AT&T-Time Warner and a Sea Change for the Internet
You’re reading the Benton Foundation’s Weekly Round-up, a recap of the biggest (or most overlooked) telecommunications stories of the week. The round-up is delivered via e-mail each Friday.
Round-Up for the Week of June 11-15, 2018
June 2018 has already been a pivotal month for the internet. On June 11, the repeal of net neutrality rules went into effect. The next day, Judge Richard Leon of the U.S. District Court in Washington (DC) approved AT&T’s blockbuster $85.4 billion acquisition of Time Warner in a decision that could unleash a new wave of megamergers. While I will focus here on the AT&T-Time Warner decision, one thing is for sure: this week has brought a sea change for the internet.
The acquisition unites AT&T distribution (the nation’s second-largest mobile phone provider, third-largest home broadband provider, and second-largest pay-TV provider) with a deep well of content (notably HBO, CNN, TNT, film franchises like Harry Potter, and DC Comics). The deal includes Turner Broadcasting, which owns rights to college basketball’s March Madness, plus NBA and major-league baseball playoffs, and much much more.
First, a close look at Judge Leon's ruling. Reporters waited, cellphones stowed away, as Judge Leon read his decision from the bench. And the initial reporting was that he denied the Department of Justice's request to block the deal. But let's unpack what Judge Leon found.
"The Government Has Failed to Meet Its Burden"
Throughout the decision Judge Leon said that the Department of Justice failed to show potential harms if the deal were to advance. The Department of Justice's primary theory of harm to competition focused on the merger's integration of Turner's important video content -- content that includes, among other things, the networks CNN, TNT, and TBS -- with AT&T's video distributors, U-verse and DirecTV. Justice says Turner's relationship with AT&T will enable Turner to extract greater prices from AT&T's rival distributors for its "must-have" content than it could without the merger -- and those price increases would be passed on to subscribers.
"I conclude that the Government has failed to clear the first hurdle of showing that the proposed merger is likely to increase Turner's bargaining leverage in affiliate negotiations," Judge Leon ruled. He agrees with AT&T and Time Warner that Turner's programming is not literally "must have" in the sense that distributors cannot effectively compete without it. The evidence showed that distributors have successfully operated, and continue to operate, without the Turner networks or similar programming.
The Department of Justice's second theory of competitive harm relates to streaming services known as "virtual MVPDs" (think Sling TV, DirecTV Now, YouTube TV, Hulu Live and PlayStation Vue) that offer live television programming via the internet in exchange for a subscription fee. Justice believes the acquisition of Time Warner programming gives AT&T the ability to slow the growth of virtual MVPDs. Judge Leon ruled that the Department of Justice failed to show a likelihood that the merger would substantially lessen competition by empowering the merged company to act, either unilaterally or in coordination with Comcast-NBCU, to harm virtual MVPDs. Judge Leon found Justice's evidence that AT&T will restrict virtual MVPDs' access to Turner programming "fatally anemic."
Finally, the Department of Justice alleges that AT&T will have the incentive and ability to prevent rival distributors from using HBO as a promotional tool to attract and retain customers. Judge Leon ruled Justice failed to meet its burden of proof on this theory for two reasons: 1) it failed to show that the merged entity would have any incentive to foreclose rivals' access to HBO-based promotions and 2) it failed to show that the marketplace substitutes for HBO (think Netflix) are inferior, inadequate, or more costly.
What the Government Can Do Next
The Department of Justice can appeal the ruling, and, as part of the appeal, it could have sought a stay of the decision, essentially freezing the combination of the two companies while the case works its way through the appeals process.
But Judge Leon took the unusual step of warning the government not to try to seek a stay, saying it would hurt the defendants, which had already gone through an 18-month regulatory and legal battle for approval. He said such a request would be "manifestly unjust" because it would have the effect of killing the acquisition, since AT&T and Time Warner's agreement expires on June 21. "I hope and trust that the government will have the good judgment, the wisdom, and the courage to avoid such a manifest injustice," he said in court. "To do otherwise, I fear, would undermine the faith in our system of justice of not only the defendants but their millions of shareholders and the business community at large."
On June 14, AT&T completed the acquisition, shortly after the Department of Justice announced it would not seek a stay after AT&T said it would maintain some separation between its old and new business units. The DOJ still has 60 days from the date of the ruling to file an appeal, even if the companies close the merger.
"AT&T Communications will have no role in setting Turner's prices or other terms to unaffiliated distributors, and Turner will not consult with AT&T Communications in setting Turner prices or other terms for programming provided to unaffiliated video distributors," AT&T said in a letter to Justice June 14. AT&T also said that it "will implement a firewall between Turner and AT&T Communications to prevent the transmission or exchange, either directly or indirectly, of competitively sensitive information of unaffiliated programmers or distributors." That separation won't prevent AT&T from using customer data gleaned from its broadband and TV services to sell more targeted ads, though.
If the court agrees to hear the appeal, a panel of three judges would only consider the evidence presented in trial. If the Justice Department loses there, it could attempt to take the appeal up with the Supreme Court. But it would be a notable moment if the high court's justices decide to take the case, since the Supreme Court has not taken up a merger case since the 1970s.
A New Precedent for Vertical Mergers?
One of the main reasons this trial received so much attention was the thinking that it would set a precedent for judicial reviews of vertical mergers.
When it comes to vertical mergers like AT&T and Time Warner, “antitrust law is stuck in the 1980s,” said Tim Wu, a professor at Columbia Law School. Until Tuesday, there had not been a federal court ruling on a vertical merger — a combination of two companies operating at different levels within an industry's supply chain — since 1979.
“Given all of the competing considerations at play, the ‘analysis of vertical mergers’ has been described as ‘much more complex than the analysis of horizontal mergers.’ Things are made more difficult still by the lack of modern judicial precedent involving vertical merger challenges—a dearth of authority that is unsurprising, considering that the Antitrust Division apparently has not tried a vertical merger case to decision in four decades!” Judge Leon wrote.
James Stewart for the New York Times notes that Judge Leon’s decision seems to align with Robert Bork:
[T]he most important aspect of Judge Leon’s opinion is that it essentially embraces the Robert Bork approach, which rested on a few premises: that markets are inherently competitive; that a firm’s dominance in one market cannot be leveraged into another; and that market success is a result of maximizing consumer welfare, not anti-competitive behavior. The theory is that vertical mergers produce efficiencies that can be passed on to consumers in the form of lower prices, higher quality or both.
Not surprisingly, AT&T argued in court that it had no incentive to withhold Time Warner’s programming from other distributors, that consumers would derive many benefits from the merger and that the combined companies would be in a better position to compete with upstarts like Amazon and Netflix, which already are vertically integrated.
But it’s not clear that logic holds in a case like AT&T’s merger with Time Warner. Not only does AT&T occupy a dominant position in a highly concentrated telecommunications market, but Time Warner product’s — like HBO’s “Game of Thrones” and CNN — aren’t at all fungible. If AT&T wants to withhold “must have” programming from a rival telecom company, or charge more for it, that company cannot readily replace it. That was the crux of the government’s case — that vertical mergers, at least in this context, can reduce competition and harm consumers.
Former advisor to FCC Chairman Tom Wheeler and Benton Foundation fellow Gigi Sohn wrote, “Even though Judge Leon recognized the ‘lack of modern judicial precedent’ for blocking vertical mergers, he ignored the increasing criticism of this relatively recent approach, and instead largely reaffirmed its vision. He didn’t merely declare that ‘academics, courts and antitrust enforcement authorities alike’ agree that vertical mergers create more efficient companies — he also said he is inclined to agree with the argument that vertical mergers should always be permitted.”
In his decision, however, Judge Leon stressed that his ruling should not be taken as a broad precedent. “The temptation by some to view this decision as being something more than the resolution of this specific case should be resisted by one and all!” he wrote.
But, that did little to quell consternation among an array of public interest groups and antitrust lawyers that the stakes were so high in the case that it naturally will have an impact on future enforcement. Whatever the Department of Justice decides, many are wondering whether the department will be more reluctant to challenge other vertical transactions in the future. “If [the AT&T decision] is not going to be a chill on antitrust enforcement, I don’t know what is,” said Sohn. “The Antitrust Division is going to be disinclined to challenge vertical mergers.”
No matter the outcome if the decision is appealed, the Justice Department “is going to have to update the vertical merger guidelines,” said Steven C. Salop, professor of law and economics at Georgetown University Law Center.
What We Can Expect Next
More Bundles! More Apps! More Wireless Content!
“For now, at least, the internet will not be disrupting the bundle,” wrote Christopher Mims. “The classic triple play—call it the boomer bundle—included many TV channels, broadband internet and a landline. With the rise of streaming, bundles were thought to be on the way out, making way for extremely personalized offerings: You pick your internet provider, your phone carrier and the assorted video sources you like….Now the big bundle looks set for a comeback.” He continued, the deal will mean "more of the same: bigger—not cheaper—packages of entertainment rather than the a la carte, pay-as-you-go custom content that many customers have long desired.”
When AT&T chief executive Randall Stephenson testified in court in April, he teased a new, online streaming app that's now expected to roll out in the coming weeks. The service, known as WatchTV, will cost $15 per month and provide a slew of cable programming that specifically excludes sports content. Stephenson added that the product will be free for AT&T wireless subscribers who have an unlimited data plan.
Wireless is already becoming a much bigger part of entertainment delivery, and wireless providers will include more content as part of their unlimited service plans. Meanwhile, as next-generation 5G networks become a thing, companies such as Comcast will offer wireless service. In 2017, Stephenson suggested that hour-long Game of Thrones episodes could be cut into 20-minute episodes for people watching on mobile devices.
Net Neutrality and Sponsored Content: “The dump pipe era is over”
The day before the AT&T/Time Warner Decision, the “Restoring Internet Freedom Order” took effect. Some see the combination of net neutrality repeal and Judge Leon’s decision as a toxic combination for consumers. Joel Esepelien wrote for The Diffusion Group:
The gutting of net neutrality, which became official earlier this week, makes this kind of consolidation a lot scarier. AT&T already controls DirecTV and offers a zero-rating deal for AT&T Wireless customers who want to stream DirecTV content directly to their device without hitting data caps. With no restrictions on throttling or paid prioritization, those deals can get broader and more aggressive over time. The rollout of the new rules will be slow, but if you’re already buying cable, internet, and phone service from AT&T or Verizon, you may find it harder to resist their streaming offerings in the years to come.
With the end of net neutrality—which would have kept the internet’s gatekeepers from abusing their power to charge other companies for carrying their data—telecom giants are more likely to aggressively pair their offerings with free content.
Scott Rosenberg and Ina Fried wrote in Axios that, “The service providers all say they don't want to limit choice, and that they have no intention of blocking or prioritizing content. But the concern is that, once companies have vertical control over home internet and cable TV service, mobile data service, and multiple content sources, the temptation to pursue such strategies — once upon a time they were dubbed ‘synergies’ — could be irresistible.”
More Data Gathering and Targeted Ads
There could also be privacy implications to the deal. Brian Fung noted how the merger enables AT&T to better compete in data gathering and digital advertising business with Google and Facebook.
"We have really great customer insight on what kind of shows, media, content they’re viewing, where they are, all kinds of information on the consumer," said AT&T CEO Randall Stephenson. But so far, he said, those insights have been limited to a "small scale."
As it pipes Time Warner's content over its wireless and home broadband connections, AT&T will get a much broader perspective on what consumers like to watch, on which platforms, in which locations and so on. This could turn AT&T into a data-gathering behemoth resembling Google, Netflix or Facebook.
AT&T said it will have an advertising and analytics division that "provides marketers with advanced advertising solutions using valuable customer insights from AT&T's TV, mobile and broadband services, combined with extensive ad inventory from Turner and AT&T's pay-TV services." Time Warner will become "AT&T's media business" and be given a new name, AT&T said.
All that data collection will allow AT&T to sell highly targeted advertising, just as Google does. These targeted ads are way more profitable than non-targeted TV ads, Stephenson has said, bringing in anywhere from three to five times more money.
Gigi Sohn wrote, “the collection of massive amounts of consumer data for use in targeted advertising — as will be enabled by the fusion of a cable operator with media giant — has now been recognized as a kind of public good, enabling, in the judge’s view, a more competitive marketplace. At a time when there is a Facebook data collection scandal nearly every week, the fact that Judge Leon determined that the ability to collect more data from consumers would be a benefit of this merger is remarkable.”
This has been, perhaps, one of the most important weeks in the history of the Internet. On June 11, the repeal of net neutrality consumer protections went into effect, laying the regulatory groundwork for large Internet service providers to (transparently) favor some (their own) content. On June 12, a court approved a huge combination of content with a major internet service provider. We can do the math. With the Federal Communications Commission allowing ISPs to be the internet’s gatekeepers and the courts OKing the next way of media ownership consolidation, consumer protections are about to be drowned away.
Net Neutrality News
Restoring Internet Freedom Order Takes Effect (FCC press release)
Chairman Pai Interview (Marketplace)
Democrats Use PIRATE Act Markup to Slam Net Neutrality Rule Rollback (Multichannel News)
The basis for killing network neutrality rules is bogus, studies say (The Center for Public Integrity)
- Comcast disabled throttling system, proving data cap is just a money grab (ars technica)
White House restricts US press access to Kim Jong Un summit (Associated Press)
Facebook Gave Some Companies Special Access to Additional Data About Users’ Friends (Wall Street Journal)
Weekend Reads (resist tl;dr)
State of the News Media: Newspapers Fact Sheet (Pew Research Center)
ICYMI from Benton
- An Open Letter to My Daughters on Net Neutrality, Adrianne Furniss
- Sharpening Blades in the FCC's Regulation Weed Wacker, Robbie McBeath
Events Calendar for June 18-22, 2018
June 19 -- The AT&T/Time Warner Decision: What it Means for Technology and Media Mergers, Technology Policy Institute
June 19 -- Cambridge Analytica and Other Facebook Partners: Examining Data Privacy Risks, Senate Consumer Protection Subcommittee hearing
June 19 -- Do We Need Federal Privacy Legislation?, Phoenix Center for Advanced Legal & Economic Public Policy Studies
June 20 -- FCC Commissioner Geoffrey Starks Nomination Hearing, Senate Commerce Committee hearing
June 20 -- Smart Agriculture: Increasing Productivity Through Technology, NTIA
June 21 -- Open Meeting of the Information Security and Privacy Advisory Board, NIST