AT&T and Time Warner

In what seems like a repeat of Comcast’s purchase of NBC Universal, AT&T has announced its intentions to purchase Time Warner to the tune of $85 bn. AT&T, a provider of TV, internet, phone and wireless services, is purchasing the content to carry on those pipes and airwives: HBO, TBS, TNT, CNN, and Warner Brothers TV, movies and video games.

James Stewart of the New York Times mentions how vertical integration deals rarely get prohibited by regulatory authorities, especially in recent decades. Even the Comcast and NBC Universal deal, which faced fierce public opposition, was ultimately approved 4-1 by the FCC with minor concessions. If you are not buying a direct competitor, as when AT&T attempted to purchase T-Mobile, then there are few things in the way, generally, according to the current antitrust calculus. But the public’s appetite for such deals has appeared to sour in recent years as there’s been a growing awareness of corporate power in society.

There’s little risk here for AT&T to pursue Time Warner, with a break-up fee of just $500 mn (a drop in the bucket for AT&T) in the event the deal doesn’t work out, compared to $4 to $6 bn in cash and assets sent to T-Mobile when that deal failed to pass regulatory muster. But there are a few questions here that can help illuminate whether regulators should take action to block the deal. As James Stewart notes, things have changed in recent years. Donald Trump says the deal shouldn’t be pass; so do Bernie Sanders and Tim Kaine. Trump says lots of things, but let’s go with it for now.

First, why is AT&T going for Time Warner?
It’s important to note a few things. AT&T is profitable in offering cellular service to consumers, but the U.S. market is increasingly saturated: almost everyone has a smartphone with a data plan, and it’s increasingly difficult to add new customers. AT&T is also profitable in offering TV, internet and home phone services to consumers, but again, this market is largely saturated (and there are expected to be a fair amount of cable cutters in the future).

Furthermore AT&T has already begun experimenting with alternative revenue streams. As part of building out gigabit internet (with a terrabyte cap) and offering it to consumers for $70 (depending on the market), there is the scarcely mentioned fact that as part of the subscriber agreement, customers agree to allow their internet traffic to be used to target ads to them. They can opt out by paying $100 instead. This should raise privacy concerns, but there is an (expensive) option to opt out. At an extra $30 per month, few will. Verizon, meanwhile, is pursuing a similar strategy of highly-targeted ads in their wireless services, and this is one reason they have purchased AOL and Yahoo in recent years (for the ad tech as well as the high-traffic properties).

So what’s the business motivation here? As noted above, providing core services (the pipes) has ceased to be a growth industry, although it remains profitable. And so these companies, with huge cash reserves, low interest rates, and scarce investment opportunities, are increasingly buying the content delivered on their pipes. AT&T would deliver the content to consumers regardless, but it usually pays fees to Time Warner for the right to do so. Now they don’t have to pay those fees, and can collect the fees from other competing cable service providers. Second, they now own both the pipes and much of the content delivered on these pipes. And they increasingly collect large amounts of information about their consumers. They approach a position of collecting fees to use the pipes; fees to view the content regardless of whether it’s on their pipes; and fees for highly targeted ads on the content given to consumers. At every step of the process, a new AT&T can now earn revenue on every part of the flow of information and content.

Second, what has been the impact of Comcast purchasing NBC Universal? Were consumers benefited or hurt?

This one is harder to assess. It’s hard to imagine a public benefit that came out of it, as Susan P. Crawford has noted in the NYTimes piece. And it’s easy to note some instances where Comcast, with or without NBC Universal, has exercised its market power for ill (think of the hoops they made Netflix jump through). This had less to do with NBC Universal, but it’s something to consider.

There was a recent report that stated the FCC was probing whether there was an effort by cable companies to harm the growth of internet video, including Comcast and Hulu (which they explicitly stated they would not do in order to gain approval for purchasing NBC Universal). The evidence looks bad to neutral, and it calls into question whether concessions can ever be effective for taming the market share and power of the companies merging.

Third, should industries involving the flow of information be treated differently by antitrust law?

In a word: yes. This is in some ways the main point in Tim Wu’s book, The Master Switch. Information is different (the content on TV and internet), and concentrated power should be fought and avoided at every possible turn. Giving power over content to companies who already have large power over the pipes that control what information we get is a dangerous trend.

There’s also the issue of precedence. AT&T is buying Time Warner, in part, because Comcast bought NBC Universal. They’ve even stated that this deal is much less problematic than the Comcast deal, and on those grounds it should be immediately approved.

Consolidation, power, and vertical integration by one company pushes the other few competitors to make similar decisions in the future. You see this not just in vertical mergers, but also in horizontal mergers. Over the course of a few years, the airline industry consolidated and merged to essentially a few major players. They have cut capacity and been very profitable. In part this is due to low oil prices, but it also has to do with having fewer major competitors to deal with. This started a while back, in 2005. By 2015, when US Airways merged with American Airlines, there was little hope of stopping the deal. How else would they compete with the other large airline groups: Delta/Northwest, United/Continental, and Southwest/Airtran? In other words, approving the earlier deals tied the regulators’ hands. They created the conditions early on under which they would have to approve later deals. This was one reason why AT&T and T-Mobile were not allowed to merge: it was clear that Sprint could not exist in that market (and it might not, still).

Approving these deals also leaves regulators in a fundamentally reactive and passive state of being. They are never breaking companies that get to be too large; they are always allowing companies to get bigger. Not since going after Microsoft in the late 1990s (with no major consequence, ultimately) have antitrust authorities made any attempt at breaking up large powers.

Given the stakes here are not just higher airfare, but how we receive and consume information, and how we express ourselves to a large extent, and that there is little consumer benefit to be had, it’s hard to argue in favor of the deal. Vertical integrations should be looked at suspiciously, especially when they involve just a few large corporations and the flow of information.


Book reviews

I sometimes get in the habit of reading a huge amount of news articles and blogs, often about a single subject over the course of a couple of days. Maybe it’s about sequestration, or Zero Dark Thirty, but in any event, reading about current events can wear me down mentally. It’s usually then that I shut down the computer and try and spend more time reading books, which manages to feel refreshing.

I had a chance to read a couple of very informative non-fiction books over the past couple of months. The first is The Power of Habit by Charles Duhigg. The second is Thinking, Fast and Slow, by Daniel Kahneman, which I mentioned in a previous post about prospect theory.

I have mixed feelings about popular science books. When I say popular science, I basically mean Malcolm Gladwell books, like Blink, which try to decipher large volumes of psychological research into something for the average reader. The writing is clear, fun and breezy, and you feel like you’ve gained some significant knowledge about the world. The major danger in Gladwell’s Blink (the only one I have read) is that they are deceptively easy. Research into the mind is hard, and often messy, and the picture the reader receives is one of complete certainty, when that is far from the case. Furthermore, Gladwell introduces a compelling thesis of his own based on a selective reading of research, and the evidence for this thesis seems less convincing as the book goes on. Late in books he seems to come up with examples that he has to almost manipulate into his original thesis. This was my experience with Blink, anyway.

The Power of Habit is sort of like Gladwell’s books in the way it tries to approach complex science into the mind in an easy-to-read manner, but it manages to avoid most of the problems. Charles Duhigg, like Gladwell, has a general thesis, that habits overwhelm and determine huge amounts of our life, and he proceeds to expound on this through an omniscient narration of compelling events while interjecting with analysis and discovery. The early part of the book looks at a man who lost his ability to generate new memories, but still, he seemed to learn some things by way of habit, and even he seemed unaware that this was happening. Later the book delves into other fascinating examples, like Starbucks employee training and Target’s data operations which try to capture pregnant shoppers by sending them coupons earlier than their competitors.

Duhigg does a good job of illustrating different examples, as well as admitting the complexity of habits in different scenarios. Ultimately, at the end of the book, I did feel like I had a much firmer grasp of my own habits, and how I could improve upon them (and replace the bad ones). I also found myself thinking more about everyday activities that I had taken for granted. I finished the book a few days ago, but I still find myself thinking about parts of the book, and in particular, how I could apply the lessons in the book to my life. There’s a short Appendix focusing on this, so that’s helpful.

The drawbacks of the book are what appear in any kind of popular science book. In its efforts to draw in the reader, the narration is a bit too accurate and precise. This is common in journalism, where the writer paints a compelling picture of a character and some kind of nuance in his or her behavior before delving into some discovery or struggle, but it seems to me a bit too much like fiction in some instances.

The summary of research into the mind is generally good and nuanced, but the book also delves into some areas where I felt like Duhigg was trying too hard to fit examples into his thesis. There’s an example about Rosa Parks and the associated boycotts, and also Rick Warren’s Saddleback Church. The accounts are compelling, and it is interesting to hear about them from the perspective of habits and social networks, but ultimately I felt these were out of place in the context of the rest of the book.

Thinking, Fast and Slow, by Daniel Kahneman, is a completely different kind of book. Kahneman is a Nobel winning psychologist and economist, and he provides a very serious look at a massive amount of research into the way the mind works. The writing is precise and to the point even as Kahneman tackles extremely complex topics and scenarios. The writing here is not in the mode of Gladwell or Duhigg, as there are no cheap attempts at story-telling just to draw the reader in. The chapters are heavy and full of information; I found each chapter compelling but I had trouble reading more than 2-3 in one sitting.

I learned a great deal about how irrational we are from Kahneman’s book, and even though it was a slower, more difficult and draining read, whatever I learned was incredibly rewarding. There were several chapters I read multiple times because they were both complex and delightful in what they revealed. The book covers a wide array of topics, so it is more difficult to summarize vs. The Power of Habit, which has a specific thesis in mind, so I’ll leave that job to Amazon. You can also see my previous post mentioning prospect theory here.