AT&T (T) Chief Executive Randall Stephenson, whose planned $85.4 billion acquisition of Time Warner (TWX) stunned Wall Street and aroused concerns in Congress, has already started laying out his case for why the megadeal won’t hurt consumers.
In a public appearance on Monday with his Time Warner counterpart, Jeffrey Bewkes, at the WSJDLive conference in Laguna Beach, California, Stephenson unveiled plans for a so-called over-the-top $35-per-month streaming video service that would offer 100 premium channels and wouldn’t require a subscription to a cable and satellite provider.
It’s aimed at the mostly young consumers known as cord-cutters who are quitting traditional pay TV. Critics across the political spectrum and some Wall Street analysts, however, remain skeptical and wonder whether consumers will benefit from one of the biggest transactions in recent years.
“From my observations over the years, megamergers of this kind almost never benefit average people,” wrote Dan Gilmore, a professor at Arizona State University’s Walter Cronkite School of Journalism and Mass Communications, in an email. “The people who benefit the most are executives, investment bankers and shareholders [of the acquired company]. I doubt this will be any different, assuming it’s permitted to proceed.”
AT&T’s acquisition of Time Warner is known as a vertical deal because it would bring together the distribution of the largest satellite-TV provider and the second-largest wireless company with the content produced by the HBO premium cable channel and the Warner Bros. film studios. It’s similar to Comcast’s (CMCSA) 2011 acquisition of the NBC Universal media and entertainment conglomerate.
AT&T and rival Verizon (VZ) have expanded into original content as growth in their core wireless markets withered. However, Verizon’s acquisition of AOL for $4.4 billion and its planned $4.8 billion purchase of Yahoo (YHOO) are modest by comparison. Government regulators have blocked other avenues for growth, including AT&T’s attempted $39 billion purchase of T-Mobile (TMUS) in 2011 and Comcast’s proposed $45 billion acquisition of Time Warner Cable.
“A lot of these companies are so big that the only way that they can legally merge is if they do it vertically,” said Christopher L. Sagers, a professor of law at the Cleveland-Marshall School of Law. “The companies themselves say we ought to be able to do vertical mergers because everybody thinks that vertical mergers are less likely to harm consumers.”
But consumers could be harmed if a combined AT&T-Time Warner decides to act as a “gatekeeper” and favor its own content compared with its rivals, according to the deal’s critics.
The history of the pay-TV industry underscores their worries. Consumers saw their average monthly cable and satellite-TV bills rise 39 percent between 2010 and 2015, according to market researcher Leichtman Associates. Many reasons for this increase are beyond the operators’ control, including the surging fees that TV networks charge cable and satellite providers to carry their programs.
When it bought NBC Universal, Philadelphia-based Comcast agreed to 150 different conditions as part of a consent decree it entered into with regulators, including a provision that prohibits Comcast from exempting its content used in its Stream TV streaming service from data caps.
But open-internet advocate Public Knowledge filed a complaint with the FCC saying that’s indeed happening. A Comcast spokeswoman argues that Stream TV doesn’t go over the internet, so it isn’t covered by the consent decree.
This is the kind of issue that seems sure to come up as regulators and consumer advocates take a close look at the AT&T-Time Warner deal. And how it and other such anticompetitive issues are viewed will go a long way to deciding the ultimate fate of the proposed merger.