Wednesday, December 14, 2016

AT&T Acquisition of Time Warner is Not an Antitrust Problem

Though good arguments can be made to the contrary, some argue that an AT&T combined with Time Warner would have too much power in the internet ecosystem. Reason enough, some argue, to block the deal, even though the acquisition would not reduce suppliers in the content business, or increase AT&T’s footprint, customer base or assets in the access business.

That might not be the point, critics essentially argue. The point is too much more power held by a gatekeeper. That, one might argue, ignores the simple consolidation trend that is, and will continue to sweep, the media and communications industries. Scale, one might argue, now is required to maintain profit margins, beyond increasing revenue.

Consider the linear video business. ISPs argue they have to raise prices every year because content fees keep rising every year. Scale, ISPs argue, will allow them more bargaining power. Conversely, content owners believe they need to match that scale to maintain their own leverage.

Consumer benefit hangs in the balance: lower service fees are not possible unless content prices are controlled and content contract terms made more flexible, allowing skinnier bundles that cost less.

In a related sense, core ISP revenues are under pressure, as voice, messaging, internet access and video revenue streams face lower demand and higher competition from substitute products. In other words, ISPs (access providers) sell generally-declining legacy products. To wring profits from a declining business, costs have to decline. That is as true in the content business as in any other.

On the other hand, content is easier to differentiate than internet access, voice or messaging. That is why content prices have been growing every year, while price per unit for voice, messaging or internet access has been dropping.

To use a simple explanation, the path forward for any large ISP is to “own at least some of the content” delivered over the access pipe. That is what Comcast already has done, and what AT&T (and eventually Verizon) will conclude they also must do.

Some see antitrust danger in the AT&T proposal to buy Time Warner. Some of us just see a “keeping up with the Joneses” move that mimics what Comcast already has concluded must be the strategy.

Like it or not, "bigness" might be a survival requirement in the access market, at the tier-one level.

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