The AT&T-Time Warner Merger Must Be Stopped

This deal invites unfair competition and locks in our horrible access problems.



AT&T CEO Randall Stephenson at a 2014 hearing on the company’s merger with DirecTV. (Bloomberg / Getty Images) Why do companies merge? Presumably, in order to get ahead in a competitive marketplace. So here’s the unavoidable truth about the AT&T/Time Warner (TWX) megadeal: First it’s not aimed at strengthening AT&T’s ability to compete in its current business — because the company faces no real competition. It’s quite happy in its current situation. Second by entering into the business of originating as well as distributing content, AT&T’s incentive to favor that content over internet sources is hugely increased. The deal doesn’t make sense unless AT&T messes with video coming across its wires and wireless connections that might compete with the pay TV offerings (HBO and other TWX channels) and other high-capacity services that AT&T wants to sell. As we’ve learned in the years following approval of the Comcast/NBCUniversal deal, no words aimed at limiting a huge carrier’s ability to mess with packets are effective or enforceable when that carrier has a built-in conflict of interest to favor its own content.

There is zero reason for the Department of Justice or the Federal Communications Commission — who will pool their resources to examine this deal — to approve this transaction. And there are more reasons to say no than there are channels on DirectTV.

Let’s start with the competitive picture. The real market here is high-speed data, and plenty of it. Americans need access to humongous numbers of bits — getting high-speed services is an increasingly vital part of everyday life. AT&T doesn’t want to pay to compete effectively in that market. The former phone company giant is totally comfortable with its place, having ceded all high-capacity customers to the local cable monopolies in its footprint. AT&T isn’t competing or planning to compete.

Think about it. AT&T sells wires to about 51 million homes, far more than any other telephone or cable company in the country. Because of its large presence in many markets, it overlaps with cable companies in many places — AT&T overlaps with Comcast in 45 percent of Comcast’s footprint and with Charter in 52 percent of its footprint. But, after a flurry of debunked press releases, it’s totally clear that AT&T has no real interest in upgrading its copper networks to fiber to the home. Its capital expenditures keep going down, not *up. (*Would you trust the future to a company that doesn’t see the need to increase investments in its core business, and instead is content to harvest profit from its subscribers?)

AT&T continues to lose scads of DSL (“the new dial-up”) customers. Its non-fiber-to-the-home “U-Verse” product isn’t making up for those losses with new subscribers. Why? Because U-Verse isn’t an effective competitor to cable’s data offerings. The copper between homes and the AT&T neighborhood nodes serves as a big ol’ chokepoint, sharply limiting the capacity of AT&T’s wired networks to carry a lot of data downstream (much less upstream). To make U-Verse actually compete with cable, AT&T would have to install fiber where that copper is now.

That means that the unchecked ability of your local cable monopoly to charge you whatever it wants continues to increase, because only fiber to the home competes effectively with cable’s high-speed internet access offering. AT&T is saying to us that it is content with selling low-capacity, second-rate service to those Americans who can’t afford cable’s sky-high prices; it will hang onto its 20 percent market share in cable areas, at least for a while.

AT&T will probably exit the wired access business eventually, selling off even more systems to second-tier companies like Frontier. Companies like Frontier, in turn, will be even less interested and have even less capacity to provide good service, much less invest in their networks. They just want to sweat their networks for whatever revenue they can make and someday sell out to private equity firms. Take it from unbelievably frustrated customers in Frontier territory: if you’re served by Frontier, the word of the day is “debacle.” (See: here, here, and here.)

AT&T’s proposed merger with Time Warner is evidence that AT&T doesn’t ever plan to invest in fiber to the home. The deal will so weaken the company’s ability to spend money, particularly when people wake up and realize that AT&T isn’t even counting its overwhelming pension and retiree healthcare obligations as debt, that it will have zip ability to invest in infrastructure even if it wants to. Which it doesn’t. If the deal goes through, AT&T’s debt will be alarmingly close to $200 billion dollars. That’s a lot, even for AT&T.

All this means that the current stagnant situation that leaves two-thirds of Americans with at most one choice for high-speed internet access will stay in place. And residents in AT&T areas that don’t have the option of cable (or can’t afford it) will be completely stuck with AT&T’s unmaintained second-class services. AT&T faces vanishingly low competition from other telcos for those second-class services, by the way. Just four percent of its footprint overlaps with other telcos. All those Americans are being relegating to the equivalent of a badly maintained bike path while people in Asian and Nordic countries are sailing along on a superhighway.

The company’s main interest appears to be in keeping its unbelievable dividend payments to its shareholders—and the pace of its buybacks—up as high as possible. The deal appears to keep that status quo in place. Its smoothly competent CEO, Randall Stephenson, can sail off to retirement once the transaction goes through, secure in the knowledge that, if nothing else, he protected the dividend and diversified AT&T’s portfolio of investments. All of this is rational from AT&T’s perspective; all of this is good for AT&T’s shareholders. But it’s not good for the rest of America.

And I haven’t even gotten to the worst part of this deal. It’s bad enough that the merger would lock in the current problem of Americans without adequate access. The new problem—the merger-specific problem the deal prompts—is that it will give AT&T even more of an incentive to beat up potentially competitive sources of content in a gazillion ways.

AT&T already has a built-in conflict of interest to favor its own stuff because it owns DirecTV and its programming contracts. Now it will have all of the Time Warner properties — including HBO and Warner Bros. — to protect and favor as well. This will happen not only in AT&T’s wired home market but also in its massive wireless business. Remember, AT&T is in a comfortable “duopoly with a fringe” position in mobile, sharing the vast majority of wireless customers and almost all free cash flow with Verizon Wireless. Appropriately, the FCC doesn’t include wireless services in the high-speed internet access marketplace, because given the capacity limitations and the expense of wireless connections no one who could afford it would swap out their home wire for a wireless account. But the TWX acquisition would give AT&T a giant, overwhelming incentive to protect its video offerings from competition so that it can distribute its own video effectively to both its wireless and wired subscribers.

And, boy, can AT&T protect its media against internet (quaintly called “over the top” these days) offerings. It can play a thousand games with interconnection, launch multiple “specialized services” that it can pretend are not “the internet,” continue to deploy data caps and overages — the playbook is endless — in order to ensure that its media distribution powers remain strong. How will this affect consumers? If you are an AT&T wireless customer, don’t be surprised if your data charges head to the moon when you stream Netflix — but an HBO subscription may not put a dent in your data budget.

We’ve already seen the FCC fail to restrain these animal spirits following the Comcast/NBCU deal. There’s no reason to think we’ll do any better this time around. Words don’t constrain these guys. And regulators suffer from a striking asymmetry of resources, capacity, and information when it comes to enforcing stipulations made in the heat of merger fever.

And what of the value of the massive content corporation being acquired? AT&T is such a colossus that TWX, with all its first-class content and venturesome production studios, will be a shiny object vanishing in the chubby, enormous hand of a giant. (If the deal goes through, TWX will account for just 14 percent of AT&T’s revenue, according to famed Wall Street analyst Craig Moffett.) The giant’s other chubby hand is outstretched to its shareholders, giving out historic levels of dividends and share buybacks. That’s what AT&T does.

It’s sad. The high-speed internet access market in America is entirely stuck on a expensive plateau of uncompetitive mediocrity, with only city fiber networks providing a public option or, indeed, any alternative at all. The AT&T/TWX deal will not prompt a drop of additional competition in that market. Nor will it mean that the entertainment industry will see more competition or new entrants — just that one player will get an unfair distribution advantage. It’s hard to think of a single positive thing this merger will accomplish, other than shining a bright light on just how awful the picture is for data transmission in this nation.

This deal should be dead on arrival. In fact, AT&T should spare us by dropping the idea now. This merger must not happen.

Big Cable Owns Internet Access. Here’s How to Change That.

*Surveying the landscape of internet access, one could be forgiven for a single dank conclusion: Winter is coming.*backchannel.com