Mergers & The Monopoly Moment: On the AT&T/Time Warner Deal
November 2, 2016
AT&T’s proposed $85.4 billion purchase of Time Warner has been met with skepticism from Wall Street as well as open opposition from politicians and regulators. Commentary on the merger has flagged the significant anticompetitive concerns associated with the proposed vertical integration of a content creator (Time Warner) and content distributor (AT&T) across two highly concentrated markets.
Contrary to the claim by AT&T CEO Randall Stephenson that this is a “standard vertical merger” with minimal impact to existing market structures and potential benefits for consumers, the deal is anything but standard.
As demonstrated by K. Sabeel Rahman and Lina Khan in Roosevelt’s Untamed report, the assumptions underlying Stephenson’s claim have been found to be less and less compelling in recent years. AT&T’s ultimate goal is to cement its control of the user market by controlling distribution channels by granting its customers access to Time Warner’s proprietary content like hit HBO shows Game of Thrones and Westworld on preferential terms. The anticompetitive effects of AT&T’s post-merger plan extend beyond mere price change and will have significant impact on net neutrality, data privacy, consumer choice, and upstream competition for over-the-top (OTT) services (think Nextflix, Hulu, and Amazon Prime Videos) and content creation. As companies like AT&T continue to seek out new ways to increase and exert market power, regulators must adapt their review and enforcement standards to effectively safeguard the public interest.
Making Sense of the Deal: What Is AT&T’s Post-Merger Strategy?
To better understand the anticompetitive impact of the merger, it is important to ask why AT&T is willing to pay a 35 percent premium on Time Warner’s stock price prior to the deal’s announcement. At $107.50 per share, the purchase price translates to 13 times Time Warner’s estimated earnings for 2016, topping not just 21st Century Fox’s failed 2014 bid but also the market capitalization of other big entertainment companies and comparable mergers.
The answer likely lies in AT&T’s planned release of its own Netflix-like, or OTT, service, DirecTV Now. Per the announcement that came just days after the AT&T-Time Warner merger agreement was signed, DirecTV Now will be priced at $35 per month and will provide live-streaming of 100 TV channels. Here’s where things get interesting: Streaming through DirecTV Now by AT&T customers won’t count toward their monthly data limits, a practice known as “zero-rating.”
Public Interest Harms of Zero-Rated and Fully Integrated Content Distribution
AT&T is hardly the first to engage in zero-rating. A slew of zero-rated services has surfaced in recent years following the Federal Communications Commission’s adoption (and the D.C. Circuit Court’s recent affirmation) of Open Internet rules. While the FCC rules bar internet access providers (IAPs) like AT&T, Verizon, and Comcast from blocking, impairing, or creating paid “fast lanes”, they remain silent on more subtle forms of positive discrimination like zero-rating. As a result, from T-Mobile’s “Binge On” to Verizon’s “Go90”, there has been an increasing trend in carrier use of zero-rated OTT services.
From a consumer standpoint, this all looks like a great deal. That is exactly the point of zero-rating: to create an offer consumers can’t refuse. But zero-rating is a violation of the core tenet of net neutrality, which requires IAPs to treat all data alike, without preferential treatment. Zero-rated services like DirecTV Now allow carriers to exert far greater control over content creators and tighten their grip on users.
Prized content from Time Warner subsidiaries like Warner Bros., HBO, TNT, and TBS will greatly magnify both upstream and downstream anticompetitive impacts of DirecTV Now. Not only will barriers to entry be raised for content creators who lack distribution partners with AT&T’s reach, emerging OTT services will be similarly disadvantaged. While Netflix might be sufficiently entrenched to weather such anticompetitive effects, competition from new third-party OTT services will likely dwindle since they will be denied access to the consumer bases that belong to integrated distribution channels like AT&T.
In addition, by leveraging highly popular properties like Game of Thrones, AT&T’s zero-rated streaming could limit the choices of consumers who would otherwise have considered switching to competing IAPs or simply cutting the cord. This is not to mention AT&T’s heightened ability to capitalize on the surveillance of user data following the merger, a questionable practice the company is already engaged in through Project Hemisphere.
Realistically, is there any way that this deal can be stopped? The regulators looking at this merger will be the Antitrust Division of the Department of Justice, in coordination with the Federal Trade Commission, and the FCC. The DOJ can seek to block the merger, but it will have to take AT&T to court, and its track record there isn’t great. Of the 20 vertical mergers that the DOJ and FTC have reviewed since 2000, one was abandoned and the remainder was completed following settlement between the parties and regulators.
This leads to the next possibility: The DOJ can allow the merger to go through by issuing a consent decree, which is a court order that would reflect the terms of settlement agreed to by AT&T and contain conditions tailored to remedy anticompetitive effects. AT&T is actually banking on this, since it remains confident that the deal will pass regulatory muster, as evidenced by the relatively modest $500 million fee to be paid by AT&T if the deal is scuttled for regulatory reasons, likely reflecting a low level of risk assigned by the parties. Critics, however, have noted the limits to such conditions: firstly, it is hard to know if the conditions will be sufficient to address the merger’s anticompetitive impact, especially in the highly concentrated industries in which AT&T and Time Warner operate; and secondly, such conditions are often time-limited. Take, for instance, the consent decree for the Comcast-NBC Universal merger, which is set to expire in 2018 unless the D.C. District Court grants an extension.
The FCC can also prevent the merger from going through by blocking the transfer of FCC-issued licenses from Time Warner to AT&T, effectively denying the ability of AT&T to operate assets acquired from Time Warner. Unlike the DOJ, the FCC, in this context, functions as an adjudicator, and the burden is on the applicants to show that there are sufficient public interest benefits derived from the transfer to offset public interest harms. The catch is that the number of licenses that AT&T needs from Time Warner may not be enough for the FCC to use as leverage, meaning that AT&T/Time Warner could try to shed the assets that require FCC licenses to escape FCC review (though it is unlikely that AT&T would want to do this, and the FCC would not look kindly on it).
Alternatives to Merger Review
By banning zero-rating, the FCC could kill two birds with one stone by undercutting a significant potential upside of the merger while enhancing net neutrality and its Open Internet rules. Separately, the adoption of broadband consumer privacy rules by the FCC on October 27 is a step toward addressing data privacy concerns surrounding the merger.
However, a more comprehensive change to U.S. antitrust policy is needed to fully address not just the proposed AT&T-Time Warner deal but also the larger trend of mergers with increasingly complex public interest concerns. While the DOJ is undoubtedly working closely with the FCC in its review and factoring into its analysis the impact of AT&T’s plans for its zero-rated service, what is ultimately missing is a more definitive and comprehensive standard for merger review and antitrust enforcement. Such a standard should be grounded in analysis of a merger’s impact on the public interest, which is more multi-faceted than the narrow and price-oriented focus of the current “consumer welfare” basis of review. Given the rare bipartisan support this election cycle for tackling market concentration, the incoming administration will be in a unique position to implement this policy overhaul.