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Mossberg: Why the AT&T-Time Warner merger is dangerous

Can we count on Washington to keep the playing field level?

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In my many years of covering business and technology, I’ve yet to encounter an industry as strange as wireless carriers. They are simultaneously successful and yet perpetually unhappy with their very trade. They spend tens of billions to build out huge cellular and Wi-Fi networks, and boast that they use smart network technology to serve their customers. But they constantly worry about being just a “dumb pipe.”

Take AT&T, the second-largest US wireless carrier. While it trails Verizon a bit, an estimate of total subscribers at the end of its third quarter shows AT&T with 133 million customers, more than the next two biggest players, Sprint and T-Mobile, combined.

For that quarter, which ended in October, AT&T reported revenues up nearly 5 percent, operating income up over 8 percent, and its 33rd consecutive annual dividend increase.

Yet it also announced that month that it planned to buy a huge company in an entirely different business: Time Warner. I’m not talking about Time Warner cable, another distribution or “pipe” company, which was spun off long ago. I refer to the media company of that name which owns CNN, HBO, the Harry Potter franchise, and such hit shows as Game of Thrones, Veep, and The Big Bang Theory.

If this $85 billion merger goes through, it would, in my view, represent an unhealthy concentration of power between a distributor and a maker of content. And it could be a threat to small players on the mobile web, if AT&T extends to its Time Warner content a technique called “zero-rating,” in which selected content and services don’t count against users’ data plan caps. That makes favored content much more attractive to users than similar content from other sources, which uses up your scarce data allotment.

And I’m not the only who opposes the deal. President-elect Donald Trump, speaking as a candidate in October, had this to say:

"As an example of the power structure I'm fighting, AT&T is buying Time Warner and thus CNN, a deal we will not approve in my administration because it's too much concentration of power in the hands of too few."

Don’t believe me? Here’s CNN’s story about it. And here’s the video:

As with many of his campaign promises, it’s become unclear whether or how much Mr. Trump will hew to this one after becoming president. There are already reports that AT&T has been quietly told it needn’t worry. I can’t say if this is true.

But I hope it isn’t. It’s the government's job to prevent too much concentration of economic powers, and to protect the open internet via net neutrality. This merger, in my opinion, is bad news on both counts.

To be sure, this isn’t a classic “horizontal” merger, in which two directly battling companies want to merge, reducing competition in a clear, visible way. AT&T already tried that when it sought to buy T-Mobile in 2011, and was slapped down by the Feds.

This proposed pairing is what’s called a “vertical” merger, involving complementary businesses that don’t currently compete. AT&T CEO Randall Stephenson has expressed confidence that “generally, vertical mergers are viewed as consumer friendly” (video interview starts at 34:20), and that he’s confident that the Justice Department will approve this deal, even if there are a few concessions required.

But the problem is that such mergers can still be anticompetitive if the distributor (AT&T) gives special treatment to its newly acquired content provider (Time Warner), to the detriment of unaffiliated, especially smaller, competitors.

In fact, in 1948, that was one reason the Supreme Court broke up the ownership of movie theaters by Hollywood studios in the famous Paramount case.

Of course, much more recently, the government did allow a merger that looks a lot like AT&T-Time Warner, namely the Comcast-NBC merger of 2011. But that merger came with various conditions, including some related to net neutrality. And, so far, there’s no evidence that Comcast is unfairly promoting NBC content over other content on its vast cable TV network. Indeed, the two companies seem to operate largely separately, with the merger being mainly a financial or diversification deal. (Disclosure: Comcast is a minority investor in Vox Media, parent company of The Verge.)

I spoke to Julius Genachowski, who chaired the FCC when the Comcast deal was approved and the AT&T-T-Mobile rejected.

"Looking back on it, I think that both blocking the AT&T-T-Mobile merger, and approving Comcast-NBC with tough conditions, have stood the test of time,” he says. “The proposed AT&T-Time Warner deal is more similar to Comcast-NBC. After a full review of the facts and issues, I think the key will likely be strong conditions to ensure competition and net neutrality. That's worked with Comcast and NBC."

Maybe. But the Trump FCC seems headed for a repudiation of net neutrality. And, unlike Comcast, AT&T is already giving a boost on its network to a company it acquired through zero-rating.

To be specific, AT&T-owned DirecTV, best known as a satellite TV provider, has put together a streaming service of various networks which resembles a cable TV bundle and costs from $35 to $70 a month. And now AT&T is zero-rating it. That means subscribers to these packages can watch them on their mobile devices via AT&T’s network without busting their data caps.

This seems like a great thing for consumers: free mobile video. And AT&T has a program allowing other content creators to pay wholesale prices to turn their programming into zero-rated content, too. Not only that, but the company says its goal is to allow consumers to pay once and view everywhere.

AT&T CEO Stephenson compares zero-rating to 1-800 toll-free phone numbers, which began when long-distance phone calls were costly and businesses saw an advantage in paying the phone company to subsidize free consumer calls to their sales or customer-service people.

Mr. Stephenson has told a US Senate committee that zero-rating doesn’t violate net neutrality, which he defines narrowly as “no blocking, no discrimination, no paid prioritization.”

He has made clear that AT&T’s ambition is to promote longform content on mobile devices. “We’re evangelical about this,” he declared at Business Insider’s Ignition conference on December 6th. He added that AT&T didn’t buy DirecTV because it cared much about satellite television, but in order to more easily gain access to media rights at a lower cost.

But, if the merger goes through, and Time Warner content is zero-rated, it will surely put pressure on others to pay AT&T (and other carriers) to also be zero-rated, lest they fall behind Time Warner in mobile popularity. Small sites that produce video may not even be able to afford such payments.

Meanwhile, the cost to Time Warner would involve nothing more than some internal shuffling of the combined company’s books.

That’s why I see zero-rating as a dagger at the heart of net neutrality, and a threat to the equal opportunity internet.

And, yes, I’m well aware that the accretion of huge power by Facebook and Google and others over media online is also a threat. But that doesn’t make this latest AT&T deal any less worrisome, especially if President Trump’s administration takes a friendlier view of it than candidate Trump seemed to do.

For instance, reading Mr. Trump’s October statement carefully, I could easily imagine a deal where the merger goes through without the net neutrality provisions advocated by former FCC chief Genachowski. But there would be a concession: spin off CNN. That might serve a dual purpose: allowing Mr. Trump to say he kept his pledge, while depriving the news network, which Mr. Trump has often criticized, of corporate financial support.

For media companies, for consumers, for advertisers, the best solution is to keep distribution and content separate, so consumers and creators meet on a level playing field. AT&T, which seems more excited right now about owning media than running a network, should be forced to choose whether it wants to be in one business or the other.