Amazon announced on Wednesday it would be taking over Metro-Goldwyn-Myer, the 97 year-old film studio in a $8.45 billion deal. The deal would be the second entertainment megamerger in as many weeks, following the announcement of a $43 billion merger between AT&T spin-off WarnerMedia and Discovery.
The deal allows Amazon to beef up its entertainment offerings in a big way, as it seeks to compete in the streaming space with its Prime Video service and draw more customers into its retail offerings.
"The real financial value behind this deal is the treasure trove of IP in the deep catalog that we plan to reimagine and develop together with MGM's talented team," said Mike Hopkins, senior vice president of Prime Video and Amazon Studios. "It's very exciting and provides so many opportunities for high-quality storytelling."
A megamerger like this is a bold move from Amazon, almost a dare to politicians and regulators who have been eyeing the company with increased intensity over the past year. On Tuesday, D.C.'s Attorney General Karl Racine launched the first government antitrust lawsuit targeting Amazon over anticompetitive practices including price-fixing via restrictions placed on sellers. These accusations are similar to those found in the House Judiciary Committee's Antitrust report that alleged Amazon was regularly violating antitrust law and engaged in exploitative anticompetitive behavior.
“This is a major acquisition that has the potential to impact millions of consumers. The Department of Justice must conduct a thorough investigation to ensure that this deal won’t risk harming competition,” Senator Amy Klobuchar told Motherboard in a statement. “This is also a reminder of why we need to fund our antitrust agencies so they can take on investigations of multi-billion dollar deals. Our government cannot ensure major corporations are playing by the rules if enforcement agencies are chronically underfunded. My bipartisan legislation, which recently passed through the Judiciary Committee, would give the antitrust agencies additional resources to conduct rigorous reviews of large mergers.”
Financially, it's a beautiful deal for Amazon. While it may be reportedly paying a 40 percent premium, the company is effectively doing so with free money. The company’s most recent earnings report revealed it has $73 billion in cash and marketable securities, but the company has also been raising debt it doesn’t need. Amazon raised $18.5 billion through bond sales on top of the $10 billion it raised last year. The MGM deal will cost Amazon a meager $8.45 billion.
Here, Amazon is going back to the basics: using profits and debt from one of its various monopolies to finance a monopoly speed-run in a new sector of the economy. In this case, Amazon is leveraging its monopoly profits and cheap debt in a way that regulators will likely pick up on, since it rhymes with how the company leveraged predatory prices to gain market share then control.
“In acquiring MGM Studios, Amazon is brazenly trying to take over another sector of the economy,” said Sarah Miller, Executive Director of the American Economic Liberties Project in a statement to Motherboard. “Congress should respond quickly by passing bipartisan legislation to ban mergers by large tech firms. And President Biden must appoint a full slate of smart, aggressive antitrust enforcers at the DOJ and FTC as soon as possible.”
The Biden administration has a few possible paths to take here. One remedy would be pursuing structural separation―a strict limitation on the types of businesses firms can enter. As likely incoming FTC member Lina Khan wrote in a paper on the idea, this would entail "proscribing entry in certain markets or by requiring that distinct lines of business be operated through separate affiliates." If, for example, you own an e-commerce platform, then a structural separation regime would prohibit you from competing on that platform as Amazon does.
Another solution could be pursuing legislation along the lines of Senator Amy Klobuchar’s omnibus antitrust bill that just so happens to effectively ban megamergers by shifting the burden of proof onto merging companies. Firms, not the regulators, would have to prove their proposed merger would not be anticompetitive, create a monopoly, or a monopsony. In fact, under Klobuchar’s regime, deals over a certain value ($5 billion) or that would yield a certain market share (>50 percent) or where one company is a titan (>$100 billion value) would be presumed illegal from the start.
“The good news is that blocking this merger is easy to do. The takeover of MGM is a dangerous horizontal consolidation of two studios, in an already highly consolidated business,” said Barry Lynn, executive director of Open Markets Institute, in a press statement. “And it is a vertical consolidation of power between one of the primary platforms for the sale and distribution of movies and one of the studios that creates movies, which will only worsen Amazon’s already dangerous conflict of interest in dealing fairly with other studios.”
Much of this applies to other megamergers like the WarnerMedia-Discovery merger, especially because the size is larger and likely poses an immediate anti-competitive risk even when going off the words of the merging parties.
“The transaction will combine WarnerMedia’s storied content library of popular and valuable IP with Discovery’s global footprint, trove of local-language content and deep regional expertise across more than 200 countries and territories,” the announcement reads. “The new company will be able to invest in more original content for its streaming services, enhance the programming options across its global linear pay TV and broadcast channels, and offer more innovative video experiences and consumer choices.”
Telecom monopolies like AT&T regularly promise that their mergers, acquisitions, and consolidation will yield innovation, pay increases, and an increase in service quality or coverage. What usually happens, is that they leverage the lack of competition to hurt everyone but investors. In fact, that’s precisely what happened with AT&T: this $43 billion merger is the result of a failed $108 billion merger between AT&T and Time Warner that cost tens of thousands of jobs and saw price hikes even as quality and service coverage fell apart.
Megamergers are bad, monopolies are bad, and the more positive spin you hear from the merging parties, the tighter regulators should grip their wallets. And if Klobuchar gets her way, many such megamerger deals will soon be illegal.