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
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.