The AT&T -- DirecTV merger: Dynamic competition at work

[Commentary] With its proposed acquisition of DirecTV, AT&T is making a stake to be the nation’s premier pay TV provider on every screen -- TV, laptop, mobile phone and tablet. Its dream is seamless connectivity and streaming video from home to car to office and even to airplanes.

AT&T recognizes that most consumers don’t know, much less care, whether their connection is fiber, xDSL, LTE, or satellite. They just want a good service, preferably at a low price as possible.

Coming on the heels of another mega merger between Comcast and Time Warner Cable, the AT&T/DirecTV development is a textbook example of dynamic competition, characterized by high capital costs, technological change, and network effects. In dynamic markets, competition is created not by the number of providers but by the level of technology.

Only two players, albeit with different technologies, are needed to create dynamic competition. AT&T and Comcast have to go through increasingly burdensome and obligatory merger review from not only the Federal Communications Commission, but also the Department of Justice and the Senate Judiciary Committee.

If we care about innovation and investment, we should encourage these players to grow as big as possible for the simple reason that the larger they are and the larger their revenues, the larger the incentives for upstarts to disrupt them. The best outcome would be to approve both mergers as soon as possible and let the companies duke it out in the marketplace. The battle of superpowers is America’s forte. Let it flourish.

[Layton studies Internet economics at the Center for Communication, Media, and Information Technologies (CMI) at Aalborg University in Copenhagen, Denmark]