Why the AT&T–Time Warner Merger Is a Red Flag for Consumers

February 24, 2017

In October 2016, AT&T announced its plans to acquire Time Warner for $85.4 billion. This hefty price tag reflected what was at the time a 35 percent premium on Time Warner’s stock price or, alternatively, 13 times Time Warner’s estimated earnings for 2016. This figure topped not just 21st Century Fox’s failed 2014 bid but also the market capitalization of other big entertainment companies and comparable mergers. This leads to an important question: What is AT&T hoping to get out of this deal that would allow it to justify this gamble? Marshall Steinbaum and I explore the answer in our new brief, “Crossed Lines: Why the AT&T–Time Warner Merger Demands a New Approach to Antitrust.”

The merger signals AT&T’s desire to take on services like Netflix, Hulu, and Amazon Video not by leveraging what Judge Learned Hand described as “superior skill, foresight and industry,” but rather by taking advantage of the market power of two giants through the combination of AT&T’s far-reaching distribution network and prized content produced by Time Warner subsidiaries like HBO. The resulting entity will be a fully integrated content producer and distributor with unprecedented power to foreclose competition from newly emerging distribution services as well as content creators.

The lynchpin of AT&T’s post-merger strategy is a form of positive discrimination: It will encourage its customers to watch Time Warner content over its own network by exempting use of its proprietary streaming service, DirecTV Now, from the customers’ data cap—a practice called “zero rating.” AT&T is banking on the fact that using this form of discrimination, which would allow it to circumvent existing rules safeguarding net neutrality, it could capture a sizable user base. So in effect, consumers would be offered subsidized content access at the expense of prior efforts by regulators and advocates to maintain the internet as a neutral digital platform for innovation—the core tenet of net neutrality.

Meanwhile, AT&T would be able use its vertically integrated content supply chain to foreclose competition in both content creation and distribution. It could deny third-party content access to its distribution channel, charge third-party streaming services significant fees to be zero-rated, and extract greater licensing fees for popular Time Warner content from the few remaining distribution competitors. In sum, the enhanced market power of AT&T following the merger would effectively thwart growth and innovation at every turn.

As our brief further demonstrates, the AT&T–Time Warner merger is but the latest example of a continuing trend of consolidation in telecommunications. Undermined by weak, ineffective antitrust policy, the competitive environment that the deregulatory aims of the Telecommunications Act of 1996 had sought to foster never materialized. Instead, the law opened up the sector to anticompetitive abuses, leading to higher prices and poorer service for customers and increased marginalization in market access for underserved communities.

Blocking the proposed merger would be a step in the right direction. However, to correct the underlying problem of which the merger is but a symptom, the antitrust authorities, together with sector-specific regulators, should develop a coordinated, consistent, and rigorous approach to competition policy enforcement. Additionally, robust antitrust enforcement should be complemented by federal, state, and municipal policy initiatives to promote public broadband as a competitive alternative available to all.