Before the new year, Netflix announced it would acquire significant portions of Warner Bros. Perhaps unsurprisingly, some policymakers and commentators have already rushed to claim such a transaction would be bad for consumers and lead to harmful industry concentration — or even market dominance by a single firm.
They should take a step back before rushing to judgment. Such transactions are supposed to be carefully analyzed, not condemned off the bat. The focus of U.S. antitrust law is a transaction’s effect on consumers and not, as is too often the concern of commentators, the welfare of competitors in the market. As regulators analyze the Netflix-Warner Bros. deal, an objective, consumer-focused approach should guide their considerations.
But it might not, especially given the heightened scrutiny of acquisitions by large companies over the past few years. This transaction will almost certainly trigger scrutiny under the 2023 Merger Guidelines, which determine which mergers and acquisitions are presumed to have anticompetitive effects by the Justice Department and Federal Trade Commission. The 2023 version of the merger guidelines is far more focused on structural aspects, such as market concentration, than the previous version. This approach could increase the agencies’ skepticism of acquisitions and deter or prevent mergers that would actually benefit consumers. The result is that government bureaucrats get their preferred market structure, but the public consumer loses out.
Like many other discussions in the tech sector, the Warner Bros. acquisition shows how quickly markets are evolving and will raise many of the questions of market definition seen in similar debates within the tech sector. The reality is that innovation, especially in the technology sector, is common and inevitable — and allowing it to occur is often one of our best competition policies.
Today, we have more entertainment options than ever before, raising interesting questions about what market Netflix and Warner Bros. compete in, a central question that regulators will confront when determining the acquisition’s possible effect on the market.
But which market? Is it all video-based entertainment, including those already in decline, such as movie theaters and traditional cable and broadcast television? Or is their market all online video entertainment, including the growing share of attention (particularly among Generation Z) from user-generated content on both long- and short-form platforms such as YouTube and TikTok? Or perhaps the relevant market consists of only subscription-based streaming services, where there are still a growing number of options and subscribers. It is important that any market definition reflects the reality consumers experience when seeking entertainment and not merely what regulators choose to believe.
What happens if regulators get it wrong? In 2004, Blockbuster could see the writing on the wall. Facing a new dimension of competition in home-video rentals from Netflix and cheap DVD sales in retail stores, it knew it would have to adapt or die; thus, it attempted a hostile takeover of competitor Hollywood Video. Blockbuster hoped that consolidating the two largest physical home-video rental companies would enable them to expand their offerings and beat Netflix in their price war.
The FTC was never required to provide market definitions to inform the relevant parties, and its months of intense scrutiny forced Blockbuster to drop its bid. But it can be inferred that the agency’s request for pricing practices from all 6,400 physical Blockbuster stores indicated a concern only for competition between physical home-video rental stores. This is a fairly narrow market, especially compared to the options available today. In other words, the FTC’s apparently narrow market definition kept the agency from recognizing the market pressures Blockbuster faced.
In blocking the Hollywood Video acquisition, the FTC may have doomed Blockbuster to bankruptcy. This is just one example of how regulators could not see the way innovation was changing the nature of home entertainment and entertainment more generally.
STREAMING BROKE TELEVISION’S SENSE OF TIME
There can be even more significant consequences for consumers and companies when potentially beneficial mergers or acquisitions are denied. In 2022, European regulators and U.S. policymakers, including Sen. Elizabeth Warren (D-MA) and then-FTC Chairwoman Lina Khan, closely scrutinized Amazon’s proposed acquisition of iRobot and ultimately led the companies to pivot from the transaction. Now, iRobot has laid off thousands of employees and entered Chapter 11 bankruptcy. The beneficiary of this is not the public consumer but the company’s Chinese rival, which is now set to acquire it at a lower cost.
Antitrust laws are designed to ensure that consumers benefit from a competitive marketplace. As regulators and the public debate the proposed acquisition of Warner Bros., they should focus on whether such a merger can benefit the public.
Jennifer Huddleston is a technology policy research fellow at the Cato Institute and an adjunct professor at George Mason University’s Antonin Scalia Law School. Christopher Gardner is a research associate at the Cato Institute.