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.
