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AT&T and Time Warner accidentally argue against their own merger

AT&T and Time Warner accidentally argue against their own merger

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Randy Glass

AT&T and Time Warner were called before Congress today to defend their upcoming $85 billion merger and they played all of the antitrust bingo words in the book. We heard a lot about “investment,” “competition,” and “innovation” in the two-hour session — but no reasons to believe that this merger is a necessary path to producing any of those things. And bizarrely, AT&T and Time Warner seem to have unwittingly argued against their need to merge.

The testimony was an unexpected vote for the value of an open internet and higher-quality services from ISPs across the board. Their arguments hinged on the idea that offering more innovative services over the internet is a way to better compete with cable companies. But that has nothing to do with a content company becoming part of the network company, and everything to do with the fundamental nature of the internet as an open platform.

Innovation is created by companies that use the open internet, not ISPs

In his opening testimony, AT&T CEO Randall Stephenson said that the intent of the merger “is to disrupt the existing pay TV model.” Cool — but Time Warner has already done that. Take HBO Now, for example, which delivers HBO to anybody with an internet connection without requiring they pay for a TV subscription. Time Warner did that all on its own without needing to be part of an internet service provider.

Here are some more things Stephenson said that have absolutely no connection to the proposed merger:

We want to get the most content to the most people at the lowest prices.

This is just called “being an internet service provider that offers fair prices to consumers.”

We want consumers to pay for their content once and then watch it anywhere, anytime.

This is just called “offering HBO over the internet without requiring a pay TV subscription.”

Disrupting entrenched business models is hard and it generally takes bold steps. Combining scaled distribution with scaled content creation is such a step.

Scaled distribution combined with scaled content creation already exists. When people request content on the internet they’re already enjoying “scaled content combined with scaled distribution,” whether it’s content from Facebook, Netflix, or a GIF on Tumblr that just went viral, and none of that requires those things to be owned by AT&T. In other words, Time Warner doesn’t need to merge with AT&T to enjoy the distribution mechanism the internet already offers.

The core of Stephenson’s argument is actually a bait and switch. He’s using the same language to discuss two different things: cable distribution and internet distribution. And in so doing, he’s trying to make the latter act more like the former.

Now read what Time Warner CEO Jeff Bewkes had to say at today’s hearing:

We do not own any cable, satellite, telephone, broadband, or distribution business. As a video content company our success depends on achieving the broadest distribution of our content.

You already did that with HBO Now! And if not owning any of those networks has allowed you to achieve broad distribution, what makes being owned by one any different? Nothing — unless you fear that the internet is about to become (or are actively trying to make it become) more like cable television.

Great content is not enough. You need to deliver great consumer experiences and that’s what joining with AT&T will allow us to do.

This is pure nonsense. How is great content not enough for a content company? The best consumer experience you can provide is great content. Just keep making Westworld and offering it over the internet and you’ll be alright.

Currently when we try to introduce innovations for consumers we often need to roll them out distributor by distributor as part of lengthy affiliate agreement negotiations that take place only every few years. TV everywhere is a pretty good example[...] TV everywhere still isn’t embraced by all the cable distributors.

Again — you already obviated the need for TV everywhere by starting to offer your content directly to consumers over the internet with your own skinny bundles, which you can do because you own the content and can deliver it however you want. There’s still no explanation of how combining with a network company allows you to better compete with cable distributors, because it doesn’t, which you already proved by creating something like HBO Now.

In a different context these companies would appear to instead be making a huge argument in favor of an open internet with no discriminatory practices like blocking or paid prioritization. (Also known as an internet protected by net neutrality.) But since AT&T is fighting to reverse net neutrality, there must be another explanation for why AT&T and Time Warner want to combine.

What’s the real reason for the merger? It’s not innovation

This is where zero-rating comes in. As we explained last week, zero-rating is a scheme to erect two-way tolls on the internet through vertical integration: the first toll is collected through the consumer’s internet service bill, and the second is from competing content companies, which will have to pay to “sponsor” their data in order to compete fairly with DirecTV and Time Warner, which would both be owned by AT&T.

Competing video companies are screwed if they don’t pay up, because AT&T squeezes its customers with overpriced services. The company killed unlimited data plans years ago, and then brought it back only as a bundle if you buy AT&T’s DirecTV or U-verse television services. And things are grim if you’re an AT&T customer without unlimited data. Even after ending outrageous overage charges the carrier’s prices for mobile internet are eye popping. AT&T’s lowest plan costs $30 a month for 1GB of high-speed data, going all the way up to $135 for 30GB of data.

To put that in context, Netflix says watching just one hour of its HD video can consume up to 3GB. An AT&T customer with 3GB wouldn’t even be able to finish watching the first episode of the new Gilmore Girls before using up the entirety of their $40 a month plan. According to BTIG Research the average Netflix subscriber uses the service for two hours each day. The math here is crazy — and makes the intent of the merger super obvious. (Hint: it’s the same reason AT&T bought DirecTV and plans to bundle television with internet services.) AT&T and Time Warner want to turn the internet into cable television and use their immense combined position against cable companies and other competitors.

Ironically, Time Warner now seems to actually see Netflix as a real competitor. In 2013, Bewkes brushed it aside as a “complimentary” service. Today he said something very different:

We’re proud of what Time Warner has accomplished but today we’re competing for consumers attention not just with other TV networks but with everyone from Netflix and Amazon to YouTube and Facebook.

This is a remarkable statement. Time Warner thinks it’s competing not only with Netflix now, but with YouTube and Facebook companies that exist because of an open internet that treats their traffic just like everyone else’s.

There are lots of ways AT&T can be innovative, but buying Time Warner is not one of them. If AT&T really wanted to innovate, it would offer more high-speed data at better prices. That would give Time Warner and and everyone else the opportunity to compete without having to worry about the kind of “lengthy affiliate agreement negotiations” Bewkes complained about in the cable industry.

AT&T’s CEO made one more example today that really highlights why we shouldn’t just trust it to protect competition and an open internet.

[...]when one company accelerates innovation in the market, everyone accelerates innovation.

We launched the world’s first iPhone on AT&T on a 2G network. And as demand for the iPhone and more bandwidth exploded, the US mobile industry accelerated deployment of 3G and then 4G mobile networks, and this drove two multi-billion dollar network upgrades in 5 years. And we’re about to experience this again.

The first thing to note here is that AT&T’s depiction of this milestone is a little too rosy. First — Apple had to do a lot of work to convince AT&T to offer the iPhone in the first place. As Forbes recalls, when Steve Jobs introduced the concept to AT&T Mobility CEO Ralph de la Vega, the meeting was a failure. AT&T thought it was too much of a risk.

Second, AT&T probably only came around to the idea of offering the iPhone because it signed a five-year iPhone exclusivity deal with Apple. Apple was sued for that deal on antitrust grounds because Apple and AT&T didn’t tell customers signing up for two-year contracts that they’d actually be locked into AT&T’s world for much longer.

Third, AT&T is taking credit for something it didn’t do. The iPhone revolutionized the mobile industry, not AT&T. You can argue that AT&T was forward-looking for eventually working out a deal with Apple, but everyone wanted the iPhone.

People cared about the iPhone, not AT&T

Similarly, people who pay for internet service don’t really care about AT&T. Like all ISPs, AT&T is a means. People want HBO, Netflix, Amazon, YouTube, and Facebook. ISPs can’t stand that, and they would rather be the thing people love — like Game of Thrones or Batman.

The innovation people want and care about is made by companies like Apple and HBO, and an open internet makes those things better. HBO can spend all the money it wants on engineers to improve its user interfaces and experiences on an open internet, because it’s not controlled in the same way the cable companies control their managed television networks.

The innovation people need from companies like AT&T is simple: a network that is faster, better, and cheaper than the competition. It can do all of those things without buying Time Warner.