After all the shouting this election season, perhaps it's no wonder AT&T CEO Randall Stephenson is proposing a tone-deaf $85.4 billion megamerger with Time Warner. On paper, the deal may have seemed like a shoo-in -- after all, the Department of Justice approved a similar merger between Comcast and NBC Universal in 2011. But a lot has changed in the meantime.
Riding the current wave of populism, politicians from both sides of the aisle have expressed skepticism -- even outright hostility -- to the proposed merger. Hillary Clinton last year vowed to prevent further market concentration by beefing up the antitrust enforcement arms of the DOJ and FTC. And in a fact sheet on competition policy put out earlier this month, she promised a return to stricter antitrust enforcement, "in contrast to the highly permissive approach of the Reagan era."
The political winds aren't blowing in AT&T's favor -- which is very good news.
Bigger is not better for consumers
Economic research shows that mergers cost consumers money. John Kwoka, an economist at Northeastern University, not only found that a whopping 80 percent of mergers led to higher prices, but mergers that regulators approved with conditions intended to prevent consumer harm actually resulted in price hikes more than twice as large as the increases in an average merger.
AT&T's Stephenson assured in a recent interview that regulators needn't be concerned about the merger being anticompetitive because "it's a pure vertical integration." But vertical mergers can lead to price increases, too. With its acquisition of DirecTV last year, AT&T became the largest pay-TV company in the country. Within five months of completing the purchase, AT&T announced it was increasing prices for its U-Verse broadband service. DirecTV announced a price hike at the same time.
As the Center for Public Integrity notes, "AT&T said in its announcement that the deal [with Time Warner] would provide 'significant financial benefits,' including revenue and earnings growth, lower capital costs, and savings of $1 billion within the first three years. Nowhere in the announcement did AT&T specifically mention how the proposed transaction could lower costs for consumers."
Content is king
If the merger is approved, AT&T will own media titan Time Warner's trove of content. If you're a fan of HBO ("Game of Thrones" or "Westworld"); watch TBS ("Full Frontal with Samantha Bee") or TNT ("The Last Ship"); get your news coverage from CNN; follow Major League Baseball, the NBA, or March Madness; wax nostalgic over Turner Classic Movies; or are a fan of the "Harry Potter" or "Lord of the Rings" films -- and a range of others, from "Inception" and "American Sniper" to "Wedding Crashers" and "The Notebook" -- all that content is owned by Time Warner. Warner Bros. also controls DC Comics and the rights to Batman, Superman, Wonder Woman, and a host of pop culture icons, and its Interactive Entertainment division is one of America's most prominent video-game publishers.
Some argue that regulators would likely impose conditions banning AT&T from using that content for competitive advantage. But policing conditions of mergers is notoriously difficult. When Comcast acquired NBC Universal, it was banned from giving favorable treatment to NBC Universal content on its networks. "This has proven, in practice, difficult to enforce," Vox notes. "Bloomberg TV, for example, has repeatedly complained about discriminatory treatment in which its business news channel will be exiled to a distant and illogical corner of the channel guide while Comcast's own CNBC property is nestled in with other news networks."
Furthermore, while the FCC is somewhat better equipped than the DOJ to monitor anticompetitive business practices, Reuters has reported that AT&T could avoid FCC review of the deal altogether simply by selling off a television station Time Warner owns.
Hardly reassuring -- even less so is the trail of broken promises left in the wake of previous AT&T mergers with conditions.
Doubling down on zero rating
Discriminatory treatment of content isn't the only danger. "Restricting access to content by providing it only to AT&T users wouldn't make any sense," argues Fortune. "But with zero rating, AT&T can theoretically have its content cake and eat it too."
Indeed, mere hours after the Time Warner merger was announced, AT&T unveiled its new DirecTV Now streaming service, which is the "tip of the iceberg" in terms of its collaboration with Time Warner, an AT&T spokeman said. It's an even better deal if you're an AT&T customer because the streaming won't count against mobile data usage.
The FCC has failed to police zero-rating programs, so if regulators outright banned the practice as a condition of the deal it might actually be a reason to root for the merger. Perhaps that explains why Netflix's CEO says he has no problem with AT&T's megamerger -- as long as Netflix is treated the same as Time Warner's HBO.
Rise of the titans
Beyond what this merger could mean for consumers, there's the broader issue of a U.S. economy increasingly dominated by big companies. The trend of corporate consolidation "worries a growing number of economists, who fear it suggests an economy that is becoming less dynamic and competitive over time," writes FiveThirtyEight.
The evidence suggests that big, established companies enjoy more advantages than ever. The rate at which established companies fail has fallen since the 1980s, while fewer startups are surviving and growing.
Startups are a key source of innovation in the economy -- they generate new ideas, which force existing companies to adapt or risk failure. That process, repeated thousands of times, makes the economy as a whole more productive. The falling startup rate, combined with the rise of big businesses, suggests that this process has somehow broken down.
How big is big enough?
Not all mergers succeed -- the fiasco of Time Warner's acquisition by AOL springs to mind. But it's a safe bet that Stephenson and his team will do well out of a deal that will make them media moguls. "Being a cable company is a great business, but it's boring and unglamorous, plus everyone hates you," Vox opines. "The executives of a media company, by contrast, get to hang out with A-list celebrities and star athletes."
Which could explain why AT&T is buying Time Warner, rather than simply partnering through licensing deals. Besides, as Stephenson carped, "[Negotiating content licensing is] slow, it's painful, just the contracting itself takes a lot of time whereas when it's completely owned, you just move a lot faster."
Media mogula also get paid very well, Vox notes. "As the Associated Press reported last year, 'six of the 10 highest-paid CEOs last year worked in the media industry.' None of the top 10, by contrast, was the head of a utility company. AT&T CEO Randall Stephenson, who is currently paid less than Time Warner CEO Jeffrey Bewkes, and his team of executives have a perfectly good reason to want to buy Time Warner -- whether or not it makes business sense."
This merger makes little sense for consumers, the economy, or the companies' shareholders. At the end of the day, what will it really accomplish? As The Verge asks of a telecom industry swept up in the "fundamental insanity" of merger mania:
How many dollars of value and hours of effort have been sucked up inside these ill-fated remixes of content and infrastructure giants? How many good ideas died because these companies were spending time and money chasing these doomed integrations instead? Wouldn't we be better off if the content companies were competing to have their work widely distributed and earning revenue by capturing audience attention on their own merits, and the network companies were competing to deliver faster, more reliable service at lower prices?