of commerc e with it." 292 The court reasoned that while substitutes may exist for every product, "a relevant market cannot meaningfully encompass that infinite range." 293 In the final analysis, the Times Mirror court regarded the daily newspaper business as a commercial reality which was "universally recognized as a line of commerce." 294
Just as the court considered practical indicia and market realities in determining the product market, it also incorporated such characteristics in defining San Bernardino County as the relevant geographic market. 295 First, the court stressed that the county encompassed virtually the entire area of circulation and home delivery overlap between the Los Angeles Times and the Sun . 296 Second, the court stated that the newspaper industry recognized San Bernardino County as a single newspaper market. 297 Third, the court noted that both the Sun Company and Times Mirror had recognized San Bernardino County as a daily newspaper market for years, and had regularly reported for advertisers' use such things as circulation, number of households, population, an d retail sales on a San Bernardino basis. 298 Finally, and most importantly, the court found that Times Mirror, itself, in evaluating the acquisition of the Sun, had used the daily newspaper business in San Bernardino County as the relevant market area. 299 As a result, the court held that San Bernardino County constituted the relevant geographic market for the acquisition in question. 300
The second step of the court's Section 7 analysis was to scrutinize the trend toward concentration in the daily newspaper industry. 301 In its inquiry, the court examined the trend not only in the relevant market of San Bernardino County, but also in the larger area of Southern California, where the Los Angeles Times circulates. 302 Ultimately, the Times Mirror court found that there had been a steady decline of independent ownership of newspapers in Southern California, 303 and that at the time of the acquisition there was already a heavy concentration of daily newspaper ownership in Los Angeles County and the four counties immediately surrounding it. 304
In its third and final step, the Times Mirror court analyzed the industry trend toward concentration, in conjunction with other industry- and transaction-specific factors, to determine the likely anticompetitive effects of a combined Times Mirror-Sun Company. 305 Specifically, the court found that the acquisition would enhance existing barriers to entry and increase the difficulties of smaller firms already in the market, because the Southern California daily newspaper market was already significantly difficult t o enter. 306 Consequently, the court ruled that the acquisition and ownership of stock of the Sun Company by the defendant, the Times Mirror Company, violated Section 7, and directed the defendant to divest itself of the Sun Company's stock, accordingly. 307
Of the recent antitrust cases that recognize the depth of competition that the movie industry faces, the district court's decision in United States v. Syufy Enterprises 314 is one particularly instructive Section 7 analysis. In Syufy , the defendant, Syufy Enterprises ("Syufy"), 315 was a regional motion picture theatre circuit 316 that, in 1985, operated a total of 33 indoor theatres with approximately 130 screens and 23 drive-in theatres with approximately 108 screens in California, Nevada, and several other western states. 317 The government alleged that Syufy's acquisition of a competing exhibitor, Red Rock Theatre, and plans to construct a 12 screen theatre, substantially lessened competition in one particular market--Las Vegas, Nevada. 318 The market for first-run exhibition of motion pictures in Las Vegas evolved as follows: 319
| Number of Screens | |||
|---|---|---|---|
| Dec. 1980 | Jan. 1981 | Jan. 1983 | |
| Plitt Theatres: | 3 | 3 | 0 |
| Mann Theatres: | 3 | 3 | 0 |
| Red Rock Theatre: | 11 | 11 | 11 |
| Syufy Enterprises: | 0 | 6 | 12 |
| Roberts Company: | 0 | 0 | 5 |
| Syufy | Roberts/UA | |||
| Number of Screens | Market Share | Number of Screens | Market Share | |
| 1984 | 23 | 60% | 5 | 40% |
| 1985 | 23 | 91% | 11 | 9% |
| 1986 | 23 | 85% | 28 | 15% |
| 1987 (1st half): | 23 | 79% | 28 | 21% |
| 1987 (2nd half): | 23 | 57% | 31 | 24% |
| 1988 (1st half): | 22 | 39% | 31 | 25% |
| 1989 (proposed): | 34 | -- | 31 | -- |
In finding that consumers consider home video, cable television, sub-run exhibition and, to a lesser degree, pay-per-view television viable substitutes to first-run theatrical exhibition, the Syufy court emphasized four main points. 327 First, the defendant had introduced evidence that 50 percent of VCR owners attend movie theatres less often and that 67 percent of VCR owners prefer watching a movie at home instead of at a theatre. 328 Second, the defendant had established that persons who subscribe to pay cable television also go to the movies less. 329 Third, the court found that consumers viewed the above ancillary markets--VCR and cable television--as substitutes to first-run motion picture exhibition. 330 Finally, the expert testimony at trial proved that home video and cable television alternatives act as a restraint to theatre exhibitors' ability to charge excessive prices at the box office. 331 As a result, the court found that if the defendant were to raise its admission prices, many consumers simply would not go to one of its theatres to see a movie. 332 Instead, such consumers would likely rent a movie on videocassette or watch a movie on cable television. 333 Thus, the court held that the product market for the movie industry, insofar as consumers are concerned, should be defined broadly to include all ancillary markets. 334
Having defined the relevant market, the Syufy court next set out to estimate the defendant's strength in that market. As Figure 1 demonstrates, 335 Syufy had a significant, albeit steadily declining, market share throughout the 1980s. Notwithstanding such percentages, the court held that Syufy's acquisitions and internal expansions did not pose a significant likelihood of lessening competition in La s Vegas. 336 Specifically, the court found that this case was a prime example of one in which there were no barriers to entry and, consequently, no monopoly power. 337 As evidence, the court looked to the Roberts Company, the only other significant competitor to Syufy, which had expanded the number of theatres it operated in Las Vegas between November 1985 and December 1986 from five to twenty-eight screens. 338
Supporting the court's determination was an economic expert who had testified "convincingly" at trial that Roberts' great and rapid expansion was proof that no entry barriers existed in Las Vegas. 339 Moreover, the fact that Syufy was planning to build twelve more screens upon the conclusion of the trial was evidence that the market could handle additional theatres. 340 Finally, projecting population growth and applying the industry standard that there should be one screen for every ten thousand persons, the court found that Las Vegas would be underscreened in the near future if no additional screens were added. 341 As a result, the Syufy court held that additional competitors could enter the Las Vegas market with no barriers. 342 More importantly, the court found that the defendant's acquisitions and internal expansions did not violate Section 7. 343
Decisions such as Syufy are likely to stimulate mergers and acquisitions within the motion picture industry, because diminished antitrust merger concerns are likely to follow from broadened relevant product market definitions. 344 Nonetheless, this is not the only path by which rapidly developing technology will lead to consolidation within the movie industry. 345 In contrast, the advent of technology, and the corresponding rise in motion picture aftermarkets, has also lead to a lessening of judicial oversight of vertical integration within the motion picture industry. 346
In broad terms, the movie industry encompasses three markets: 347 (1) production; 348 (2) distribution; 349 and (3) exhibition. 350 At one time, courts disapproved greatly of vertical integration of these three markets. 351 For example, in the 1948 Paramount Pictures decision, the Supreme Court found that the major motion picture studios had unreasonably restrained competition in violation of the Sherman Act 352 by entering into certain anticompetitive agreements with exhibitors by vertically integrating the production, distribution, and exhibition of motion pictures. 353
In the subsequent case history to Paramount Pictures , the motion picture studios were required to divest themselves of all motion picture theatres they then owned. 354 Furthermore, in order to terminate producers' anticompetitive practice of distributing films exclusively to circuits of theatres, the studios were prohibited from "licensing any feature for exhibition . . . in any other manner than that each license shall be offered and taken theatre by theatre, solely upon the merits and without discrimination in favor of affiliated theatres, circuit theatres or others." 355 Finally, on remand from the Paramount Pictures Court, the motion picture studios were also prohibited from acquiring theatres in the exhibition business in the future, except upon application to the U.S. Attorney General and upon a showing to the court "that any such engagement shall not unreaso nably restrain competition in the distribution or exhibition of motion pictures." 356
Despite the gradual evolution of the movie industry, 357 the Paramount Pictures decision and its subsequent history were regarded as the leading motion picture antitrust decision for many decades. 358 Some 40 years later, however, in United States v. Loew's Inc. , 359 the Second Circuit Court of Appeals, finding that the growth of the motion picture aftermarkets of videocassettes, network, and syndicated and cable television had dramatically changed the nature and business realities of the motion picture industry, 360 lifted the Paramount Pictures consent judgment 361 and granted the movie producer-distributor defendant permission to own and operate motion picture theatres, subject to certain restrictions. 362 With the restrictions on vertical integration eliminated by the Second Circuit, it is likely that motion picture production studios will look to acquire or merge with distribution and exhibition firms. 363
In Cable Holdings , the three corporate parties, Cable Holdings, Home Video, and Wometco, were engaged in the cable television business 370 in Cobb County, Georgia. 371 The antitrust allegations in the suit arose out of an attempt by the plaintiff, Cable Holdings, to expand its cable business into an area of the county known as the "western territory." 372 In addition to a number of Sherman Act accusations, 373 the plaintiff charged that the merger between Home Video and Wometco violated Section 7. 374
Regarding the relevant market definition, the Cable Holdings court held that all "passive visual entertainment" was reasonably interchangeable by consumers and constituted a single product market. 375 In addition, the court found that the two merged companies did not control a significant portion of the relevant product market and, consequently, no anticompetitive effects arose from the merger. 376 The Eleventh Circuit thus held that the district court had properly dismissed Cable Holdings' Section 7 claim, on the grounds that Cable Holdings had failed to prove that the merger would monopolize a significant portion of the relevant product market. 377
Regarding the definition of the relevant geographic market in an antitrust merger analysis of the television or radio industry, some courts have examined the range of broadcasting signals, 378 while other courts have looked to different criteria, 379 to determine the area of effective competition. For example, in Ralph C. Wilson v. American Broadcasting Companies , 380 the court ruled that the entire San Francisco-Oakland-San Jose Bay area constituted a complete geographic market, 381 where the plaintiff and defendants operated several television stations. 382 In arriving at this decision, the court weighed several factors, including: (1) that the Federal Communications Commission ("FCC") regarded the area as one market; (2) that the two recognized national ratings services, A.C. Nielson Company and Arbitron Company, considered the region to be a single market; (3) that there was a large overlap in the signal coverage of both the plaintiff's and defendants' television signals; and (4) that the plaintiff's and defendants' television stations shared a substantial overlap of viewers. 383
Regarding the media industry, courts are gradually adopting two approaches for recognizing competition among differing media products: a compartmentalized approach and a broad-market approach. Under the compartmentalized approach, courts find consumers' p erception of media product substitutability as limited. 386 By finding that a particular media product has few substitutes, these courts contract the outer boundaries of the product market, resulting in a particularly narrow relevant market definition. 387 One sub-category of the media industry for which courts have adopted this compartmentalized approach is the newspaper industry--as explained above, newspaper antitrust decisions rarely recognize competition among newspapers, radio, and television in cons umer news and information markets. 388
In contrast to the compartmentalized approach, the broad-market approach expands the outer boundaries of the product market definition to include media product competition across industry sub-categories. For example, in motion picture antitrust decisions, courts have gradually been accepting the notion that competition exists among first-run films, sub-run films, and video aftermarkets. 389 Similarly, in television antitrust decisions, courts have also held that cable television, satellite television, video cassette recordings, and broadcast television--dubbed collectively as "passive visual entertainment" 390 --do, in some circumstances, compete for viewers. 391
This section does not advocate either compartmentalized or broad-market analyses for media antitrust decisions. Moreover, this section does not argue that certain courts erroneously followed one approach over the other, given the relevant economic and bus iness facts at the time each individual case was decided. Nonetheless, it is important to note that the evolution of a compartmentalized versus broad-market approach distinction has lead to an inconsistent recognition of competition in the media industry.
Regarding television, the Telecom Act repeals or modifies many television ownership limitations. 400 First, the Act eliminates cable cross-ownership restrictions, 401 thereby permitting a single person or entity to own or control both a network of broadcast television stations and a cable television system. 402 Second, the Act increases the percent of national viewers that television stations can reach from the former limit of 25 percent to 35 percent. 403 Third, it eliminates FCC restrictions on the number of television stations that a person or entity "may directly or indirectly own, operate, or control, or have a cognizable interest in, nationwide." 404 Fourth, the Act directs the FCC to reevaluate its multiple ownership rules, which restrict ownership of more than one television station in a local market. 405 Fifth, the Act orders the FCC to exempt the top 50 markets from its "One-to-a-Market" rule, 406 which bans cross-ownership of radio and television stations in the same market. 407 Finally, the Act directs the FCC to revise its rules concerning "dual networks," 408 thus permitting a television station, either broadcast or cable, to affiliate with a person or entity that maintains two or more networks, unless such dual or multiple networks are composed of: (1) two or more of the four existing networks (ABC, CBS, NBC , and FOX) or, (2) any of the four existing networks and one of the two emerging networks (WBTN and UPN). 409
Concerning radio ownership, the Telecom Act eliminates all FCC provisions limiting the number of AM or FM broadcast stations that one entity may own or control nationally. 410 In addition, one entity may now own up to five stations or 50 percent of all stations, whichever is less, in small markets with 0-14 stations. 411 In markets with 15-29 stations, one company may own six stations; 412 in markets of 30-44 stations, one company may own seven stations; 413 and in markets with more than 45 stations, one company may own eight stations. 414
According to many commentators, the new Telecom Act paves the way for "wave after wave" 415 of multimedia 416 mergers and acquisitions. 417 Once firms can own more stations, cable television and entertainment companies will probably see even more consolidation within their respective industries. 418 In addition, where Congress permits cable television and local and long-distance telephone companies to compete directly, 419 mergers and alliances between telecommunications and cable enterprises will likely follow. 420
Finally, the Telecom Act provides multimedia companies with the opportunity to offer consumers a bundle of communications services, including local and long-distance telephone services, wireless communication, and cable television. 421 Ultimately, then, the Telecom Act is likely to result in an evolutionary blurring of the line between telecommunications and entertainment, 422 producing major multimedia conglomerates, 423 and rendering traditional notions of "telephone companies," "cable companies" and "movie companies" obsolete. 424
With so much new technology and legislation stimulating the simultaneous rising forces of media competition and consolidation, applying existing antitrust law to the multimedia industry moves beyond the realm of "exceptionally difficult" 428 to the level of nearly impossible. Therefore, as explained in the following three sub-sections, the evolving competitive landscape of the media industry requires a new model for the multimedia antitrust analysis.
As this example demonstrates, recent technological innovation has lead to a rise in media product substitutability. Nonetheless, courts fail to consistently recognize that competition exists among different media exhibiting similar content. 433 Therefore, a new antitrust model is needed for the media industry that reflects technological innovation, and the corresponding change in market realities.
Finally, with the restrictions on television and radio station ownership significantly lessened, 438 media companies are encouraged to consolidate 439 in order to achieve higher market shares and economies of scale. 440 Consequently, the antitrust analysis of multimedia mergers and acquisitions must adequately consider recent changes in competition from the supply side of the industry.
In contrast, motion picture antitrust decisions have gradually started accepting the argument that competition exists among first-run films, sub-run films, video aftermarkets, and cable television. 442 Similarly, television antitrust decisions have also held that cable television, satellite television, video cassette recordings, and free broadcast television--dubbed collectively "passive visual entertainment" 443 --do, in some circumstances, compete for viewers. 444
The approaches taken in newspaper, motion picture, and television decisions may have reflected market realities at one time. Nonetheless, these "older media" decisions cannot guide future courts because the past decisions recognize competition o n an inconsistent basis. Where companies are suddenly permitted to own amalgamations of publishing, television, radio, motion picture, and computerized interactive media concerns, 445 courts must adopt a new antitrust model that consistently recognizes competition across media sub-categories.
An appropriate product market definition for multimedia, then, can only follow from focusing on the special characteristics of the industry. 455 First, courts and enforcement agencies should recognize that consumers' perception of media interchangeability varies, depending on the content of that media. 456 Second, consumers' propensity to substitute media is also a function of "communication medium." 457 Third, the content on some forms of media is more heavily regulated than on others, thereby limiting competition among some media. 458 Finally, multimedia firms can now provide "one-stop shopping" benefits to consumers, as a result of the recently passed Telecom Act. 459 Viewed individually or together, such characteristics significantly affect the mode of competition in the marketplace and, in turn, must be factored into the product market definition. 460
Taking the special characteristics and market realities of the multimedia industry into account, a product market definition for multimedia merger analysis must include a definition of a product market that recognizes competition where, in fact, competiti on exists. 461 Such a definition must focus on the medium's content, as well as the manner in which it is communicated. 462 What follows is a three-step process for delineating a product market for the multimedia industry: (1) create "content genres"; 463 (2) exclude nonsubstitutable media; and (3) incorporate "cluster markets." 464 In the first step of the process, a court or enforcement agency should group similar content genres into individual markets. 465 By limiting the outer boundaries of each product market to media that communicates the same content genre, this first step minimizes the danger that the amount of competition will be overstated. Moreover, creating content genres recognizes that different media do compete, but only to the extent that they communicate similar messages. 466
After basing the initial product market definition on the applicable content genre, the next step is to evaluate the special characteristics of the communication medium. 467 As it appears on a particular medium, a content genre may not be substitutable with the same content genre appearing on another medium. 468 This may result from the existence of: (1) technical or regulatory restrictions; 469 (2) diehard consumers; 470 (3) temporal price discrimination; 471 or, (4) bundling. 472 Media with such characteristics should, therefore, be placed in their own markets, in order to avoid overinclusive market definitions. For example, a preliminary "sports genre" may include sporting events on television and radio, and in live ar enas, newspaper stories, and movie theaters. Nonetheless, because the last two media are not physically capable of broadcasting real-time images or sound, they are limited substitutes of the first three. Thus, in order to accurately "recognize compet ition where, in fact, competition exists," 473 the preliminary sports genre line of commerce should be divided into two submarkets: live sports exhibition and "anecdotal" sports reporting. 474
The final step of the product market definition is to incorporate "cluster markets" and other supplier conduct into the analysis. 475 Under the cluster market rationale, products that consumers tend to purchase concurrently from a single producer should be grouped together, even if the products do not typically compete. 476 Consequently, the product market definition would be broadened to include such clustered goods. 477 For example, because cable and satellite television offers "one-stop shopping," 478 but broadcast television does not, programs of all types exhibited on cable and satellite television should be combined into a single cluster market. 479 Similarly, with the passage of the Telecom Act, cable and telephone companies are permitted to offer packages of services, including local and long-distance telephone services, wireless communications, and cable television. 480 As was the case with commercial banking services in Philadelphia National Bank , such goods and services should be included in the same relevant market, even where those products do not typically compete. 481
Once a court or enforcement agency has determined the product market for a multimedia merger, it must delineate the relevant geographic market. 482 Nonetheless, because the law of geographic markets parallels that of product markets, multimedia substitutability, clustering, and market behavior also determine the geographic market. 483 In addition, courts might consider: (1) any overlap of broadcasting signals; 484 (2) the area of a certain periodical's circulation; 485 (3) industry and regulatory definitions of the geographic market; 486 (4) the existence of any trade associations, societies, or journals; 487 and, to a lesser degree, (5) both parties' stipulations of the appropriate geographic market. 488 While these criteria should guide a court or enforcement agency in establishing the "area of effective competition," the geographic market ultimately should be defined to encompass any commercially significant area which can reasonably be said to confine the relevant commercial activities. 489
In the third part of the analysis, the court or enforcement agency must estimate the concentration of the relevant market. 494 Because market concentration is often an abstract and inexact concept, courts, the DOJ, and the FTC favor the HHI--an objective and easy-to-understand formula. 495 Nonetheless, the test for market power is not always as simple as computing a firm's market share to see if it exceeds a critical threshold. 496 As the Supreme Court warned nearly fifty years ago, "[t]he relative effect of percentage command of a market varies with the setting in which that factor is placed." 497
An overly rigid test, then, could potentially obscure the reality that "market power" varies significantly with the structural and political factors of some markets. 498 Indeed, mergers and acquisitions that result in a post-transaction HHI of less than 1000 could escape antitrust scrutiny, and yet still pose anticompetitive and antidemocratic threats. 499 Moreover, such threats are especially prevalent in the media industry, where even minimal economic control may equate to significant influence over public sources of information. 500 When two firms that inform the population merge, the decrease in the number of competitors may threaten the free flow of information, quite apart from any economic repercussions. 501 Therefore, while the HHI may provide an objective and somewhat useful standard, the antitrust investigator should not overemphasize the importance of the formula in deciding whether to proceed with a full antitrust analysis of multimedia mergers and acqu isitions. 502 Nonetheless, until a more flexible methodology is developed for measuring market concentration in the multimedia industry, courts should continue to use the HHI in the multimedia antitrust analysis. 503
Nonetheless, free speech comes at a price. While the U.S. Constitution protects an individual's right to speak, it does not guarantee that a mass audience will receive the message. 509 Moreover, certain controversial viewpoints on a "Web sight in Zaire" 510 simply may not compete with those same viewpoints when they appear on an established and, presumably, objective 24 hour cable television news channel. Consequently, the public may not perceive the World Wide Web as a legitimate substitute for news, comme ntaries, and editorials on television or radio. Therefore, the multimedia industry should be examined with the same traditional efficiency and market entry analyses as any other industry.
With this in mind, a court might consider a number of industry-specific factors in determining whether a particular multimedia merger is anticompetitive. For example, the content on certain media, such as broadcast television, are more highly regulated t han other media. 511 In addition, some media are limited physically in the number of distribution channels on which they may be offered. An example includes the radio industry, which can only broadcast on a finite number of frequencies. Consequently, broadcast television and radio have higher barriers to entry than other types of media.
While proponents of the Chicago School Approach for evaluating multimedia mergers would conclude the antitrust analysis with entry and efficiency analyses, 512 supporters of the Multivalued Approach would examine the social and political ramifications of the proposed transaction. 513 At the most extreme and controversial level, some proponents of the Multivalued Approach would even extend those socio-political implications to include First Amendment concerns: 514 "that the widest possible dissemination of information from diverse and antagonistic sources is essential to the welfare of the public." 515
Without advocating either approach in general, the antitrust model that this Note proposes addresses the considerations of both the Multivalued Approach and the purely-economic Chicago School Approach. As explained above, the First Amendment concerns that multimedia mergers and acquisitions limit the number of channels for communication are intertwined inseparably with traditional Chicago School notions of "competition" and "substitutability." Consequently, this Note protects the socia l and political ramifications of multimedia mergers and acquisitions by developing an antitrust model that "recognize[s] competition where, in fact, competition exists." 516
To illustrate how the proposed model addresses both the Chicago School and the Multivalued Approaches, assume a merger between a 24 hour cable television news channel, such as New York 1 in New York City, 517 and a regional newspaper, such as the New York Post . 518 Assume further that both New York 1 and the New York Post report some national news, but focus primarily on events that occur in, and affect, New York City. 519 Under the historical antitrust analysis of the media industry, a court would probably not include New York 1 and the New York Post in the same product market, because courts in the past generally have not regarded television stations and newspapers as substitutes. 520 While this historical approach to an antitrust analysis of the merger would fulfill the Chicago School Approach because it would be purely economic, the analysis would not satisfy the Multivalued Approach because the analysis would not consider any socio -political ramifications that could potentially follow from the merger.
Nonetheless, under the proposed model, a court would probably place New York 1 and the New York Post in the same "news and information" content genre. 521 Specifically, a court would likely find that both media compete, because they communicate nearly identical content at comparable prices to the consumer. 522 Consequently, a court would probably include both New York 1 and the New York Post in the same relevant market definition.
In contrast to the historical analysis of this hypothetical merger, the analysis under the proposed model would address both the Chicago School and the Multivalued Approaches. First, the proposed model would comport with the Chicago School because it app lies an economically-based antitrust analysis to the New York 1- New York Post merger. Intangible First Amendment and other socio-political concerns would not enter into the analysis; the model would focus solely on competition between the two media. Second, the proposed model would also satisfy the Multivalued Approach. This is be cause it would recognize that a hypothetical merger between New York 1 and the New York Post would eliminate an editorial voice over New York City's "marketplace of ideas." 523 Therefore, the model that this Note proposes protects the socio-political concerns of the Multivalued Approach, by developing a Chicago School, economically-based analysis that focuses on competition across sub-categories of the multimedia industry.
Conclusion
Courts and enforcement agencies need a new antitrust model for analyzing mergers and acquisitions in the rapidly advancing multimedia industry. This Note develops a model that protects the social and political concerns surrounding multimedia mergers and acquisitions, by focusing on traditional economic concepts of competition and product substitutability. By approaching antitrust law in such a manner, this model addresses the both Multivalued Approach and the Chicago School Approach for determining the a nticompetitive effects of consolidation within the multimedia industry.
| 1 | * J.D. Candidate, 1997, Fordham University School of Law. This Note is dedicated to my family for their constant love and support. I would also like to thank Robert D. Joffe, Esq., Partner, Cravath, Swaine & Moore, New York, for his invaluable commen ts and criticism, Professor Thane Rosenbaum for his inspirational teaching, and the editors of the Fordham Intellectual Property, Media & Entertainment Law Journal for their tireless efforts. I am especially grateful to Elizabeth A. Bloomer, without whose love and encouragement, this Note would not have been possible. |
| 2 | . See Richard Lapper, Survey of Capital Sources--Year End Review , Fin. Times, Jan. 16, 1996, at 1 (commenting on the flourishing merger and acquisition activity in the United States); Steven Lipin, Let's Do It: Disney to Diaper Makers Push Mergers and Acquisitions to Record High , Wall St. J., Jan. 2, 1996, at R8 [hereinafter Lipin, Disney to Diaper Makers ] (reporting that the number of corporate mergers in the United States and abroad reached a record in 1995); Mergers |