An interesting analysis....
Craig
http://www.infoworld.com/article/3136218/m-a/whats-really-at-stake-if-att-buys-time-warner.html?idg_eid=593b93817ad0a9726f889c7044a6e9d3&token=%23tk.IFWNLE_nlt_infoworld_daily_2016-10-28&utm_source=Sailthru&utm_medium=email&utm_campaign=InfoWorld%20Daily:%20Afternoon%20Edition%202016-10-28&utm_term=infoworld_daily#tk.IFW_nlt_infoworld_daily_2016-10-28
What's really at stake if AT&T buys Time Warner
Combining the telecom giant and content titan is a lose-lose for consumers and
the economy alike
InfoWorld • Oct 28, 2016
After all the shouting this election season, perhaps it's no wonder AT&T CEO
Randall Stephenson is proposing a tone-deaf $85.4 billion megamerger with Time
Warner. On paper, the deal may have seemed like a shoo-in -- after all, the
Department of Justice approved a similar merger between Comcast and NBC
Universal in 2011. But a lot has changed in the meantime.
Riding the current wave of populism, politicians from both sides of the aisle
have expressed skepticism -- even outright hostility -- to the proposed merger.
Hillary Clinton last year vowed to prevent further market concentration by
beefing up the antitrust enforcement arms of the DOJ and FTC. And in a fact
sheet on competition policy put out earlier this month, she promised a return
to stricter antitrust enforcement, "in contrast to the highly permissive
approach of the Reagan era."
The political winds aren't blowing in AT&T's favor -- which is very good news.
Bigger is not better for consumers
Economic research shows that mergers cost consumers money. John Kwoka, an
economist at Northeastern University, not only found that a whopping 80 percent
of mergers led to higher prices, but mergers that regulators approved with
conditions intended to prevent consumer harm actually resulted in price hikes
more than twice as large as the increases in an average merger.
AT&T's Stephenson assured in a recent interview that regulators needn't be
concerned about the merger being anticompetitive because "it's a pure vertical
integration." But vertical mergers can lead to price increases, too. With its
acquisition of DirecTV last year, AT&T became the largest pay-TV company in the
country. Within five months of completing the purchase, AT&T announced it was
increasing prices for its U-Verse broadband service. DirecTV announced a price
hike at the same time.
As the Center for Public Integrity notes, "AT&T said in its announcement that
the deal [with Time Warner] would provide 'significant financial benefits,'
including revenue and earnings growth, lower capital costs, and savings of $1
billion within the first three years. Nowhere in the announcement did AT&T
specifically mention how the proposed transaction could lower costs for
consumers."
Content is king
If the merger is approved, AT&T will own media titan Time Warner's trove of
content. If you're a fan of HBO ("Game of Thrones" or "Westworld"); watch TBS
("Full Frontal with Samantha Bee") or TNT ("The Last Ship"); get your news
coverage from CNN; follow Major League Baseball, the NBA, or March Madness; wax
nostalgic over Turner Classic Movies; or are a fan of the "Harry Potter" or
"Lord of the Rings" films -- and a range of others, from "Inception" and
"American Sniper" to "Wedding Crashers" and "The Notebook" -- all that content
is owned by Time Warner. Warner Bros. also controls DC Comics and the rights to
Batman, Superman, Wonder Woman, and a host of pop culture icons, and its
Interactive Entertainment division is one of America's most prominent
video-game publishers.
Some argue that regulators would likely impose conditions banning AT&T from
using that content for competitive advantage. But policing conditions of
mergers is notoriously difficult. When Comcast acquired NBC Universal, it was
banned from giving favorable treatment to NBC Universal content on its
networks. "This has proven, in practice, difficult to enforce," Vox notes.
"Bloomberg TV, for example, has repeatedly complained about discriminatory
treatment in which its business news channel will be exiled to a distant and
illogical corner of the channel guide while Comcast's own CNBC property is
nestled in with other news networks."
Furthermore, while the FCC is somewhat better equipped than the DOJ to monitor
anticompetitive business practices, Reuters has reported that AT&T could avoid
FCC review of the deal altogether simply by selling off a television station
Time Warner owns.
Hardly reassuring -- even less so is the trail of broken promises left in the
wake of previous AT&T mergers with conditions.
Doubling down on zero rating
Discriminatory treatment of content isn't the only danger. "Restricting access
to content by providing it only to AT&T users wouldn't make any sense," argues
Fortune. "But with zero rating, AT&T can theoretically have its content cake
and eat it too."
Indeed, mere hours after the Time Warner merger was announced, AT&T unveiled
its new DirecTV Now streaming service, which is the "tip of the iceberg" in
terms of its collaboration with Time Warner, an AT&T spokeman said. It's an
even better deal if you're an AT&T customer because the streaming won't count
against mobile data usage.
The FCC has failed to police zero-rating programs, so if regulators outright
banned the practice as a condition of the deal it might actually be a reason to
root for the merger. Perhaps that explains why Netflix's CEO says he has no
problem with AT&T's megamerger -- as long as Netflix is treated the same as
Time Warner's HBO.
Rise of the titans
Beyond what this merger could mean for consumers, there's the broader issue of
a U.S. economy increasingly dominated by big companies. The trend of corporate
consolidation "worries a growing number of economists, who fear it suggests an
economy that is becoming less dynamic and competitive over time," writes
FiveThirtyEight.
American companies aren't only getting bigger -- they're also getting older and
the startup rate has been falling. According to FiveThirtyEight:
The evidence suggests that big, established companies enjoy more advantages
than ever. The rate at which established companies fail has fallen since the
1980s, while fewer startups are surviving and growing.
Startups are a key source of innovation in the economy -- they generate new
ideas, which force existing companies to adapt or risk failure. That process,
repeated thousands of times, makes the economy as a whole more productive. The
falling startup rate, combined with the rise of big businesses, suggests that
this process has somehow broken down.
How big is big enough?
Not all mergers succeed -- the fiasco of Time Warner's acquisition by AOL
springs to mind. But it's a safe bet that Stephenson and his team will do well
out of a deal that will make them media moguls. "Being a cable company is a
great business, but it's boring and unglamorous, plus everyone hates you," Vox
opines. "The executives of a media company, by contrast, get to hang out with
A-list celebrities and star athletes."
Which could explain why AT&T is buying Time Warner, rather than simply
partnering through licensing deals. Besides, as Stephenson carped,
"[Negotiating content licensing is] slow, it's painful, just the contracting
itself takes a lot of time whereas when it's completely owned, you just move a
lot faster."
Media mogula also get paid very well, Vox notes. "As the Associated Press
reported last year, 'six of the 10 highest-paid CEOs last year worked in the
media industry.' None of the top 10, by contrast, was the head of a utility
company. AT&T CEO Randall Stephenson, who is currently paid less than Time
Warner CEO Jeffrey Bewkes, and his team of executives have a perfectly good
reason to want to buy Time Warner -- whether or not it makes business sense."
This merger makes little sense for consumers, the economy, or the companies'
shareholders. At the end of the day, what will it really accomplish? As The
Verge asks of a telecom industry swept up in the "fundamental insanity" of
merger mania:
How many dollars of value and hours of effort have been sucked up inside these
ill-fated remixes of content and infrastructure giants? How many good ideas
died because these companies were spending time and money chasing these doomed
integrations instead? Wouldn't we be better off if the content companies were
competing to have their work widely distributed and earning revenue by
capturing audience attention on their own merits, and the network companies
were competing to deliver faster, more reliable service at lower prices?
