Recent court decisions in New Zealand and the United States clearly illustrate the different processes and responses to proposed media mergers in the two countries.
Our Commerce Commission rejected the planned merger between NZME and Fairfax New Zealand because it believed the transaction was likely to lead to substantially less competition in certain markets and wasn't expected to generate sufficient public benefit.
The Commission's decision was upheld by the High Court.
Meanwhile, in November 2017, the US Justice Department initiated legal action to block the proposed US$108 billion ($157b) merger between AT&T and Time Warner.
AT&T, through its DirectTV operations, is the largest distributor of subscription television in the US while Time Warner owns several large TV networks, including TNT, TBS, CNN and HBO.
The Justice Department's action was based on the belief that the proposed merger was likely to substantially lessen competition in the video programming and distribution market.
Justice Richard Leon, who heard the case in March and April, began his judgement with the statement: "If there ever were an antitrust case where the parties had a dramatically different assessment of the current state of the relevant market and fundamentally different vision of its future development, this is the one. Small wonder it had to go to trial!"
Leon decided that the Government had failed to prove its case. He believes that Netflix, Hulu and Amazon have become major competitors to AT&T/DirectTV while Facebook and Google have developed new ways to attract advertisers from Time Warner's TV networks.
Why does the Commerce Commission and the NZ Court believe that Facebook, Google and other new media offerings don't represent strong competition to traditional media companies while the US Court takes a totally different point of view?
In the United States, the Department of Justice investigates proposed mergers and files lawsuits against transactions it believes will be anti-competitive.
Thus, the burden of proof before courts in the US is for the Government to prove that a merger is anti-competitive.
In this country the Commerce Commission decides that a merger is anti-competitive and the burden of proof before the courts is for the merger parties to prove that the transaction is not anti-competitive.
These processes inevitably mean that it is easier to gain approval for a merger in the United States than New Zealand.
The AT&T/Time Warner court case, which was held over 23 days and involved 46 lawyers, was predominantly about the difference between vertical and horizontal mergers.
In simple terms, the media industry consists of producers and distributors. Time Warner is a producer of television content while AT&T is a distributor, it doesn't produce content.
A horizontal merger would involve two producers or two distributors planning to merge whereas a vertical merger would involve a producer and a distributor, as is the situation with AT&T and Time Warner.
Judge Leon quoted the following statement from a highly regarded legal source; "The basic reason for limiting horizontal mergers is well-founded and rather generally accepted: horizontal mergers increase market concentrations, and high market concentration can substantially lessen competition among rivals, particularly with respect to price. Unfortunately, there is no comparable theoretical basis for dealing with vertical mergers".
AT&T and Time Warner argued that they were facing intense competition from several vertical operators including Netflix, Hulu and Amazon.
The two companies concluded that a merger would allow them to catch up with their competitors, many of which are vertical operators involved in both content production and distribution.
For example, Netflix started as a distributor but now spends more on content than Time Warner.
Judge Leon agreed and wrote: "The Government has the burden of proof to demonstrate that the merger is likely to lessen competition substantially" but "I conclude that the Government has failed to meet its burden to establish [this]".
The US Justice Department won't appeal Judge Leon's decision and the AT&T/Time Warner merger will proceed. The merger will be the fourth largest M&A deal in US corporate history.
On May 27, 2016, the Commerce Commission received an application from NZME and Fairfax New Zealand seeking approval to merge under section 67 of the Commerce Act 1986. NZME listed on the NZX a month later.
NZME, which publishes the Weekend Herald, proposed to acquire all of Fairfax for $55m cash and the issue of new NZME shares to the vendor, Australia's Fairfax Media. These new shares would represent a 41 per cent holding in NZME.
NZME and Fairfax believe that the proposed merger is a commercial response to the changing media landscape.
They pointed to declining print readership and revenue as they experienced increased competition from online news and information, particularly from social media.
These competitors included Facebook, Google and other new entities, just as AT&T and Time Warner faced increased competition from Netflix, Hulu, Amazon and additional disrupters.
The NZ media companies believed that the proposed merger would allow them to continue to invest in journalism and content while providing customers with an improved advertising offering.
However, the problem with the proposed NZME/Fairfax merger is that the two companies are producers, as well as distributors. Consequently, the proposed deal can be classified as a horizontal merger between companies that produce and distribute news content.
NZME and Fairfax compete in print production and distribution, particularly Sunday and community newspapers, and they also have their own digital websites.
The Commission rejected the view that Facebook and Google represented stiff competition to the NZME Herald and Fairfax Stuff websites.
The Commission argued that readers who want serious journalism will go to the Herald or Stuff websites, rather than Google or Facebook, with the latter sites rated by popularity rather than reliability, timeliness or importance.
The High Court hearing before Justice Dobson and Professor Richardson, which took nine days with representation from 11 lawyers, found in favour of the Commission.
Dobson and Richardson wrote: "We come to the same conclusion as the Commission on the prospects of substantially lesser competition in the reader market for online national news, reader market for Sunday newspapers, and both advertising and reader markets in the 10 areas in the North Island where the appellants' existing community newspapers compete."
NZME and Fairfax have subsequently taken the case to the Court of Appeal.
Last year the Commission also rejected the proposed merger between Sky TV and Vodafone New Zealand when there was a stronger argument that this was a vertical, rather than a horizontal merger.
The Commerce Commission takes a traditional and academic approach to its analysis, including the view that NZME and Fairfax must continue to play an important role in providing competing political opinion in New Zealand.
Meanwhile, Judge Leon took a more visionary and realistic slant illustrated by the following Bob Dylan quote included in his judgement: "You don't need a weatherman to know which way the wind blows".
In other words, you don't need 300-plus page studies to tell you that the media landscape is changing dramatically and traditional media companies are under attack from well-funded new entrants with huge global reach.
Judge Leon recognises this whereas the Commerce Commission takes a much narrower stance and focuses on maintaining competition in the Sunday and community newspaper sectors.
Investors would welcome a far more futuristic vision from the Commission because New Zealand media companies compete with global entities that operate in a much more sympathetic regulatory environment, particularly as far as mergers are concerned.
- Brian Gaynor is an executive director of Milford Asset Management which holds NZME shares on behalf of clients.