When AT&T announced in October that it would spend $85 billion to acquire Time Warner, the plan was met with strong headwinds right out of the gate. A surprisingly broad array of lawmakers, from both sides of the political aisle, immediately voiced concerns. Among the concerned parties? The Senate Judiciary Committee, which today held a hearing examining the impact on competition, and potential antitrust concerns, the merger could raise.
As you would expect, AT&T CEO Randall Stephenson thinks that letting his company snap up Time Warner will be great for everyone, especially AT&T. In his prepared testimony [PDF], Stephenson said that together, the two companies “will disrupt the entrenched pay-TV models,” give consumers more options, increase competition for cable TV providers, and, somehow, speed up the development and deployment of 5G wireless networks.
Disruption in the pay-TV industry is, of course, already happening — and AT&T is already a participant. Not only is premium content now available online through services like HBO Now and Netflix, but also with the rise of streaming bundles like DirecTV Now, Dish’s Sling TV, PlayStation Vue, and upcoming offerings from Hulu, “cable” has indeed begun to break open.
“These changes to the old TV model unquestionably have been good for consumers,” Stephenson asserts. “But consumers want and deserve more options and better choices.”
So how does the merger make that happen, exactly? The same way these things always do, in the end: money. Stephenson wants AT&T to own more content because then they don’t have to pay third parties to get it on their own streaming service, DirecTV Now.
Because while the method of delivery — streaming vs coaxial cable — might be new, some things haven’t changed: the content companies that own media still want the distribution companies to pay them for access to those networks and that content.
Stephenson doesn’t just hint at that reasoning; he states it outright. “Currently, our ability to bring customers more of what they want has been constrained because we own very little of our own programming,” Stephenson writes. “Instead, we have to negotiate [distribution] matters with third-party content owners, and in a fast-changing marketplace like video, it is particularly difficult to obtain flexibility. … This transaction will help us break out of that box and reshape the competitive landscape.”
He continues by describing how owning content will let AT&T optimize it and deliver it more readily on a variety of platforms, including mobile, because the company wouldn’t have to seek rights agreements. “We will be able to innovate more quickly, experiment more readily, tweak our offerings as we gauge customer response, and bring consumers the options they seek,” Stephenson says. “We want to give customers more control of how they watch their video content … we are in an ideal position to do that because of our own mobile network … we expect to deliver mobile-optimized content and services, and ad-supported services that shift more costs from consumers to advertisers.”
If Stephenson’s comments are to be taken at face value, then what he alludes to throughout is not just the desirability but the necessity of vertical integration going forward in the 21st century. Acquiring content costs money; thus, owning content allows you to streamline deals and save money. And when you own that content, you can arrange to give it preferential treatment. Making your internet traffic travel faster, or slowing down a competitors’s, is now against the law thanks to the Open Internet Order of 2015 (aka, net neutrality), but exempting your own traffic from data caps you impose — zero-rating — is still something you can get away with, even if the FCC does have “concerns” that it may harm consumers.
Despite that leverage, however, Stephenson says that “it would be a gross mistake to view this transaction as anything but pro-competitive. This transaction is a vertical deal between two firms operating in separate markets — one in content distribution, the other in content production. … AT&T’s and Time Warner’s businesses complement each other, and those complementary businesses, when combined, naturally result in consumer and competitive benefits.”
Opponents and critics, however, see anything but “natural” benefits for consumers.
Our colleagues down the hall at Consumers Union (the policy and mobilization arm of our parent company, Consumer Reports), also submitted testimony to the committee [PDF], which Sen. Amy Klobuchar (MN) added to the record.
In their testimony, Consumers Union points out that consumers benefit most from competition — and that mergers are, well, the opposite of that.
“One key to empowering consumers to protect themselves is working to ensure meaningful consumer choice, through effective competition,” Consumers Union writes. “When consumers have meaningful choice, businesses are stimulated to provide more affordability, better quality, and new innovative thinking. By effective competition, we mean a marketplace marked by a fair and level playing field, where companies earn consumers with better products, lower prices, and attractive offerings and can compete free of exclusive deals and other monopolistic and anti-competitive barriers.”
Continued media consolidation, CU continues, is basically the opposite of that, “despite the claims to the contrary always put forward by the merging parties.”
For one thing, mergers like this — as we’ve seen in the five years since Comcast snapped up NBCUniversal — don’t actually result in lower prices, CU points out. Programming and distribution costs keep going up, across the board, no matter who buys whom.
So what’s really up? CU posits that AT&T is seeking not only money, but relevance. “A likely reason” for the merger, CU suggests, “is that AT&T, as one of the nation’s largest providers of wireless, pay-TV, and broadband service, is trying to position itself not to be relegated to the simple function of a utility just providing the connection that other use to make money supplying program content to consumers.”
Because if that were all, in a competitive marketplace, consumers could feel free to walk away and switch providers — something cable consumers can’t usually do, but wireless and satellite customers can.
“If we believe the conventional wisdom that ‘content is king,'” CU continues, “then acquiring content created and owned by Time Warner is AT&T’s gambit to prevent itself from being commoditized into, and to enable it to evolve into something more than a mere telecommunications company.”
And by becoming a content company, the testimony adds, AT&T “could seek to maximize the value of this premium content [that Time Warner owns] in ways that could hurt consumers and competition.”
Stephenson claims that withholding Time Warner content from competitors would make no sense, since the idea behind programming is to get it in front of as many eyes as possible. And to a point there’s something there, CU agrees, but in business, well, business tends to reign paramount. “AT&T might decide not to restrict content when negotiating with other large MVPDs [pay-TV companies, traditional or streaming] who also own content — and therefore, have their own leverage — like Comcast-NBCU. But what about a small rural cable operator who does not own content, and possesses such a small subscriber base as to be at the mercy of whatever price AT&T decides to insist on for HBO or CNN?”
And of course, CU continues, there is the problem of zero-rating. “Under [AT&T’s] ‘Sponsored Data’ plan,” CU writes, “DirecTV pays AT&T Mobility for zero-rated data service and other, unaffiliated video providers, such as Netflix or Charter, are reportedly able to obtain the service at the same rate. But because the payment from DirecTV to AT&T Mobility is AT&T simply moving money from one of its pockets to another, there is potential for anti-competitive cross-subsidization — the same payment does not ‘cost’ them as much as it costs the independents.”
That’s how preferential treatment benefits companies: someone concerned about potentially incurring high fees for going over their mobile data limit is going to be more likely to gravitate to a service that doesn’t count against that limit. That means other companies — say something like Sling TV, theoretically — would either have to pay AT&T for access to zero-rate their customers, or AT&T customers would instead potentially avoid it in favor of something that spares them data costs. Either way, AT&T wins.
“We view the choice between these two outcomes as a ‘double whammy’ that hurts competition in the emerging market of streaming, over-the-top wireless video,” CU concludes.
AT&T is, of course, not alone here, as CU notes. Comcast/NBCU is the biggest merger of media and content companies in recent years, but it’s not the only one. Verizon, too, has been trying to move into content, with extremely limited success. Still, its acquisition of AOL and pending attempt to buy Yahoo are both with an eye to expanding its advertising and media presence.
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