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.
- Primer, WaPo
- James Stewart, New York Times
- Other commentary/analysis:
- Wired analysis/commentary
- Ars Technica analysis/commentary
- A look at Tom Wheeler of FCC on the deal, NYTimes
- The Verge, pros and cons
There are conflicting visions of a future with autonomous driving. One version seems to focus on a select few benefits: expanded availability to disabled, elderly, and perhaps even children, vastly reduced traffic deaths (they were on the order of 30,000 in 2014), and the possibility that you won’t have to own a car at all: you’ll simply summon one when you want one. An article from The Atlantic’s City Lab seems to focus on this latter point and its potential impact in disrupting public transit systems: why would anyone ride public transit at all?
Yet as I think about a possible future with driverless cars, it seems more likely that people will continue to own their vehicles, as this is the primary way the median American travels to and from work. There are probably deep cultural reasons somewhere in there too. The article has some interesting notes, and it seems to me that very few people are thinking about how autonomous driving technologies would implement into public transit systems in cities.
In fact, if driverless cars encourage a large class of people to ride in cars more frequently (they no longer have the pain of driving themselves, and can focus on work or some other form of leisure in the car), then things like commute times and congestion (and possibly pollution, absent greater gains in emissions technology) may become an even greater problem. The only solution to this problem, electric cars or not, autonomous driving or not, is increased investment in public transit.
So what happens to public transit? Potentially, implementing this autonomous driving technology could eliminate or greatly reduce the share of labor costs in public transit. A bus can be added to a route without hiring a person with a pension, health benefits, and overtime restrictions. This could be good from the perspective of a commuter: costs would be more predictable, service could be expanded, and chronically underfunded systems could potentially have more cash to invest in infrastructure and maintenance. Adding a bus route used to depend on the fixed cost of potentially buying a bus and the variable cost of adding a worker to drive the bus for certain hours of a day. Without a worker, the bus would sit idle. Now, the sole essential cost is a fixed one (or the role of labor costs would be much smaller, perhaps limited to inspection and repair). Furthermore, pre-set bus routes seem more predictable and easier to implement in the autonomous driving algorithms as compared to the many additional challenges faced with a personal car, where the destination could literally be anywhere. Fewer edge cases would be encountered.
This is one possibility. Yet another is that companies like Uber, which are investing heavily in a driverless future (few people mention the dark motivations of this: Uber doesn’t want to deal with the headache of having actual employees), could take advantage of the current state of affairs in public transit. It’s not hard to imagine that the acrimonious relationship between many cities and Uber could be changed: tired of dealing with labor unions in the public transit sector and chronic under-service, they make a deal with Uber to start providing some bus-like services. And so the privatization of government services in American society may continue. This may seem crazy right now, but I have to think that companies like Uber and Lyft are thinking beyond their current model. They have already thought of car pooling, and they are already investing in driverless cars to rid themselves of the headache of dealing with actual employees. It may not be crazy to imagine Uber getting into operating its own line of buses as cities turn desperate.
Another interesting question that comes out of all of this: what happens to the jobs? Public transit systems are heavily unionized, and the relationship with the public is ambivalent in many ways. A job that provides generous benefits and a living wage should be applauded: on the other hand, in a society where median wages have stagnated and living in many urban centers has grown more expensive, fewer and fewer think “we should try and get what they have”, and instead think “if we don’t have it, neither should they.” Having lived through several public transit strikes where service was largely shut down by unions, bringing city life to a standstill, I have some sense of the complex feelings involved.
So then in 30 years, when the occupation of driver (whether bus, taxi or truck) has disappeared, where do these millions of workers transition to? It has been a fallacy throughout history to decry technology as destroying jobs on net: new industries arise from the gains in technology and productivity and fill the gap created by the destroyed industry. But so far, I have seen very few imagine what this future would look like, and where these jobs might appear. Instead we hear about a future where the Silicon Valley unicorns and monopolies gradually solve all of society’s ills. Furthermore, even if new industries appear, we have learned over the past few decades just how hard transitioning careers can be, and how permanently harmful the process can be to one’s lifetime earnings (not to mention psychological well-being). Research by David Autor has also shown that jobs have become increasingly bifurcated: a hollowing out of middle-class jobs and an expansion in low-wage jobs, and to a lesser extent, highly skilled jobs. And has the role of technology fundamentally changed, moving from something augmented by labor to something completely substituting for labor?
If it’s going to happen, it’s going to happen. But the future to aim for is one where institutions are robust and able to handle the future’s potentially massive job losses, and one that doesn’t envision a personal car for every person who can afford it, exacerbating congestion issues and disadvantaging the poorest. As the population grows and technology becomes potentially more disruptive to the workforce, investments in infrastructure and accessible education should be made a priority. Out of all the claims made by Silicon valley types about the huge technological advances just around the corner, autonomous driving seems to be the one that might actually come to pass. It’s better to be proactive if we know the changes are coming.
How can CEOs, management and boards of directors have their interests aligned with the long-term health of the companies they run? How can their interests be aligned with the interests of their employees?
I’m grappling these questions as I look to a few glaring cases of capitalism gone wrong, and I am wondering why boards of directors ultimately do what they do. In my mind, a board should provide diverse expertise and guidance for a company, choose its CEO, and stay vigilant in making sure the chosen CEO has taken an appropriate course. Part of choosing the CEO also requires setting contract terms and compensation. And on this, I have a hard time understanding how boards in America can agree to such large compensation terms with so little downside risk for the executives involved.
It has recently come to light that in the event of a merger, Marissa Mayer, CEO of Yahoo, would receive $55 million in severance if she were ousted. Just as ridiculous is her compensation across 5 years: at minimum, it was projected to be worth $117 million across 5 years. It will likely end up being closer to $365 million, depending on the share price. Not only are these amounts ridiculous, but they are in part determined based on share price, an imperfect indicator of company health. If you happen to enter as CEO during a recession, and you stay on just as the economy and the technology sector expand, then you see the gains flow to your pay. All you had to do was nothing. This is almost precisely what happened with Yahoo: their share price increased entirely due to a large stake in Ali Baba (an investment made prior to Mayer’s tenure), which had its IPO in 2014 and currently has a market cap of nearly $200 bn.
People who defend CEO compensation in America try to draw comparisons with everyday workers and their own motivation to show up and do a good job based on the pay they receive. Money rewards good work, so their fable goes. But there is no parallel here. When most people do a poor job, they can be let go. Most don’t receive severance, and most immediately worry about how they will make ends meet, or get another job. The psychological and financial impact is often severe.
There is no similar downside for Marissa Mayer. She never has to worry about money, and she gets paid tens of millions of dollars even if she screws up and leaves. And so, I wonder: what are boards of directors thinking? This kind of thing doesn’t even seem to align with shareholder interests.
Yahoo recently laid off 1,600 people. Make the rosy assumption that Yahoo did not lose any revenue from cutting all of these workers, and that the move only cut costs. Suppose Marissa Mayer gets her severance this year of $55 million: assuming (conservatively) that employees receive a total of $200,000 in compensation on average (including health insurance and other benefits), $55 million would pay 275 workers for a year. If we consider her $365 million potential pay across 5 years, that money would pay for 365 workers for 5 years. In reality, Yahoo arguably lost some revenue from laying off these workers.
The same would not be said for the CEO. Is it at all possible to make the argument that she, or some other CEO, would have done a worse job with just $36.5 million instead of $365 million? This discussion leads easily to questions of taxing the rich. Many arguments against raising rates on the very rich seem nonsensical when put in this perspective.
There are other examples of boards of directors making poor decisions: Men’s Warehouse tried a disastrous acquisition of Joseph A. Bank and ousted its famous founder George Zimmer in the process. In this case, the board went against the CEO, and gave him no severance. Why? Men’s Warehouse’s largest shareholder was the hedgefund Eminence, which also owned a stake in Joseph A. Bank. They had pushed for a merger of sorts (and overpaid, to their simultaneous detriment and benefit). Among the members of the board of directors was Deepak Chopra, bullshit artist and new age spiritualist. What expertise could he have brought to Men’s Warehouse’s business dealings? Zimmer deserves some of the blame, as he handpicked many of the directors.
Mr. Zimmer, who lives in the Bay Area, says he feels bad for Men’s Wearhouse employees, but not for Eminence. “I don’t have a high regard for hedge funds,” he said. “Nothing personal — I’ve never met the Eminence people — but I love the idea they might lose a fortune. Hedge funds may force companies to be more efficient, but that’s not always the best thing for every stakeholder group, like employees. It’s curious we’ve allowed capitalism to become all about shareholders.”
At least in this case, you could argue that the decision was based on large stakeholder in the company. But it sucks that the employees will ultimately pay the price. Should boards be prescient rather than short-sighted? Shouldn’t they be actual experts on business matters, representing both shareholders and the many employees that work for the company? Was Deepak Chopra qualified to be a part of that decision?
Freeport is another example where a board of directors failed to do its job properly, sitting idly by (and getting rich) while letting an overcompensated CEO take the company down. The mining company decided to get into oil at the height of the commodity boom by taking on massive amounts of debt to the tune of $20 billion. The chairman, James Moffett, argued for the purchase of two companies: Plains Exploration and Production and McMoRan Exploration, where he was also the CEO. The conflicts of interest are staggering, as he stood to get rich from buying a company he had a large stake in. Where was the board to voice these concerns?
Freeport’s chief executive, Richard Adkerson, was McMoRan’s co-chairman. Nine Freeport directors owned stock in McMoRan totaling about 6 percent of the shares. Freeport agreed to buy McMoRan for $2.1 billion — a 74 percent premium over its market price before the deal was struck. Mr. Moffett himself was paid $73 million.
Moreover, Plains owned 31 percent of McMoRan, enough to block any deal. Freeport eliminated that possibility when it bought Plains. And James Flores, Plains’s chief executive, who now runs Freeport’s oil and gas operations, was also a director of McMoRan. He made $200 million on the deal.
In addition to the $73 million, after Moffett was “let go”, he received another $79.4 million in severance. The company’s market capitalization had fallen to as low as $4bn and is now $13.08B, far below its debt obligations.
Not all companies face such dramatic ends. But the questions remain: how can boards of directors do a better job for the company and the employees, and how can CEO compensation be drastically changed?
It is sometimes too easy to be jaded and cynical, and to write people off as merely a product of their affiliations and past lives. This especially applies to public figures and how we think about them. When I say easy, I mean cognitively easy: we think of a person and what they stand for in a way that challenges our world view the least and fits neatly into a narrative we had already started writing. Rewriting, or adding digressions and nuance to the story, is too time-consuming. I am as guilty of this as anyone. In many cases, the judgement is actually correct, and more often than not it is borne out by an abundance of evidence.
But every so often, I need to be reminded that people are people, and that they can be complex and difficult to label. Their motives are not so simple, and not so impure as we might have first thought. This realization doesn’t automatically render individuals great, nor does it wipe the slate clean. But it is an antidote to thinking of the world as a static and stark chess board, where everyone plays a single role for a single side, never changing.
The first example is Neel Kashkari, the Goldman Sachs banker picked by Treasury secretary Hank Paulson (and former Goldman Sachs banker himself) to “administer” the Troubled Asset Relief Program (more commonly known as TARP). It was never clear to me what his job was precisely, or whether he was particularly good or bad at it: but members of Congress were not happy with it or the turn TARP had taken after being passed under the spectre of a harsh financial collapse. Recall the famous hearings, where Kashkari was asked by Rep. Cummings: “Is Kashkari a chump?”
After going back to the world of finance and working for Pimco, he then ran for governor against Jerry Brown in California (we know the outcome there). His ads made him sound like any other ostensibly fiscally conservative Republican. Low taxes, less government, etc. Nothing remarkable, interesting, or particularly thoughtful.
Then, surprisingly, he was picked as the next head of the Federal Reserve Bank of Minneapolis. I don’t think he was qualified or should have been picked for that position, in which he will occasionally be asked to vote on monetary policy that impacts the entire economy, but I’ll leave that for others: Brad DeLong and others summarize the issues and his views well.
But then, in February, he gave his first major speech. It was all about ending Too Big To Fail (TBTF). Here are his policy prescriptions:
- Breaking up large banks into smaller, less connected, less important entities.
- Turning large banks into public utilities by forcing them to hold so much capital that they virtually can’t fail (with regulation akin to that of a nuclear power plant).
- Taxing leverage throughout the financial system to reduce systemic risks wherever they lie.
Sounds like the Bernie Sanders plan. It’s not clear that breaking up large banks into smaller banks is a good solution (nor do I understand how one enforces them to be less connected than if they were part of a big entity with a large capital base). Nor do I think TBTF is something you can regulate away. The tax on leverage is probably a good idea (a financial transaction tax), and large banks have been forced, thanks to Basel III and Dodd-Frank, to hold significantly more capital. Stress tests carried out by the Treasury have also pushed towards this.
But all of this is a long way of saying I was surprised by the speech. Probably it went into territory that’s not really standard (and maybe not appropriate) of a newly-appointed Federal Reserve Bank president, at a time when there’s unprecedented scrutiny by outsiders to politicize the Fed. And the usual caveats apply, especially when dealing with an aspiring politician: this could simply be an attempt to change his public perception rather than a sincere belief in the kind of financial regulation he talks about. Only time will tell. But it certainly did not sound like a Wall Street banker.
The second example is Tom Wheeler, FCC chairman since 2013. Ars Technica had an in-depth interview entitled “How a former lobbyist became the broadband industry’s worst nightmare.” Tom Wheeler had served as a chief lobbyist for the cable and telecommunications industries prior to his appointment. Few had expected him to be anything but a friend to those industries, and progressive were unhappy with his nomination.
Fast forward to 2016, and he has largely acted as an opponent to the telecommunications and cable industries in their ambitions to consolidate and monopolize. Famously, he led the charge to destroy the proposed merger between Time Warner and Comcast. Most recently, he has pushed for rules requiring cable companies to conform to a single standard in cable boxes, thus allowing customers to purchase rather than lease the boxes at extraordinary rates (to the tune of $20 billion annually, or $231 for the average customer). The entire interview is worth reading. There is even a reference to The Master Switch by Tim Wu, a definitive text on monopolies in the information industries of past and present from the man who coined the term net neutrality.
Wheeler’s tenure has been consequential. But looking at his resume, you might have thought he would reach different decisions on a number of important issues. Sometimes people can surprise you. It’s worth remembering that.
I have no doubt that NBA teams probably have sophisticated (and proprietary) databases and technically-savvy analysts looking at all kinds of basketball data to assess strengths and weaknesses of teams and individual players.
But as an outsider looking in, I was thinking about what areas of data analysis in basketball seem most promising for the future, given that we are now in a “big data” world.
First, basketball is really hard to analyze because there are countless variables interacting with each other all the time. In baseball, you can analyze a pitcher and a batter and ignore everyone else, basically, without losing too much information. In basketball, there are always people active on the court beyond just the shooter. There are help defenders, there’s the guy that fed the shooter the pass, there’s the guy that fed the guy who fed the guy the pass, there’s the guy that set the screen, and there’s the guy on the opposing team in the paint who may be deterring a drive that was never attempted. So it seems like focusing on problems of interacting variables is something that should be given more thought than it has been given thus far.
Second, basketball is spatial, so it would be interesting to do more in this area. Already TV networks visually show shot selections for various players, but I don’t get the sense that it has gotten much deeper than that.
Third, as I alluded to in a previous post, people look at averages but not so much at the variability of players’ performances. Getting some measure of how consistent players are seems important in correctly assessing value.
Finally, analyzing injury impacts on players in a statistically-rigorous fashion would be interesting, and probably really helpful for teams who are considering signing players who are just coming off injuries. Andrew Bynum is one example of this. A database of ACL-injuries, pre and post-injury, and whether things improved over time, or whether you could predict the quality of a comeback based on the first 10 games, for example, seem like interesting questions to try and answer.
Some questions can be answered as more and better data are collected, but other questions are simply hard to quantify and answer with data. Quality of coaching seems like one area in particular where this holds true.