The announced takeover bid by AT&T for Time Warner will likely be challenged by antitrust authorities, and possibly by the Federal Communications Commission (FCC) in the United States. The resulting litigation will crystallize many of the issues surrounding the regulation of the broadcasting sector in the emerging age of online and mobile broadcasting, as well as codify the degree to which market forces will be allowed to determine the evolution of the broadcasting industry going forward.

The AT&T/Time Warner merger represents what economists describe as “vertical integration.” That is, AT&T is primarily a wireless telephone company and a distributor of broadcasting content through its wireless and direct broadcast satellite networks. Time Warner, the acquisition target, is primarily a programmer and producer of news and entertainment content through its ownership of specialty channels such as HBO and CNN, as well as its ownership of Warner Brothers film studio.

A combination of companies operating at different stages of an industry’s value chain does not limit competition directly, since it does not reduce the number of competitors in any specific stage of the value chain (e.g. wireless carriage). Rather, the concern from a competition policy perspective is that the combination of “upstream” and “downstream” participants will indirectly reduce competition in one or more of the value chain stages affected by the merger.

In the specific case of the AT&T/Time Warner merger, one concern is that AT&T will use its ownership of content produced by Time Warner to restrain or reduce competition in the distribution of content by other companies, including Internet carriers such as Netflix. For example, if AT&T was legally allowed to be the exclusive distributor of Time Warner programming, and if there were no good substitutes for the latter, AT&T could attempt to leverage its exclusive distribution privileges to reduce competition in the distribution of programming by wireless and Internet carriers by tying access to Time Warner’s content to a customer’s subscription to AT&T’s distribution service.

A related concern is that AT&T will eliminate data caps or charge lower prices to customers of its broadband streaming services, thereby increasing demand for Time Warner content and reducing demand for other content. Interestingly, the CRTC is holding hearings this week to decide whether it should regulate the data-pricing mechanisms of Internet providers.

A third concern is that AT&T will focus exclusively on carrying Time Warner content depriving other content producers and programmers of access to an important distribution channel, thereby suppressing the production of content by Time Warner competitors.

Indeed, it was these various concerns that led the U.S. Department of Justice to demand that the cable distributor, Comcast, as a condition of allowing its acquisition of NBC Universal, a content programmer, make its content available to all rivals and to keep its cable network open to other content providers.

Crucially, these prohibitions on exclusivity also apply to regulated broadcast distribution outlets in Canada under CRTC rules, ostensibly to promote new entrants into wireless distribution of content, and to ensure competitive distribution outlets for independently produced Canadian content.

The counter-argument to prohibiting exclusivity is that there is already so much competition in both the production and distribution of content that even a large merger such as AT&T’s acquisition of Time Warner cannot unduly reduce competition in either the upstream or downstream sectors of the broadcasting industry.

Furthermore, permitting exclusivity arguably promotes innovation by strengthening the innovator’s intellectual property rights. In the case of the broadcasting industry, distribution units have less incentive to invest in newly produced content if they’re obligated to make that content available to competitors on terms deemed “fair” by the regulator, as is the case in Canada. Symmetrically, independent content producers may face more limited financing options because of legal prohibitions on their freedom to license content exclusively to a single large distributor.

The upcoming investigation of the AT&T/Time Warner merger by the U.S. government should provide a major platform for policy analysts to argue the merits of vertical integration in the broadcasting sector and, in doing so, help inform public policy regarding broadcasting in other countries including Canada.