It’s not every day that I find myself strongly agreeing with Bernie Sanders, but there are circumstances in which my conservative philosophy overlaps with his liberal ideas. Even more shockingly, we agree on a critically important issue of economics and regulation in regards to modern technology.
The issue to which I am referring is AT&T’s proposed $85b acquisition of Time Warner, which has dominated the non-election headlines in the last week. If completed, the deal will create a massive media and telecommunications conglomerate which provides cellular communications, satellite TV, and owns HBO, DC Comics, Warner Brothers Studios, and dozens of other content properties.
However, I cannot support this acquisition because I view the proposed acquisition as a failure of the free market. In all likelihood, this deal (and the further ramifications of its completion) would create massive media and telecom giants which stifle competition and hurt consumers. The only group of people who stand to potentially gain from the merger are AT&T shareholders, and even that is not guaranteed. Worst of all, the new AT&T will have unrivalled power and influence over both our media content and our consumption of that content.
First, I’d like to provide a little bit of context as to why AT&T proposed the acquisition. AT&T’s main business has long been telecommunications, but they’ve seen stagnated growth, shrinking margins, and subscriber loss due to increased competition in an already saturated telecom market. There was no avenue for AT&T to grow as a company acting solely as a cell network and an internet service provider. In 2015, AT&T acquired DIRECTV in an attempt to diversify into television delivery and take advantage of both customer and cost synergies by offering consumer packages and combining the technologies used for satellite TV and telecommunications. With the acquisition of Time Warner, AT&T aims to gain media content which it could distribute across its networks and attract new subscribers (from Time Warner’s media properties).
As far as the regulatory issues are concerned, the deal is somewhat different from other headline-grabbing M&A activity since the recession. The acquisition is a case of vertical integration for AT&T, which refers to a case in which a company buys other companies which compose its supply chain. Conversely, US anti-trust laws are mostly focused on preventing horizontal integration, which involves the combination of competitors in an industry. Historically, economic studies show that horizontal mergers have had a more adverse effect on competition and prices, which is why anti-trust laws are more heavily skewed against these kinds of mergers.
Since it is a vertical merger, the acquisition is more likely to be approved, although there are significant hurdles. The most compelling evidence is the approval of Comcast’s purchase of NBCUniversal, which was completed in 2011 which combined a cable infrastructure company with a content creator in NBC. I do not believe that this deal should have been approved, and even so, it does not change the calculus involved in the AT&T – Time Warner decision.
There are two mains ways that this acquisition has the potential to directly hurt consumers. The first is the outcome that is likely expected: price increases. When AT&T acquired DIRECTV, one of its first moves was to increase the price of DIRECTV service across the board, even though AT&T touted the extensive cost savings associated with the acquisition.
In this case, the price increases would most likely occur in broadband internet connections rather than for Time Warner’s content itself as AT&T faces less competition in this area. Currently, 19% of Americans who do not use the internet cite the cost of internet access as their reason; consequently, the effects of this deal would disproportionately impact lower-income communities who already have limited internet connection.
The second and more concerning way that this deal may impact consumers relates to net neutrality. Imagine that AT&T allowed its customers to stream/download Time Warner content at a faster rate than its competitors, and/or charged premium prices for customers to access the content of its competitors. The net neutrality regulations announced last year prevented internet service providers from discriminating between download speeds based upon prices paid, but the discrimination that I’ve described is not expressly prohibited. Further, it is difficult for regulatory authorities to prove this type of discrimination.
In fact, the CEO of Netflix raised this exact concern in response to the initial announcement of this deal. The logic is understandable- AT&T has a strong financial incentive to promote its content in terms of streaming speeds, specific deals, and to penalize competitors on its networks. After all, what chance does Netflix have in competing against Time Warner when the company that controls customer’s access to internet content owns Time Warner?
AT&T’s CEO pledged that the deal “will be essentially a catalyst to more competition, more innovation,… lower prices, and happier consumers.” However, favoritism for certain content over others would violate this exact principle. Right now, all we have is AT&T’s word that it will not discriminate the source of the content, despite its financial incentive and low risk to do exactly that.
This last point hits upon the dangerous repercussions of allowing this deal to happen. Traditionally, we think of cable networks and internet service providers as neutral platforms by which we can access our favorite media and entertainment content. In the free market, these content distributors would win customers through their pricing and speeds of their services. However, the best response for a combined content creator and distributor is to focus on maximizing revenue from the content it owns, rather than investing in its services to win new customers. As I’ve said, this response is indicative of a market failure.
Think about the power and influence that AT&T will have as a company should this deal be completed. The company would have direct control over some media and entertainment content, which directly impacts our culture, and would have influence over what additional content we have access to. Economically, the company has the means to censor the content produced by Time Warner’s rivals. Moreover, AT&T’s scale in multiple industries gives it enormous bargaining power to intimidate other providers of content as it sees fit. Again, there are few restraints against the company exercising this power.
Further, if the DOJ permits this deal to be completed, it will likely spark a chain-reaction wave of consolidation within the media and telecom industries. Analysts of the industry believe that CNN, 21st Century Fox, CBS, Viacom, and even Netflix are all likely targets for acquisition by AT&T, Disney, Verizon, Comcast, or other cable networks. With this AT&T – Time Warner deal as a precedent, there would be no recourse to stop this consolidation.
It is long established in American history that the government must act to ensure that free markets do in fact remain competitive and efficient for all involved. The consolidation of our entire telecom, entertainment, and media industries into a few giant conglomerates harkens back to the fully integrated trusts which dominated American politics at the turn of the 20th century. These companies enjoyed unrivaled political and economic power, and could leverage their resources and power over the economy to accomplish their goals.
Quite simply, the government must be the last resort to prevent this consolidation of power, to balance out the forces which weaken the mechanisms of free market competition. Combining content creators and distributors does not promote the free market- it hands a few dozen executives direct control over entertainment and news. All we have is the word of these executives that they will not surreptitiously influence what we hear and see- and I for one will not take these executive to be scrupulous solely at their word.
The decision will ultimately rest in the hands of the DOJ and the next administration. No matter who is in the White House, I strongly urge his/her administration to wholeheartedly reject this deal on behalf of the American citizens and capitalism.