Will AT&T Scale Lead to Innovation, Competition?
In the U.S. market, AT&T argues that its acquisition of Time Warner will lead to more innovation and competition, an argument some will find hard to believe, even though some AT&T customers might already be seeing the advantages (zero rating of video, additional channels added to existing packages at no incremental charge, including Sunday Ticket, in some cases), more bundle discounts and DirecTV Now.
One argument is that AT&T needs both Time Warner and DirecTV to compete with industry giant Comcast, as all providers in the access, voice and mobile markets find they must create new sources of revenue.
An early and logical path has been for telcos and cable to attack each other’s markets, growing revenue by gaining share in new markets. Cable’s path is easier, as it is attacking the far-larger telecom markets. Telcos have the smaller video market in which to take share.
Roughly speaking, annual core telecommunications revenue is something on the order of $330 billion each year. Linear video is about $100 billion a year. Rough math: 30 percent of $330 billion is $99 billion; 30 percent of $100 billion is $30 billion. If telcos and cable companies trade market share at equal rates, cable gains an order of magnitude more revenue than do telcos.
In the important internet access business, cable already dominates. Since about 2007, U.S. telcos have steadily lost market share in internet access services, with cable now getting all the net new additions.
So perspective is a key issue. Many continue to see AT&T as a “giant monopolist” in need of restraint. Others might argue that all of AT&T’s core markets are shrinking, and that revenue growth has come primarily because of acquisitions outside its core business. All of AT&T’s legacy businesses are mature, and under attack from new competitors.
Comcast and cable TV, on the other hand, also facing shrinkage in its core business, have been able to gain dominance in internet access, substantial share in voice, growing share in business services, and soon will enter the mobile business as well. The new markets Comcast and others are entering are far larger than the markets where they face competition from the likes of AT&T.
Some might argue AT&T should be prevented from acquiring Time Warner simply because AT&T “gets bigger.” But scale arguably is required, to compete against Comcast and Charter Communications in video markets.
Also, a simple way to describe the fundamental cable strategy is that “you have to own at least some of the content you deliver over your networks.” If AT&T follows suit, it just makes sense: it is following the cable playbook. Yes, that means more scale. But scale is required, many would note
“Winner take all” is a key feature of application markets. “A few take all” is a better description of access markets. In such markets it arguably is the case that only big company to compete. In fact, looking at what Apple did to mobile device markets, it can be argued that only a big scale player can disrupt existing markets. That might be a valid statement even if new competitors can enter markets relatively easily. It isn’t the ease of entry that matters, but the ability to gain traction and scale.
Facebook and Google provide the best examples of “winner take all” dynamics in social media and search. And virtually all telecommunications markets (mobile or fixed) feature just a few providers, with one or two providers typically accounting for half to 60 percent market share.
History, logic and theory also would suggest that facilities-based competition requires so much capital, and strands so much investment, that business models become unsustainable rather quickly, when there are two or more facilities-based competitors. In other words, telecom facilities tend to be oligopolistic in nature.
The issue for policymakers is how to structure conditions for maximum feasible investment and maximum feasible competition, understanding that those are, to a large extent, contradictory goals.
Nor does the number of leading providers in a market necessarily lead to robust competition, either. Regulators in Japan, South Korea, Singapore and Myanmar, for example, want to increase competition in their markets by one more provider. In those markets, duopolies or markets lead by three providers are not deemed to be providing enough innovation.
In the U.S. fixed networks market, competition between cable TV and telco providers has been surprisingly robust, perhaps intensified by cultural and industrial issues. The cable TV industry always has seen itself as a small entity competing against a much-larger “telco” ecosystem with vastly-more resources.
So multiple providers might best be described as “necessary for robust competition, but not sufficient.”