Last week, the Wall Street Journal criticized FTC Chairman Deborah Majoras for simply “rubber stamping” Staff’s recommendation to challenge the Blockbuster / Hollywood Video proposed merger. WSJ complained that Majoras failed to recognize market realities, and in supporting Staff’s recommendation to challenge the merger, Majoras hurt business. The Journal, in my opinion, is way off the mark in its criticism of Chairman Majoras.
This is the second time in four years that Blockbuster has proposed to acquire Hollywood Video. Four years ago, the five-person Federal Trade Commission voted to block the merger because of its effects on competition, and the likely negative impact that the transaction would have on consumers. Although Blockbuster abandoned its bid before the Commission voted during this last go-round, it seemed apparent that Blockbuster was again going to face a 5-0 vote against its proposed merger. That’s 10 independent votes against the merger, each one made after careful studies of the market, competition and anticipated effects of the transaction. Blockbuster, it seems, is a clear two-time loser. I’m at a loss as to why the WSJ considers Majoras’ decision at all incorrect, or is at all surprised at the decision to challenge.
A lot of people—practitioners, business folks and commentators—enjoy criticizing the FTC and DOJ for their antitrust activities. Practitioners complain that Second Requests are too burdensome. Consumer advocate groups complain that the FTC does not spend sufficient time investigating potentially anticompetitive mergers. Industry analysts complain that too many transactions are blocked by the DOJ and FTC; at the same time, Congress complains that too many oil/petroleum mergers are approved. Some complain that the FTC investigates too thoroughly the conduct of certain industries (pharmaceuticals, in particular); others complain of blatantly anticompetitive conduct going unchecked in the industry.
In my years of practice, I have found that it is easy to find someone or some entity that is blaming the FTC or DOJ for just about every decision it makes—for either being too lax in its enforcement decisions or too permissive in allowing industry consolidation. A sure sign that an agency is doing its job, though, is the ability to withstand this criticism and not bend to constituent complaints (often more properly classified as ranting and raving). Here, the FTC and DOJ should not—and I would suspect will not—bow to such pressure.
Specifically with regard to the Blockbuster/Hollywood proposed hostile takeover, it is not that difficult to understand why the FTC had significant concerns with the transaction. The two parties are by far the largest video rental chains in the country, accounting for a great majority of in-store rentals (and in some geographic markets, accounting for the only rental chains at all). Where there is competition, it is not nearly as robust as that offered by the parties—the selections are smaller and the availability of first-run (i.e., “new”) titles is lacking. Blockbuster contended that other market forces—in particular video purchases (from the likes of Walgreens and BestBuy)—would constrain the post-merger entity from raising prices, but the unambiguous evidence demonstrates that first-run movies sell (at stores like Walgreens and BestBuy) for nearly three times the price as they are rented. Such a price differential demonstrates clearly that even if Blockbuster raised the prices of its new movie rentals by 50% that consumers would be unlikely to purchase such selections instead, given the significant price differentials. Finally, other forms of movie rentals, including on-line rentals (from the likes of Netflix), video-on-demand, and pay-per-view, were not sufficiently competitive to have the clout to counter any anticompetitive activity from the merged entity.
So in the end, it is likely that Chairman Majoras did not simply follow the lead of her staff. Instead, it is far more likely that she saw the evidence that the parties presented, evaluated it, and determined that the merger would harm consumers. That Blockbuster and WSJ are unhappy with the decision is not in doubt. Nor, however, is it particularly relevant.