Why AT&T Is Buying Time Warner, And Why So Many People Aren’t Happy About It

The time from new rumor to signed deal was only about two days, and yet here we are: AT&T is putting the moves on Time Warner, planning to bring the content powerhouse under its roof. This proposal will now, of course, have to grind its way through the gears of government approval. But while this proposal is a giant deal for two giant companies, the name that’s likely to come up more than any other in all the comments back-and-forth is neither Time Warner nor AT&T, but rather a competitor: Comcast.

That’s because we’ve been through this vertical integration carousel before, five years ago. Comcast blazed the trail that AT&T now hopes to follow, and everything that has happened before is going to be key fodder in the arguments for everything that happens next.

Supporters of the deal will point to the feared harms of the Comcast/NBCU transaction and say: see? The sky did not fall. Everything is fine, we can totally do this again. Opponents of the deal, meanwhile, will point to the feared harms of the Comcast/NBCU transaction and say: see? Look at this! This is terrible! Do not let it happen again!

On top of that, we will see all the interested parties bring in competition, openness, access, differential treatment, and more. So let’s break it down a bit.

What AT&T Wants

AT&T wants exactly what any major corporation wants: money. Maximum money. And buying Time Warner would be a path to making money.

AT&T makes a big portion of its cash from being the nation’s second-largest wireless provider. It also maintains a shrinking but still very significant landline phone and internet business.

In addition to a dominant presence in the phone and data biz, AT&T is also the nation’s biggest name in television thanks to last year’s DirecTV acquisition. While AT&T’s U-verse pay-tv business “only” serves 5-6 million subscribers, DirecTV serves the better part of 20 million. Put those two numbers together, and your number is higher than the total of Comcast pay-TV viewers out there, making AT&T the biggest pay-TV provider in the country.

That’s the distribution end of things covered: AT&T owns the avenues and arteries that you use to view your content.

AT&T is already planning to launch DirecTV Now, an over-the-top streaming TV service of its own in the next two months, taking full advantage of that good old-fashioned corporate synergy in order to exempt this new offering from AT&T customers’ data caps.

But in order to beam programming to people’s TVs, computers, and phones, you need content to air. That content is expensive. Owning a great deal of desirable content makes it cheaper. Unfortunately for AT&T, they don’t really own any content right now… so that’s where Time Warner comes in.

What does Time Warner offer? Basically, the biggest blockbuster cross-platform media company this side of Disney, with huge, popular, lucrative properties in television, film, and video games.

Time Warner comprises HBO, Turner Networks and all things Warner Brothers, among others. And among the channels, networks, film studios, and brands the company owns are:

  • HBO
  • TBS
  • TNT
  • Cartoon Network
  • Adult Swim
  • CNN
  • The CW
  • Warner Bros. Pictures
  • DC Entertainment
  • New Line Cinema
  • Warner Bros. Interactive Entertainment

So basically, anyone who snaps up Time Warner gets Game of Thrones, Lord of the Rings, Lego Batman, The Flash, Steven Universe, Mad Max, Wolf Blitzer, Superman, Conan O’Brien, Harry Potter, John Oliver, and Anderson Cooper, among many (many) others.

Bringing that in-house would be a big get for AT&T, and could potentially both save and generate them lots of money down the line. But first, before any money or any assets can change hands, the companies need the feds to sign off on the deal.

Media and telecom deals usually need approval from both the FCC and the Department of Justice in order to move forward.

All Of This Has Happened Before…

When a distributor of something owns the production of that thing, that’s called vertical integration. And our media template for vertical integration in the modern era is none other than Kabletown itself, Comcast NBCUniversal.

Comcast announced all the way back in 2009 that it was interested in purchasing NBC Universal from then-owner General Electric. Despite objections from lawmakers and consumer interest groups (like our siblings down the hall, Consumers Union), the deal was approved in early 2011.

Comcast acquired a majority, 51% stake in the film and TV empire in 2011 when that deal was finalized, and then in 2013 dropped another $16.7 billion and bought out the remaining 49% of the company from General Electric, too.

Since then, the Comcast/NBCUniversal deal has basically become the template for what is or isn’t, should or shouldn’t be allowed in a vertically integrating marketplace. In a way, it’s shown what the outcomes and unintended consequences of such a deal can be, and what conditions — and loopholes in those conditions — a merged behemoth may agree to or take advantage of. And it’s also shown which ones a giant company may choose to ignore until called out on.

Arguments In Favor Of The Merger

AT&T is relying on the fact that this merger is vertical, not horizontal, and therefore is not anticompetitive.

In other words: Where something like Comcast’s failed attempt to buy Time Warner Cable, or AT&T’s successful bid for DirecTV, draws scrutiny because of the potential for reduced competition in the marketplace, a vertical merger, theoretically, does not.

AT&T CEO Randall Stephenson said over the weekend that “there is no competitive harm that is rendered by putting these two companies together,” since anyone could keep distributing Time Warner content, and AT&T could not get by on Time Warner Content alone.

AT&T argues that the merger will not only create massive financial benefits for its shareholders, but also will provide benefits for end consumers.

The main benefit it touts? Making it a lot easier for you to watch what you want — premium content — wherever you want to watch it, meaning on your phone or online.

The merger, AT&T says, will provide “better value, more choices, [and] enhanced customer experience for over-the-top and mobile viewing.”

AT&T also promises that the merger will bring “more innovation with ad-supported models” that “shift more cost of content creation from customers to advertisers.” In other words — letting you watch an ad-supported stream of some Time Warner content, instead of paying $5 or $15 a month for a subscription service.

“With great content, you can build truly differentiated video services, whether it’s traditional TV, OTT or mobile,” Stephenson said in the company’s official statement.

“Our TV, mobile and broadband distribution and direct customer relationships provide unique insights from which we can offer addressable advertising and better tailor content. It’s an integrated approach and we believe it’s the model that wins over time.”

Arguments Against The Merger

As advocates have long argued — since the Comcast case — vertical integration may not reduce the technical ability of all media to appear on all carriers, but it can lead to discriminatory carriage deals and more subtle means of harm.

Consolidation: Media consolidation — the collection of all reach and power into the hands of a few — is also something that sits very poorly with consumer interest advocates.

“There are good reasons to be skeptical that further consolidation in the communications industry could be good for consumers,” John Bergmayer, senior counsel at Public Knowledge, said in a statement. “DirecTV, for instance, might favor Time Warner content, crowding out or refusing to carry alternative and independent programming that viewers might prefer. AT&T might also make it more expensive or difficult for competitors to DirecTV or to its streaming service to access Time Warner [programming], hoping to drive customers to its own platforms.”

Former FCC commissioner Michael Copps — the lone dissenter in the 4-1 vote that approved the Comcast/NBCU merger — released a statement saying that allowing “a communications behemoth like AT&T to swallow the Time Warner media empire should be unthinkable.”

Copps continued, “The sorry history of mega mergers shows they run roughshod over the public interest. Further entrenching monopoly harms innovation and drives up prices for consumers. The answer is clear: regulators must say no.”

Zero rating: Telecom analyst Craig Moffett told the Washington Post that, “Zero-rating any of AT&T’s content over wireless or broadband would be prohibited” by the FCC. To the New York Times, he said, “You can imagine lots of strategies that would involve withholding content from distributors or not counting downloads of Time Warner content against data caps … But those things are either already expressly prohibited or will be” as part of a merger deal.

Except zero-rating — the practice of exempting data of your choice, like a platform you own, from data caps — is not expressly prohibited. In fact, AT&T already does it with the DirecTV app that exists, and is widely expected to do it when DirecTV Now eventually launches later this year. And the FCC has not made a universal determination about zero-rating, instead choosing to handle instances on a case-by-case basis.

Media Independence: There are also potential concerns about owners interfering with the content itself. Stephenson has promised that if the deal goes through, AT&T will keep its hands off of CNN’s “journalistic independence.”

“This is particularly important as it applies to an institution as culturally significant as CNN,” Stephenson wrote in an e-mail seen by the Washington Post and others. “My board and I are not confused. Ensuring the public that CNN remains independent from an editorial perspective is critical.”

Comcast had to make a similar promise (PDF) to keep out of NBC’s business — and not to mess with the availability of competitors on its systems — back in 2011.

Privacy: The more data a company has about you, the more it can sell, trade, barter, or otherwise use that data on you. And the bigger a company gets, and the more services it brings under its roof, the more data that company has to work with.

Public Knowledge’s Bergmayer said, “Increased vertical integration could also increase AT&T’s opportunities for data collection, which has relevance to FCC privacy initiatives.” And how: AT&T has complained more than most about how unfair it would be if the FCC took action to block it from selling more of your personal data. AT&T did voluntarily end its controversial pay-for-privacy plan last month, but there’s basically nothing preventing it from bringing it back later.

With a final rule on protecting consumers’ privacy still pending at the FCC, this one is likely to remain a hot-button topic.

So What Next?

There are a few things making the guesswork around this merger a little less predictable than usual.

The first is something that basically everyone in the country is already sick to death of hearing about: Election Day. Just over two weeks from now, Americans will select a new president. No matter who voters pick as a replacement, the Obama administration will end and a new one will begin on Friday, Jan. 20, 2017.

The FCC and DoJ that review this deal won’t be the same as the FCC and DoJ that reviewed the Comcast deal; the last five years have seen a fairly significant amount of turnover. Nor will they necessarily be the same folks that rejected the Comcast/TWC transaction and approved the AT&T/DirecTV one.

FCC commissioners — and the head of the Antitrust division — are presidential nominees, approved by the Senate to fill their positions. FCC chairman Tom Wheeler is likely but not guaranteed to step down from the commission when the administration turns over. Other commissioners’ terms will expire and those commissioners will either need re-nomination and re-confirmation, or new nominees would need to be confirmed.

At the very least, experts expect that the regular, ordinary transition time that comes with any administration turnover will add a few months to the length of time it takes the merger to move forward. But there’s also another sticking point: the two may actually be able to avoid FCC scrutiny altogether.

As we’ve explained before, whole the DoJ (or, sometimes, the FTC) oversees the antitrust (monopoly-related) implications of mergers, the FCC’s authority relates instead to the public interest.

MORE: How the merger approval process for media and/or telecom companies works

The FCC must grant approval to any transaction where an FCC license changes hands, and to grant that approval commissioners must first judge that the public interest will be served by such a handover. Broadcast networks have licenses; cable-only networks generally do not.

In the Comcast/NBCU transaction, obviously the broadcast network(s) were a huge, valuable part of the deal. But Time Warner is largely not a broadcast-dependent outlet. It basically owns one or two licenses anymore.

If those properties are spun off — divested, sold, in some other way removed from the Time Warner portfolio — that could basically mean the FCC would have no grounds to be part of the process. The combined mega-company probably wouldn’t miss them that much; in general, the companies have focused on “premium content” in their statements.

With any FCC-licensed properties spun off, AT&T and Time Warner would need neither an approval nor a blessing from the FCC, and would not become subject to any merger conditions from the commission. It would simply stroll on by and do its thing.

The collection of people who have already made statements signaling wariness or discomfort with the merger, meanwhile, is surprisingly large. Members of both the Donald Trump and Hillary Clinton campaigns have expressed skepticism about the deal, as have Senators Al Franken (MN), Bernie Sanders (VT), Amy Klobuchar (MN), Mike Lee (UT), Richard Blumenthal (CT), Tim Kaine (VA), and Ed Markey (MA). The Senate Antitrust Subcommittee plans to start looking into the deal in the weeks after the election.

Competing media companies, too, are wary. Representatives for Disney have said that, “A transaction of this magnitude obviously warrants very close regulatory scrutiny.”

Robert Weissman, president of Public Citizen, said the planned merger “aims to concentrate far too much market, communications and political power in one corporation, threatening to impede the free flow of information, undermine the integrity of the Internet, raise consumer prices and further corrupt our politics,” and urged all regulators to reject it wholesale.

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