What the Justice Department Got Wrong in Opposing the AT&T –Time Warner Merger

            In a previous post, I offered insights on grievous flaws in the court decision rejecting the Department of Justice’s (“DOJ”) opposition to AT&T’s acquisition of Time Warner.  See http://telefrieden.blogspot.com/2018/06/grievous-defects-in-at-warner-court.html  This post will address problems with DOJ’s strategy.

            Both Judge Leon and DOJ largely ignored the impact of market and technological convergence that makes it all but impossible to frame a merger with a completely vertical or completely horizontal designation.  These two types of mergers trigger vastly different assumptions including the view that horizontal mergers require far greater scrutiny based on the comparatively greater potential for harm to competition than vertical transactions among assumed non-competitors.

            Convergence makes the vertical vs. horizontal dichotomy unsustainable.  Even before acquiring Time Warner, AT&T was in the content business in a BIG, BIG way as a content aggregator.  Content aggregators are to content creators as wireless resellers are to facilities-based wireless carriers.  Of course, AT&T was and remains a content purchaser, but it was and remains a content packager fully participating in and affecting the supply and cost of content to consumers.

            Courts have identified conditional First Amendment rights in content packaging and curation (Turner Broad. Sys., Inc. v. FCC, 512 U.S. 622, 636 (1994) (“There can be no disagreement on an initial premise: Cable programmers and cable operators engage in and

transmit speech, and they are entitled to the protection of the speech and press provisions

of the First Amendment.”) (see also Rob Frieden, Invoking And Avoiding The First Amendment: How Internet Service Providers Leverage Their Status as Both Content Creators and Neutral Conduits, 12 U.PA. J. CONST. L. 1279 (2010); available at: https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=1134&context=jcl.

            Even before its acquisition of Time Warner, AT&T operated as a content speaker, through its content aggregation, curation and tiering.  The company seamlessly integrated this content-based function with its content carriage function.  In this convergent time, it made no sense for DoJ to concentrate almost exclusively on AT&T’s upstream activities, as content seller.  By doing so, DoJ made it possible for Judge Leon to embrace the incorrect assumption that the merger would eliminate $352 million in content markup revenues that AT&T would not incur and which the Judge wrongly assumed would completely flow through to consumers.

            DoJ’s second major mistake was to emphasize what AT&T probably would do now that it became fully integrated, i.e., price discriminate by charging downstream competitors higher content prices.  AT&T is far too sophisticated and clever to use such a blunt and readily detected anticompetitive strategy.

            What AT&T can and already has begun to do is strategically exploiting its market dominance, particularly in downstream delivery of content to consumers.  It appears that DoJ did not emphasize that AT&T shares a near duopoly in the ever more important wireless marketplace along with a significant market share in wireline delivery of content. 

            The FCC’s decision to abandon all regulatory safeguards addressing the downstream delivery of content means that AT&T has free reign to use content tiering as a powerful weapon, potentially quite harmful to both consumers and competition.  It starts with seemingly benign, if not consumer friendly, zero rating of content and proliferating bundles of content.  Because consumers love the concept of “free,” even when it isn’t, AT&T can upsell consumers, or at least prevent them from cord shaving with strategic placement of most desired (what some would term “must see”) content.  That’s how DirecTV streams for free now, but only to AT&T subscribers of both wireless and DirecTV. 

            Some of the $352 million in reduced overhead payments will flow through to consumers, particularly those maintaining or increasing their monthly payments to AT&T.  The real harm from the merger with Time Warner lies in the extraction of more revenues by AT&T simply with strategies that reduce, or eliminate consumer surplus. 

            Even as it appears to offer skinny and low cost, small bundles of content, look for AT&T to migrate the “good stuff” to higher and more expensive programming tiers.  AT&T can justify the higher fees and higher tier placement by claiming that even it has to recoup the ever higher program creation costs of its stars, HBO and CNN.  What will be framed as consumer friendly bundling of content masks a strategy of increasing Average Revenue Per User and raising both content licensing fees and subscriber out of pocket costs.

           

            Depending on your political and economic philosophy, that’s smart business strategy, or anticompetitive behavior.  The former emphasizes the need for size and scale to offer one-stop shopping and a competitive response to Netflix, Hulu and Amazon Prime.  The latter emphasizes how much undetectable downstream content meddling AT&T can execute, particularly now that network neutrality safeguards have evaporated.  Bear in mind we still don’t know who or what caused Comcast’s network congestion that slowed and Netflix traffic in 2015.  We do know what the problem ended overnight when Netflix blinked first and agreed to a paid peering arrangement with Comcast.

            Lastly, not forget, long ago, Time Warner vertically integrated with AOL with disastrous consequences.  This time, it might be different, because the marketplace has become far more concentrated, particularly on the downstream side.