AT&T has won the lawsuit brought by the US Department of Justice against its takeover of Time Warner, allowing the US operator to complete the deal without conditions. The court found that the DoJ was unable to show how competition would be reduced or that prices for TV or broadband would increase as a result of the merger. The DoJ could still appeal. The earlier merger of Comcast and NBCUniversal did face conditions, and there appear to have been no negative effects on the market. However, it's unclear whether the companies have clearly profited from the merger.
Time Warner was earlier broken up, with the print division Time Inc and Time Warner Cable spun off. What remains for AT&T are the three divisions:
- HBO: premium channels HBO and Cinemax.
- Turner Broadcasting: cable channels CNN, TNT, TBS, and websites.
- Warner Bros: film and TV production.
Will vertical integration continue?
Regulatory approval for the merger seemed likely, as there is no overlap in the companies' assets. This is a continuation of the vertical integration already underway on the US market, but still raises questions about synergies, market concentration and net neutrality. After Comcast/NBCUniversal and AT&T/Time Warner, other combinations may follow. The remaining big telecom operators are Verizon, Frontier, T-Mobile US and Sprint (the last two are already planning to merge) and cable operators such as Charter and Altice USA. On the entertainment market, there is Walt Disney, 21CF, Sony, CBS and Viacom (which may merge again), as well as Discovery, Lionsgate, MGM and DreamWorks.
The advantage of vertical integration is lower content acquisition costs. The downside is content and distribution remain different businesses and independence allows content producers to maximise their output more. Time Warner has some 'must have' channels (HBO, CNN, TNT, TBS, TCM), but competing telecom operators could decide to drop them if Time Warner increases prices.
Verizon has said previously that it doesn't see the point of such an acquisition. Comcast didn't waste anytime and announced an offer to buy the entertainment assets of 21st Century Fox, beating the earlier bid from Disney. Approval of the AT&T/Time Warner deal was a condition for Comcast to go ahead with its plans. Similar deals are happening in Europe, such as Belgian cable operator Telenet's plan to acquire De Vijver Media, which owns TV channels and a production arm.
Will AT&T/Time Warner become more powerful?
The lack of overlap suggests the new combination will not have any greater market power, but that remains a question. We look more closely at the matter and how the players are directly opposed.
- Will Time Warner be stronger on the content market as part of AT&T? Can it sell its channels for more to competing telecom and cable operators? These questions come amid the cord cutting trend, which is slowly gathering pace in the US. In theory, Time Warner may feel less dependent on third parties for distribution and hence can charge higher prices. At the same time, the value of traditional TV channels is being underminded by the popularity of on-demand services.
- Will the company improve its position vis-a-vis the internet majors? Will it provide its own content in better quality and content of third parties like Netflix at a lower quality? Or only if Netflix refuses to pay? What would that mean for new and small internet players, which can't afford to pay a premium for distribution? This is the problem of net neutrality, a principle which has recently been weakened in US regulation, and another topic with no consensus. The problem is the limited competition in the internet access market, where few Americans have much choice in ISP. If market competition among ISPs reinforced net neutrality, AT&T would be forced to allow Netflix free reign on its network. Most often Comcast is the competitor and it still faces net neutrality restrictions imposed at the time of the NBCUniversal takeover. However, these have an end date.
The companies want to strengthen their position in the face of the growing presence of the internet majors in the content market, where they increasingly are producing their own content and use the internet for distribution. However, this kind of a merger is not the right response: consumers are not bothered about combining content and distribution, they just want to be able to consume what they like, on demand, at any time, in any place and on any device.
The court ruling sums up the differences: "If there ever were an antitrust case where the parties had a dramatically different assessment of the current state of the relevant market and a fundamentally different vision of its future development, this is the one!". Time will tell if AT&T profits from the takeover, strengthens its market power or prices increase. But the deal brings to mind the saying 'two losers don't make a winner'. If there's ever a good reason to merge, then there is also probably a bad reason.
