A Hard Look at Media Mergers
Robert Pitofsky, chairman of the Federal Trade Commission in his office. (Frank Johnston - The Washington Post)
By Alec Klein
Washington Post Staff Writer
Wednesday, November 29, 2000; Page E01
Robert Pitofsky leans in, the fingers of both hands tapered to a point as he contemplates a question of legal theory. There's the graying hair, the metal-rimmed glasses and that amiable smile--all conspiring to create the avuncular look of a college professor.
But where he presides, in Room 440 at 600 Pennsylvania Ave., suggests the accoutrements of power: On the wall hangs a photo of Pitofsky with President Clinton. Of Pitofsky and Jimmy Carter. But what he really prides himself on is a still shot of graceful power: Babe Ruth, swinging for the fences.
Pitofsky, the mild-mannered chairman of the Federal Trade Commission, is about to wallop a big one, too.
His image is not as ingrained in the American consciousness as that of his former antitrust counterpart at the Justice Department, Joel I. Klein. But make no mistake: Pitofsky is one of the most powerful people in Washington on such matters. Within days, Pitofsky is expected to play a central role in placing limits on American Online Inc.'s $183 billion acquisition of Time Warner Inc., a long-awaited decision likely to help shape the future of the Internet, the media and U.S. industry.
In a recent interview with The Washington Post, Pitofsky declined to comment on the merger but offered telling views on a wide range of antitrust issues, giving the contours of his thinking and suggesting how he might be approaching a merger that would create the world's biggest media company.
What emerged foremost was Pitofsky's belief that media mergers raise First Amendment questions that deserve a higher degree of regulatory scrutiny. It's important, to his mind, that business consolidations not be a barrier to the free flow of ideas and opinions.
"Antitrust is more than economics," he said. "And I do believe if you have issues in the newspaper business, in book publishing, news generally, entertainment, I think you want to be more careful and thorough in your investigation than if the very same problems arose in cosmetics, or lumber, or coal mining. I mean, if somebody monopolizes the cosmetics fields, they're going to take money out of consumers' pockets, but the implications for democratic values are zero. On the other hand, if they monopolize books, you're talking about implications that go way beyond what the wholesale price of the books might be."
Reflecting Pitofsky's position, the FTC already has taken a hard look at the AOL-Time Warner case. Earlier this month, the FTC was prepared to pull the trigger on a legal challenge to the merger--until the companies agreed to continue negotiating as they tried to satisfy the agency's concerns about how the deal would affect competition in the marketplace.
Pitofsky's belief in the government's role as watchdog runs counter to the views of AOL leaders, including its chief executive, Steve Case, who argue that the marketplace, not the government, should resolve matters of business.
What's more, AOL asserts that its merger does not pose classical antitrust problems: AOL and Time Warner are in different lines of business. But Pitofsky and his agency have been unmoved, and AOL and Time Warner have reluctantly taken steps to meet the FTC's demands.
The companies struck a deal last week to allow rival EarthLink Inc. to use Time Warner's cable-television network for high-speed Internet access. The FTC wants to maintain consumer choice among Internet providers by ensuring that AOL's rivals have nondiscriminatory access to Time Warner's cable system, which accounts for about 20 percent of the market, sources have said.
In this and other private dealings between the FTC and the merging companies, Pitofsky, the former dean of the Georgetown University Law Center, has offered a strong guiding hand, sources said. Indeed, he has been known to use the Socratic method in asking pointed questions of FTC staffers about the legal underpinnings of their arguments on the case.
"The staff works very closely with the chairman," said Jodie Bernstein, director of the FTC's Bureau of Consumer Protection. "The chairman has a great deal of input, influence in terms of the overall direction of the agency."
Pitofsky is only one of five commission votes, and three are needed to ratify the deal. The takeover also must be reviewed by the Federal Communications Commission. But as the FTC's chairman, Pitofsky carries the mandate of being the president's handpicked leader, and he selects and directs the agency's staff. Sources say he holds considerable sway over his commission colleagues, particularly his two fellow Democrats, who, along with the chairman, make up a majority.
"The power of his ideas and the ways that he presents them--it's a form of leadership," said Bill Baer, who served as the FTC's director of competition from 1995 until late 1999. "People respect him and listen to him."
Pitofsky's record bears this out: He usually wins. Since he became FTC chairman in 1995, the agency has brought suit to block 11 mergers, and in nine of the cases the parties either abandoned the deals, reached agreement with the FTC or lost. Only twice did the FTC lose.
Pitofsky is widely credited with revitalizing an agency that was once known as the "little old lady of Pennsylvania Avenue" that worked in the shadow of its big brother up the street, the Justice Department. Pitofsky, whose term will end Sept. 25, 2001, has led the agency in delving into a wide range of issues, from concerns about privacy on the Internet to cigar manufacturers' marketing.
Among his big victories was the FTC's successful challenge to the Staples Inc.-Office Depot Inc. merger in 1997. Denizens of the antitrust community didn't back the agency's argument that the combined companies would dominate the "office superstore" market, which would result in higher prices, but a federal court did, and the FTC had an unlikely victory, its first big challenge in several years, thanks in part to Pitofsky's aggressive approach.
"I believe in the free market, I believe in decentralization, I believe in as little government interference with private economic behavior as possible," he said. "But in order to support those three things, you must have vigorous antitrust enforcement to make sure that people don't take advantage of the free market."
Pitofsky, however, gives a nod to the special circumstances of the high-tech sector, where dominant players rise and fall at warp speed, industry standards evolve rapidly and innovation is dependent on an open market.
"We spend a lot of time saying with respect to a particular case: We can win, but will we do more harm than good?" Pitofsky said.
His remarks reflect those of others at the FTC, who have said they are reviewing certain aspects of the AOL-Time Warner merger with a light touch. One such area is interactive television, a nascent field that AOL and Time Warner are expected to develop, combining features of the Internet with television programming.
But Pitofsky is not shy about imposing conditions on nontraditional mergers. Most antitrust concerns arise from "horizontal mergers" that combine companies in similar businesses where they can dominate a single market. During his term, Pitofsky has given more attention to "vertical mergers" that involve companies in complementary businesses that do not overlap but do create concentrations of power in the market.
Such was the case with the merger of Time Warner Inc. and Turner Broadcasting System Inc., which brought together Time Warner's cable-television distribution network and Turner's vast programming content. As part of a 1996 consent order, the FTC imposed several conditions on the deal, including a requirement that Time Warner carry an unaffiliated 24-hour news station to compete with its own CNN. It chose MSNBC.
"It's one thing to say [vertical mergers] are not as dangerous as horizonal," he said. "It's another thing to say they're never a problem at all. There are some vertical mergers that create problems."
Gene Kimmelman, co-director of Consumers Union, the publisher of Consumer Reports magazine, is generally supportive of Pitofsky, but he criticized what he considered the FTC chairman's failure to stand in the way of competitive dangers that resulted from Time Warner's merger with Turner Broadcasting. "It was the beginning of the wave of media and telecommunications consolidation that was threatening the development of competition in the cable industry," Kimmelman said. "We were disappointed."
The AOL-Time Warner deal, it turned out, is part of that wave of media consolidation. In this case, Kimmelman said, Pitofsky faces his toughest test. "AOL-Time Warner will supersede everything else he has done in importance," Kimmelman said. "This case is every bit as important as, if not more than, the Microsoft [antitrust] case. While Microsoft established the importance of antitrust to the technology sector, the resolution of AOL-Time Warner will truly set the competitive parameters of the convergence of the Internet and cable television over the next decade."
It's too early to tell, but the FTC has shown unusual toughness in focusing much of its energy on seeking conditions that address the potential market domination that can occur with the vertical combination of AOL's Internet service and Time Warner's cable distribution.
Wall Street didn't see it coming. When the merger was announced nearly a year ago, on Jan. 10, AOL and Time Warner were expected to breeze through the regulatory process at the antitrust agency.
But they ran into Pitofsky, an antitrust expert versed enough in the law that he happened to write a textbook that Clinton used when he taught antitrust law in Arkansas.
Pitofsky, 70, is steeped in the topic. He has been a professor at New York University School of Law, a visiting professor at Harvard Law School, and is on his third tour of duty at the FTC. He ran the Bureau of Consumer Protection in the early 1970s and served as a commissioner from 1978 to 1981. He earns $130,200 a year in his current post.
"He's essentially the dean of antitrust scholars in this country," said Steven Salop, an antitrust scholar himself and professor of economics and law at the Georgetown University Law Center.
Pitofsky's is a classic achiever's tale: A product of Paterson, N.J., he is the only son of a silk-factory worker and a mother who worked in a dress shop, and he was the first in his family to go to college, attending NYU, then Columbia School of Law.
Pitofsky's antitrust career was an accident of timing. When he joined a New York law firm early in his career, he was assigned an antitrust case that lasted for about two years. Had circumstances been different, he said, he could have become an environmental lawyer just as easily. But he quipped: "I don't believe I would ever have been a tax or bankruptcy lawyer. I would've found a way to get out of it."
As it is, Pitofsky is comfortable in his role at the FTC, and he carries on with understatement. He's a member of a book club, he goes to the movies--anything but slasher films--and for decades he has played in a father-son-daughter softball game on Sundays. A good play wins over a close call, ties go to the fathers, and Pitofsky, ever the adjudicator, settles other controversial calls on the field.
"When there's a dispute," said John Oberdorfer, a fellow softball player, "he's the arbiter." |
