AT&T: It’s Fine For Us To Buy Time Warner Because We’re Too Small To Hurt Competition

AT&T’s plan to buy Time Warner — the parent company of several cable networks, not the cable company that Charter snapped up last year — was greeted with a surprising amount of skepticism right from the start. Even though AT&T is sidestepping a lot of regulatory scrutiny by not seeking FCC approval of the merger, lawmakers have continued to ask why this merger would benefit anyone other than the shareholders of these companies. AT&T’s response: Competition or prices won’t be affected because we’re such a small-time player in the pay-TV business, and Time Warner’s viewership numbers are low.

Several members of the Senate Judiciary Committee have been less than enthusiastic about this merger since it was announced last year. In December, the Committee called upon the CEOs for both companies to testify in a hearing about why they should be allowed to merge.

At the time, AT&T CEO Randall Stephenson claimed that the merger would “disrupt the entrenched pay-TV models,” give consumers more options, increase competition, and, for some reason, speed up the development of 5G wireless networks.

AT&T will save money by bringing Time Warner’s TV content — including CNN, HBO, and Cartoon Network, to name just a few — in house. AT&T would still need to pay something to air these channels, but that cash would just shift from one column in the AT&T ledger to another, rather than leaving the company’s coffers completely. Stephenson admitted as much during the hearing, but said that it would be good for consumers because viewers would get “more control of how they watch their video content” for some reason.

Then, early in January, AT&T outlined how it plans to avoid FCC scrutiny for the deal altogether. That, on top of the answers they didn’t like from the hearing, prompted a group of several senators to fire off a letter to AT&T in January demanding it explain how its merger with Time Warner could actually be in the public interest.

“[W]e remain concerned about how a deal of this size could affect consumers and competition,” the Senators wrote in that letter.

“AT&T is already the world’s largest pay TV provider and the largest telecommunications company. Combining it with one of the world’s largest producers of content gives AT&T-Time Warner both the incentive and ability to use its platform to harm competitors, and as a result, consumers. The combined company could promote its own programming above that of other content companies’ or restrict other distributors’ ability to offer its highly-desired content. As a result, the merger could raise prices on consumers, reduce access to independent programming; and harm small businesses, content distributors, and innovative business models.”

AT&T has now responded, and in its letter [PDF] insists once again that what is good for its bottom line must also be good for the country.

“Put simply,” AT&T begins, “this merger is about giving consumers what they want.”

Together, it continues, AT&T and Time Warner will “create exciting new ways for consumers to enjoy video anytime, anywhere, and on any device, with unprecedented levels of customization and interactivity.” How? Why? Because the merger will make it easier for AT&T to put content on mobile video and speed up its desire to spend money building out next-generation 5G mobile networks for you to consume content on.

“AT&T’s post-merger video services will also include not only traditional pay-TV fare — broadcast and cable channels along with on-demand capabilities — but also the more innovative and interactive online video services that this merger makes possible,” AT&T writes. “Because post-merger AT&T/Time Warner will have both content and an affiliated mobile network, it will have particularly strong incentives to offer mobile-focused video experiences.”

AT&T continues by taking aim at internet providers’ favorite targets: internet companies. Consumers “are spending more and more time consuming video content from powerful, vertically integrated providers such as Netflix, Amazon, Google, and Facebook,” AT&T writes, which is true.

But while consumers are watching lots of video from those sources, except for Google’s very small Fiber and Project Fi footprints, none of those four is in any way a cable or wireless service provider. They are vertically integrated in the sense that some original programming or content comes from in-house studios, but none of them owns the means through which the app can be distributed and used.

But because they have original content, AT&T implies, they are exempted from the “friction” that prevents AT&T and Time Warner from “bring[ing] innovations to market” and that “has kept consumers from getting the full suite of innovative features that they want,” somehow.

The Senators worried whether the merger would lead AT&T to “restrict other distributors’ ability to offer its highly desired content,” as AT&T puts it, “in the hope of harming distribution competitors and raising pay-TV prices a voce competitive levels.” Lawmakers have also worried that this merger would increase costs to consumers.

But “neither AT&T nor Time Warner even approaches the market dominance that both would need to hobble distribution competitors” or raise prices, AT&T counters. In short, it writes, Time Warner’s networks are not popular enough for this particular kind of vertical integration to be a competitive concern.

“While Time Warner’s programming is high quality,” the letter goes on, “its basic cable channels in the aggregate account for only about eight percent of viewership of all basic cable and broadcast networks.” That’s half of what Comcast’s NBCUniversal, the Disney networks, or the Fox networks each account for, AT&T claims.

Also AT&T’s too small to be worth fussing over, the letter continues, since its “second- or third-place status in local pay-TV markets would make such [a price-raising, content-withholding] strategy unprofitable even if Time Warner content were critical to pay-TV consumers.”

“Cable now accounts for more than half of all pay-TV subscriptions and more than twice the number of AT&T/DirecTV pay-TV subscribers,” AT&T writes. But that means all cable providers in the country, lumped together, have more than twice the total number of DirecTV subscribers.

At the end of 2016, DirecTV had roughly 21 million subscribers, according to AT&T’s financial reporting [PDF]. That is in fact the second-largest residential pay-TV service in the country, right behind Comcast (22.5 million video customers) just ahead of the newly merged Charter-TWC (17 million video customers).

That argument likewise completely neglects the argument AT&T posed in the entire first half of the letter, which is that consumers increasingly want mobile video delivery and that as a mobile carrier serving more than 100 million accounts, AT&T is well-placed to distribute content wirelessly.