The Bottom Line

AT&T – Time Warner Merger Raises Eyebrows

Authors: Christopher Baugh | Carlos Placido (independent adviser)

The approved merger of AT&T and Time Warner is an interesting and multi-faceted case to analyze because it is not just shaped by converging trends modulating telecoms, media and Internet businesses but also by an evolving regulatory framework, telecom-Internet players’ power balance and even U.S. politics. The sheer size of the merger raises eyebrows but should come as no surprise, being a new example of an accelerating progression where traditional “platforms” become less relevant in favor of retail reach, scale, branding power and consumer preference for bundled services, which define who owns and bills the consumer. NSR anticipated these trends ten years ago in an article titled “The End of Platform Wars as We Know it.”

Worldwide, there are many examples of consolidation in content and distribution; with the Comcast-NBC merger in 2010 being an iconic one. These deals always raise concerns as the complexity of the Internet-era competitive environment challenges traditional thinking and leaves regulatory gray spaces. Anti-trust laws tend to discourage horizontal integration more than vertical integration and have a rather local or perhaps regional significance -not global- providing opportunity for M&A activity, sometimes with impact beyond a country’s borders. Three years ago, with the acquisition of DirecTV, AT&T became both U.S. and world’s largest Pay-TV provider. The deal also had a degree of vertical integration because DirecTV owned exclusive content rights but merging with Time Warner is clearly at a new level because of powerful media properties like CNN and HBO, which transcend linear TV.

More M&A activity and vertical integration of access and content businesses appears inevitable, not only because of the domino effect of large M&A deals, but also because matured markets have reached saturation in penetration levels for wireless, Pay-TV and Internet. This is pushing business towards a churn-fighting environment that now involves both traditional and Internet players. However, a merger this size, with no regulatory conditions, in the context of recent modifications to Net Neutrality, is worrisome because it could mean fewer choices of high-quality content to consumers and a competitive access market modulated by prioritization agreements. With cord cutters, non-linear viewership and mobile streaming being irreversible trends, one has to think about how AT&T could play with internal “subsidies” across its media and access properties (wireless, fixed and satellite) that could result in non-competitive behavior. As an example, AT&T could provide no data caps on Turner content to its own wireless subscribers while, at the same time, impose more costly rights for such content on competing distribution platforms. The killing of Net Neutrality means that AT&T could charge higher tolls for third-party OTT content to be given priority when transported across its fixed and wireless lines. Thus, the simultaneous effect of content-distribution integration and recent killing of Net Neutrality -which benefited access players like AT&T in detriment of Internet players- could have unintended competitive consequences.

How this mega-deal in particular impacts the satellite business is unclear as satellite is just one of the possible transport technologies in an increasingly technology-agnostic, integrated, content-heavy war. Longer term, as additional M&A activity accentuates vertical integration of content and distribution, global impact might come in the form of less bargaining power for satellite operators when negotiating space segment lease contracts with fewer and more concentrated players combining businesses in key satellite verticals such as primary TV distribution, telco-DTH, cellular backhaul and residential broadband. How such a hypothetical evolving scenario would impact the business of “sticky” prime linear TV neighborhoods is also something to monitor, as the strong network externalities existing in such business could be challenged.

Looking a bit beyond the telecoms and media industry, one can consider the AT&T-Time Warner merger as perhaps the best example of how big of a threat Internet giants have become to even the largest telcos, mobile carriers, programmers and MSOs. There is increasing concern about the size and power of companies like Amazon, Google, Facebook, Apple and Netflix. As an example, Amazon – in different and creative ways- is also said to leverage cross-sector subsidies to grow.  NYU Stern professor Scott Galloway and other experts have been raising awareness of how Amazon is benefiting from its profitable AWS cloud business to subsidize growth in other business units, allowing it to become more competitive and larger in content and retailing, pushing smaller players and retailers out of business.

In the end, it appears that what is at the core of Internet-era consolidation, is the definition of antitrust itself within the context of cross-industry and cross-sector plays. How do we define “dominant player” in such a hybrid context? How do we prevent legislation from opening doors for new kinds of oligopolies? These will be the key questions to answer looking forward if 21st-century antitrust is to truly protect consumers and foster a healthy competitive environment.