After months of speculation, Warner Bros. Discovery — the parent company of HBO, CNN, DC Comics, and more — announced in late February that it had reached an agreement to be sold.
But it was not the merger that many were expecting.
Paramount, and not Netflix (which originally submitted a bid to buy Warner Bros.), will reportedly pay $111 billion for its media and entertainment rivals. While the deal must still pass muster with regulators, Paramount edged out Netflix because of its superior position with respect to antitrust concerns. In the end, the jockeying over Warner Bros. was not decided by the strength of New Hollywood’s ambitions or the close relationship between Paramount CEO David Ellison and President Donald Trump — two storylines that dominated the coverage leading up to the announcement — but instead, a decades-old court case with Philly roots.
The death knell for Netflix’s dreams of absorbing HBO proved to be a 1963 Supreme Court decision in United States vs. Philadelphia National Bank. In that case, the court wound up blocking a merger between the second- and third-largest banks in town, Philadelphia National Bank and Girard Trust Corn Exchange Bank. (Although not a household name today, the former company gave the city the iconic PNB letters on One South Broad, before the bank was absorbed by JP Morgan Chase in the 1990s.)
At its simplest, the case “created a kind of rule for mergers,” says Herbert Hovenkamp, a renowned scholar and professor at the Penn Carey School of Law at Penn, “a rule that remains with us today.” United States vs. Philadelphia National Bank established a historic precedent within antitrust law which is colloquially referred to as the “30-percent rule”: If a merger results in control of more than 30 percent of a market share, in any industry, then it will invariably be struck down by government regulators.
Ultimately, Netflix bowing out of its pursuit came down to antitrust concerns over its excessive control of the streaming landscape. By some estimates, a combined Netflix-HBO Max would amount to roughly 33 percent of the streaming market; meanwhile, Paramount’s merger would barely exceed 20 percent. This accounting is what reportedly scuttled Netflix’s plans.
“There’s a perfectly rational explanation that does not involve Trump,” says Hovenkamp, referring to some of the media speculation of White House influence. “When Netflix looked at the market shares, they determined that they would lose a challenge.”
But why does a decades-old court case centered around an old dispute in Philly — one that remains “fairly controversial,” per Hovenkamp — hold so much sway in the first place? And in an age where Big Tech, AI, and Wall Street are increasingly threatening consumer welfare, what does the future of antitrust laws look like?
The Citizen spoke to Hovenkamp about the mega-merger and more. This interview has been condensed and edited for clarity.
One thing that I’ve found confusing about the application of the 30-percent rule to Netflix is the notion of what constitutes “a market.” Can you explain?
You’re thinking about a very, very important issue. It’s the definition issue: Who’s in this market? Do we include only the main firms — the traditional streamers of full-length videos and TV shows, like Netflix, Amazon Prime Video, Disney+, and HBO? Or do we broaden out [the market] to include other companies that are capable of streaming video, like YouTube, TikTok, and Facebook? As the market gets defined more and more broadly, the market shares of firms go down, because there’s more people in the market.
There’s a lot of debate swirling through antitrust circles right now about how you define these markets. One of the problems with internet commerce has been that things change much more quickly than they do in traditional commerce. If you were talking about [market share with respect to] movies, you would count the number of theaters or the number of producers. Defining markets is a bigger issue with the internet.
Well, all merger law is controversial. We do not have very precise tools for predicting the consequences of a merger. The question we want to ask in a case like Netflix is about the harms: Will a merger likely raise prices or reduce quality?
You wrote an article last year for the Network Law Review raising the idea that the 30-percent rule might require revisiting. Why?
First of all, the bank case is very old, more than 60 years old. The Supreme Court’s decision was supported by very important economists at that time. It was not fringy. It was well founded within the mainstream of economic thinking at that time, applied to brick-and-mortar commerce. But if we’re living in a world where people can come into the market digitally — which means they can do it a lot faster, a lot cheaper, and from a lot more sources — is that rule still good? Or should we tolerate more mergers in those areas simply because there is more competition coming into the market? You know, we haven’t fully addressed that question yet. I personally think that the 30-percent rule is not a bad starting point, but it’s kind of long in the tooth. It really has not been refitted for internet commerce.
It’s probably worth pulling back for a second to ask: What is the point of antitrust law?
The goal of antitrust laws is to protect three things: low prices, high outputs, and unrestrained power to innovate or produce high-quality products. So those are consumer-favoring goals. Antitrust offers very little protection, however, for firms that are simply displaced by newer technologies. I mean, competitors can sue under the antitrust laws, but if the only thing they can show is that they get beaten out of the market by a product that’s better or faster or cheaper or more exciting to consumers, then that’s a sure loser, right?
In recent years we’ve seen a surge in antitrust concerns related to Big Tech firms like Microsoft, Google, and Amazon. Is this a defining moment for the field?
Antitrust is cyclical. There have been some big moments in the past, too, during my career. One was back in the 1980s when the telephone company AT&T was broken up and there were new companies coming in, like MCI and Sprint. So that one was all about telecommunications. And then there was another big one about 20 years later that had to do with pharmaceuticals and anti-competitive agreements. But this current moment has been the biggest one.
The rise of Big Tech and internet commerce has increased both the profile of antitrust concerns and the amount of time that lawyers devote to antitrust litigation. It’s a high demand business right now. Lots of students want to study it and go into it. I don’t think that’ll last forever. But right now, it’s still going pretty strong, and it has been for about eight or 10 years.
99 percent of mergers every year don’t face any legal challenges at all. (Or so I’ve read in your own writing.) So what’s driving this surge in antitrust interest?
It’s a very ideological subject. There are people that think all mergers are bad. I think one unfortunate aspect of this rise in monopolistic claims is that it’s a heavily populist development. Populists tend to view mergers with hostility on both sides of the political divide, but particularly on the left. It doesn’t depend as much on clinical investigation as on people’s vibes or feelings.
The great majority of mergers are intended to either reduce costs or improve products. Two medical practices might merge, and by doing that, can serve a broader range of specialties or provide weekend call service, things like that. Airlines frequently merge so they can offer more connecting flights. Grocery chains frequently merge because networking of grocery distribution is very efficient. Yes, there’s a small number of mergers involving firms with big market shares that pose a competitive threat, and those are the ones we try to look out for. But the vast majority of mergers occur because firms believe they can do something better or cheaper, most of them being relatively small.
The rise of Big Tech and internet commerce has increased both the profile of antitrust concerns and the amount of time that lawyers devote to antitrust litigation. It’s a high demand business right now.
Do you feel as though tech companies are being unfairly targeted?
If you look at the economics, when do we [historically] go after businesses for antitrust violations? We go after stagnant industries, where no real progress is being made — and, as a result, you see a lot of collusion, price fixing, and things like that. The internet doesn’t satisfy any of those conditions. It supports a collection of highly innovative industries with rates of patents that are very high. All of these big firms have very high investments in research and development. We would ordinarily think of these markets as ones that we ought to leave alone, not interfere too much with, because they are highly performing markets.
The problem with highly performing markets is that they leave older firms in the dust. Companies like Amazon have driven a lot of old brick-and-mortar retailers out of business, and I think that drives a great deal of the additional antitrust enforcement. Not that there aren’t antitrust violations going on in Big Tech. There are — plenty of them — and I think many of the actions have been well thought through. But I don’t think Big Tech deserves quite the viciousness that has been leveled at it by a lot of people. I think we’re prone to overregulate it. We’re not as bad as the Europeans, though.
What’s the landscape in Europe right now?
Europe has regulated these companies even worse than we do, and it’s really affected their economic growth. The European Union has had a massive reaction to digital commerce and the result has been a minefield for young digital firms to get started in Europe. So those legislatures end up regulating American firms because there aren’t any European firms that are big enough to regulate! Digital commerce has not been a very successful industry in Europe. And I think one of the reasons for that is all of this aggressive anticipatory regulation.
Why, as you’ve said, is the 30-percent rule controversial?
Well, all merger law is controversial. We do not have very precise tools for predicting the consequences of a merger. The question we want to ask in a case like Netflix is about the harms: Will a merger likely raise prices or reduce quality? We don’t have very good metrics for making those predictions, and as a result, we get them wrong a lot. Competition is more dynamic on the Internet. If Netflix raises its price, then Amazon could follow by immediately adding thousands of customers, which it could do at very low cost. This, as you might imagine, could make that price increase unsuccessful.
Before Netflix dropped its bid, how did you think it was going to play out?
The Paramount deal is the better option, because it’s unlikely to trigger concerns based on Philadelphia National Bank. But I had hoped that a Netflix challenge would produce litigation for no other reason than it’d force the courts to confront some of these issues.
Consumers are supposed to be the beneficiaries of antitrust challenges. But is there a role to play for everyday people in whether or not these mergers go forward?
Formally, I don’t think there is much of a role. I think informed consumers are always critical to this process, and there’s a lot of misinformation out there about the Internet, but I think one pervasive problem with antitrust is the economic complexity. It’s a hard discipline that heavily involves economics. You certainly wouldn’t want lay people doing your heart transplants, right?
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