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AT&T-Time Warner: Is Bigger Badder?

Submitted on December 9, 2016

You’re reading the Benton Foundation’s Weekly Round-up, a recap of the biggest (or most overlooked) telecommunications stories of the week. The round-up is delivered via e-mail each Friday; to get your own copy, subscribe at www.benton.org/user/register

Robbie's Round-Up for the Week of December 5-9, 2016

The Senate Judiciary's Subcommittee on Antitrust, Competition Policy & Consumer Rights held a hearing on AT&T’s proposed acquisition of Time Warner, a deal that would combine the nation’s largest pay-TV provider, second-largest wireless company, and third-largest broadband provider with a media entertainment titan that among other things, owns HBO, CNN, TBS, TNT and Warner Brothers studios. A fun time was had by all.

Full Committee Chairman Chuck Grassley (R-IA) pointed to concerns about the negative impact on competition and innovation. “There’s concern that a combined AT&T-Time Warner will block competitor access to popular Time Warner content. There’s concern that a combined company will give preferential treatment – for example, favorable channel placement and zero-rating pricing – to Time Warner’s premium entertainment programming to the disadvantage of other content producers, in particular small independent producers. There’s concern about AT&T-Time Warner’s ability to leverage their assets to negotiate better licensing arrangements or raise the price of their content to the detriment of other distributors. There’s concern about the merged company’s ability to employ “bullying” tactics to dictate rates and terms to other networks. There’s concern that this acquisition will concentrate too much power into one conglomerate, resulting in higher prices and fewer programming options for consumers. There’s also concern about the merger’s implications for a free and diverse press.”

Subcommittee Chairman Sen Mike Lee (R-UT) warned that “although vertical deals typically raise fewer concerns than do their horizontal counterparts, such deals nevertheless may still tend to substantially lessen competition... The potential anticompetitive favoritism that the combined firm could bestow on its own products is not limited to price or access, but extends to the quality of the offerings as well."

In the New York Times, Cecilia Kang started her coverage saying, “When AT&T and Time Warner announced their $85.4 billion deal in October, lawmakers greeted the acquisition frostily. Now their tone is changing.” Although lawmakers said the deal merited tough scrutiny, they also questioned whether traditional ways of evaluating mergers are growing outdated as Silicon Valley companies like Facebook and Google become massive media platforms that threaten the television industry. Sen David Perdue (R-GA) said the deal would combine companies that did not directly compete against one another. “The consumer is benefited from the aggregation,” he said. “That is called capitalism.”

At the hearing, AT&T and Time Warner executives pitched a message that catered to the incoming administration: a populist promise of lower prices and the potential to build more wireless infrastructure through the merger. While AT&T and Time Warner are powerhouses, they presented themselves as weaker rivals to the cable industry and Silicon Valley tech companies. AT&T Chief Executive Randall Stephenson said that cable companies dominated the broadband and television market, serving high-speed Internet to eight of every 10 American homes that have broadband service. To experiment with new mobile video technologies, he said, AT&T needed to have in-house content to quickly try new streaming services at a lower cost. He added that AT&T had just introduced a streaming service with 100 channels for less than most cable television packages. “It is only the beginning of what we want to bring to the marketplace to threaten cable’s entrenched and still-dominant market position,” Stephenson said. He promised AT&T would give CNN editorial independence if the merger were approved.

Jeff Bewkes, the chief executive of Time Warner, said, “It is not enough to deliver great content.” The companies’ competitors have multiplied, he said. Stephenson said the merger “eliminates no competitor” and that the company aims to “get the most content to the most people at the lowest prices.”

Consumer groups rejected the characterization of AT&T and Time Warner as disadvantaged rivals, saying a combined company would create a powerhouse that all cable providers and networks would have to negotiate with. Streaming providers like Sling TV and Hulu would face a major new competitor, with AT&T’s access to 110 million wireless and satellite subscribers and premium television networks under the same roof, the groups said. “If a single company is able to control so many key inputs to online video, this new market could be snuffed out,” said Gene Kimmelman, president and chief executive of Public Knowledge, a nonprofit consumer group, at the hearing. He stressed that Internet companies rely on the wireless and broadband networks controlled by huge telecommunications companies like AT&T.

Mark Cuban, an Internet entrepreneur and owner of the NBA’s Dallas Mavericks, who also spoke at the hearing, said the truly dominant companies in media distribution these days were Facebook, Google, Apple and Amazon. “Facebook is without question in a dominant position, if not the dominant position, for content delivery,” he said.

Antitrust enforcers in the Trump Administration will ultimately decide whether to approve the deal or block it as anticompetitive. However, members of Congress can both reflect and contribute to the public mood regarding the merger of such large, high-impact businesses. The members of the Subcommittee extracted a pledge from the AT&T and Time Warner executives to treat their competitors fairly on content and distribution if the deal is approved. AT&T’s Stephenson promised that the combined company would not unfairly favor Time Warner content on its distribution platforms, like DirecTV, by blocking or overcharging companies that compete with Time Warner from offering content. In turn, Time Warner Chief Executive Jeffrey Bewkes promised that his company would not inflate the price of Time Warner content for distributors that compete with AT&T.

“The reason we have these hearings is to get stuff on the record, right?” said Sen. Amy Klobuchar (D-MN), the subcommittee’s ranking member. “So they said on the record they wouldn’t discriminate. They said on the record that Time Warner wouldn’t discriminate, either, where the content went. So if that proves to be false, then you have it under oath that they said this, and then you can use that for further action.”

But there's questions about enforcement of those promises. As Michael Hiltzik wrote in the Los Angeles Times,

The fact is that regulators have no effective tools to force big companies into compliance with “behavioral” conditions on mergers. Such conditions require the merged firm to “operate in a manner inconsistent with its own profit-maximizing incentives,” as antitrust experts John Kwoka and Diana Moss observed in a 2011 paper. But that’s “both paradoxical and likely difficult to achieve” — and requires constant, intense vigilance by regulators who may be ill-equipped to provide it.

At the hearing, Sen Al Franken (D-MN) said, "I want to be clear... should this deal be approved, nothing is preventing a combined AT&T-Time-Warner from going to any of its competitors in the pay-TV market and charging double for access to Game of Thrones, Veep, etc."

During the 2016 general election, then-candidate Donald Trump slammed the deal, saying it would be rejected by his administration. On October 22, he said, "As an example of the power structure I'm fighting, AT&T is buying Time Warner and thus CNN, a deal we will not approve in my administration because it's too much concentration of power in the hands of too few." Trump also said that if he is elected, his administration would look at breaking up the 2011 merger of Comcast and NBCUniversal.

But he hasn't commented since the election on whether he intends to follow through on his campaign rhetoric. And, on December 1, the Financial Times reported that AT&T is feeling confident about its ability to buy Time Warner after meeting with President-elect Trump's transition team. Apparently, the team promised the deal would be "scrutinized without prejudice."

The deal will be a big test for President-elect Trump, as some believe any flip-flopping by the incoming President would likely see push back. But Trump antitrust adviser Joshua Wright, a former federal trade commissioner with traditional Republican views on competition policy, recently wrote in the New York Times that using antitrust enforcement for political reasons, including protecting jobs or reducing the power of large corporations, was misguided.

“The new antimerger fervour is based on the presumption that they are never a good deal for consumers because more consolidation always leads to higher prices, and never leads to cost savings or product improvements that benefit consumers. Both are demonstrably false,” wrote Wright. He added: “A high level of concentration in an industry simply does not mean the industry lacks competition.”

Approval of the AT&T-Time Warner deal could also lead to still more concentration, however. The move could also set off a new wave of telecommunications companies and Internet giants, such as Google and Apple, buying or making deals with popular content programmers, further blurring the boundaries among the industries.

The acquisition will trigger multiple layers of complexity for customers, industry regulators, investors and consumer watchdogs as they sort out revenue possibilities and conflicts of interest. "Competitors of Time Warner or AT&T can no longer afford to stand by idly," warned USA Today.

We're tracking all the developments in the review of this deal -- and we'll see you in the Headlines.

Quick Bits

Weekend Reads resist (TL;DR)
coffee iconPrinciples for Technology Rights and Opportunity (Public Interest Advocates)
coffee iconRemarks of FCC Commissioner Michael O'Rielly Before the New England Ratepayers Association (FCC)
coffee iconIs Net Neutrality (And Everything Else) Not Dead Yet or Pining For the Fjords? Contemplating Trump’s Telecom Policy. (Harold Feld Blog)
coffee iconNews Coverage of the 2016 General Election: How the Press Failed the Voters (Harvard University Research)
coffee iconDocumentary filmmakers fear more legal challenges in Trump era (Columbia Journalism Review)

Events Calendar for December 12-16, 2016
Dec 15 -- Innovation Priorities for the Trump Administration, Information Technology and Innovation Foundation & Technology Policy Institute
Dec 15 -- FCC Open Meeting (yes, we still have those)

ICYMI from Benton
benton logoThe Next Generation Connectivity Handbook, Blair Levin and Denise Linn
benton logoCommunity-Led Broadband Agendas and Issues to Watch in the Next Administration, Blair Levin and Denise Linn
benton logoInnovators in Digital Inclusion: Ashbury Senior Community Computer Center, Angela Siefer
benton logoGetting to Know Mark Jamison, President-elect Trump’s FCC Transition Team Co-Leader, Kevin Taglang

By Robbie McBeath.
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