AT&T will be allowed to complete its $85 billion acquisition of Time Warner. Why it matters.

13 June 2018 (Washington, DC) – The battle for the future of media has begun. AT&T will be allowed to complete its $85 billion acquisition of Time Warner, with a federal judge (Judge Richard Leon) yesterday rejecting an antitrust challenge by the U.S. Justice Department (DOJ). At a minimum, the ruling is expected to set off a chain reaction of other mega-mergers, while the AT&T-Time Warner tie-up will remake the media, tech and telecom landscapes. What’s next? Comcast is expected to make an all-cash bid for the entertainment assets of 21st Century Fox, setting up a battle with The Walt Disney Co.

And haven’t we been here before? As in the AOL-Time Warner “marriage” a few eons back? Yet here is the bride, once again, looking lovely in off-white with aging husband Number Two, a telco that thinks owing a media company will bring the customers flocking. Two lonely hearts whose only cultural fit is that they both remember the good times. AT&T’s logo looks a bit like the little blue pill so I am sure the old boy has one last ye-haa!! left in him before the hairpiece slips off, the glasses fog up, his back gives out and his shareholder offspring wonder where the inheritance went.

And there are big things afoot here that I’d like to address but space (and time) prevents it. My regular readers who have followed by coverage of Cannes Lions (the annual global event for those working in the creative communications, advertising and related fields; I’ll be back this weekend) know my assessment of what has happened to media in general in the last decade. It’s that Facebook, Google and Amazon all threaten Big Media … AT&T, Disney, Fox, Time Warner, etc. … by being “primary bundlers” of commercial media, whether it’s books, articles or video. They are the ones that create a usable, coherent product from its disparate parts. Their business model is infinitely better than the one it displaced … Big Media. More broadly, truly ambitious tech companies are in the business of creating markets, not competing in them; of wrapping themselves around industries, not merely disrupting them.

A short recap of the case

Judge Leon’s opinion is 177 pages (click here) and I spent the night (and early morning) parsing it. The ruling is clearly a blow to Makan Delrahim, the DOJ antitrust chief, whose attempt to stop the deal was cast by AT&T as being politically motivated. Trump had promised to block the transaction as a candidate in the 2016 elections.

It’s the first big vertical merger litigation in decades and Leon’s opinion detailed the government’s failure to build a convincing case. He said the DOJ failed to provide adequate evidence that mergers between content providers and distributors harmed competition. Leon had excluded the political argument from the case, but still came out comprehensively in the companies’ favor. He rejected the government’s arguments that AT&T would harm consumers, such as by threatening to exclude Time Warner content from rival distributors and driving up prices. What I think is the money shot from the opinion:

If there ever were an antitrust case where the parties had a dramatically different assessment of the current state of the relevant market and a fundamentally different vision of its future development, this is the one.

During a lengthy trial, opposing lawyers presented vastly different consequences of a potential merger. The DOJ argued that AT&T, which owns the video provider DirecTV, would use the threat of withholding Time Warner’s content to hurt its competitors in the video space.

Meanwhile, AT&T had argued it needs to buy Time Warner not to compete with their old-school telecom and pay-TV rivals, but new players like Facebook, Google and Netflix.

The ruling: Judge Leon roundly rejected the government’s primary theories about how the deal could harm consumers, giving AT&T a “clean” win. Many had expected that even a ruling favorable to AT&T would require at least some concessions. He also said that the government had given its “best shot” to blocking the merger, and he urged the DOJ not to seek an emergency stay that could complicate the deal’s expected closing next week (while noting that the government could still appeal): “The court has spoken,” he said. I think the government will appeal the decision. The case theoretically could reach the Supreme Court, which has not considered a vertical merger since 1972.

Note: the official statement from Delrahim’s office: “We are disappointed with the Court’s decision today. We continue to believe that the pay-TV market will be less competitive and less innovative as a result of the proposed merger between AT&T and Time Warner. We will closely review the Court’s opinion and consider next steps in light of our commitment to preserving competition for the benefit of American consumers.”

Speaking at a press conference after the ruling, AT&T lawyer Daniel Petrocelli said “we’re disappointed that it took 18 months to get here, but we are relieved it is finally behind us and we look forward to closing the transaction in the upcoming days.” It’s been about 600 days since AT&T first announced the deal in October 2016. When asked if AT&T can guarantee that prices will not increase for consumers, Petrocelli said, “As the evidence in the trial shows, this will only benefit consumers.”

By ruling in favor of AT&T, Judge Leon effectively affirmed longstanding government sympathies toward so-called vertical mergers, or deals in which the two companies are in different industries (telecom and media, in this case).

In the entertainment world … well, mixed emotions

AT&T presented the deal as a win for consumers, saying the merger means “we can begin to give consumers video entertainment that is more affordable, mobile, and innovative.” But scanning the early comments last night and this morning most industry observers think the big winners will be corporate lawyers, bankers, and moguls, all of whom are poised to benefit from a coming wave of media consolidation. And Variety quoted one studio executive: “It’s not the summer of love. It’s the summer of chaos.”

AdAge had a lengthy piece this morning that indicated Comcast, emboldened by the judge’s rubber stamping of the AT&T/Time Warner deal, is expected to formally make an offer today for most of Fox’s film and television assets. The cable giant hopes to play spoiler “potentially plucking Fox away from the Walt Disney Company, which has a deal to buy the bulk of the company. At the very least Comcast will drive the price for Fox above the $52.4 billion in stock that Disney is currently offering”.

And Jack Vincense, an old mate at the advertising firm Ogilvy told me this morning:

We think the AT&T and Time Warner deal will have a domino effect, potentially putting companies like Lionsgate, MGM, or Sony in play as bigger companies hope to capitalize on a more laissez-faire regulatory climate. It’s off to the races. Whether you’re Apple or Amazon or someone with a big wad of cash, this gives you the greenlight to go shopping.

Get ready, e-discovery industry!!

Of course, that’s a good thing for tech giants looking to buy content makers … but it’s a bad thing for job security. Quoting from Variety:

There’s already a lot of uncertainty on the Fox lot, where executives were busy mapping out their post-Disney plans. Some were thrilled to have received the silent nod they’d be part of the Magic Kingdom, others were aggrieved to have realized that Bob Iger’s team had little need for them, and a more entrepreneurial group were already mapping out new landing spots. The entrance of Comcast complicates that kind of long-term strategizing.

CONCLUSION

Entertainment industry labor unions voiced anger over the court’s decision. The Writers Guild of America, East, for instance, released a blistering statement linking the AT&T and Time Warner decision with recent efforts to weaken net neutrality protections:

Never before has so much programming been under the domination of so few massive media and technology corporations. At a time when the country demands, and needs, the broadest possible set of views and stories and voices, we have handed over the keys to the media kingdom to giants whose sole motivation is to maximize their short-term investment return, not to inform or enlighten or entertain. Monopolies and oligopolies are bad for the economy in general, and for people who care about compelling stories and insightful reporting, in particular.

We have heard this argument before. A combined AT&T-Time Warner, like so many mergers before it, will lead to higher prices and fewer choices. Further, it will pave the way for more anti-competitive mega-mergers, like the forthcoming Comcast-NBCU-Fox tie-up. But then again, as you read Leon’s opinion you come away with the thought that the Justice Department was using an overly broad definition of monopolies

But we are on shifting ground. I have no principled or scientific objections to the Internet or online media apps and streams. The Internet is my home for most of the day. Facebook and Twitter capture a huge share of my attention, especially Twitter. Quite frankly, I’m grateful for the rush of information, the microscopic way it is possible to follow politics, and sports, and journalistic gossip. Even poetry. Granted: reading on the Web is a frantic activity, compressed, haphazard, not always absorbed. So I devote 2-3 hours a day doing “tactile reading”.

Our digital future may be as glorious as advertised, or it could be a dystopian hell. But as citizens and readers, there’s good reason to throw sand in the machine. Only government policy can really dent the monopolies that increasingly control the world of ideas. Yes, yes, yes. I know. We agree. We need to find moments when we willfully remove ourselves from the orbit of these companies and their ecosystems. It’s not a matter of dropping out, but of giving ourselves moments to ourselves.

But now, as we look more closely at GAFA … Google, Amazon, Facebook and (to a lesser extent) Apple … we see more clearly how their power really operates. The colossal oligopoly that has control over the flow of global data and competes for the most precious resource of all: our attention. So now the court is giving Big Media … AT&T, Time Warner, etc. … the opportunity to fight back.

And yet, and yet … GAFA and Big Media are one in the same. George Orwell understood everything, but he had it bass-ackwards. Big Brother isn’t watching. He’s singing and dancing. He’s pulling rabbits out of a hat. Big Brother’s busy holding your attention every moment you’re awake. He’s making sure you’re always distracted. He’s making sure you’re fully absorbed. As luck would have it, I had Herbert Simon’s book “Economic Thought” in my travel bag this trip (Simon won the Nobel prize for economics back in the 1970s, and Daniel Kahneman has described him as being highly influential to Kahneman’s own work). He had a big concept and he got it right: “Information will grow but it will consume, not enlighten. It will consume the attention of its recipients. Hence the wealth of information will create a poverty of attention”. He wrote that in 1975.

I don’t have the space to devote a fair discussion of antitrust and competition. But I know the antitrust mantra has always been to look at companies and just judge them on the basis of price. And yes, they’re awesome. Who can complain about the price that Google is charging you? Or who can complain about Amazon’s prices; they are simply lower than the competition’s.

Note: credit (blame?) for this goes largely to Robert H. Bork, best known as the solicitor general who fired the Watergate special prosecutor Archibald Cox and as a doomed Supreme Court nominee, not as an antitrust trailblazer. But in 1978 (he was a Yale law professor at the time) published “The Antitrust Paradox.” The book argued that the main purpose of antitrust law was to protect consumers by encouraging economic efficiencies and that authorities, therefore, should not focus on blocking vertical deals. The argument had a profound and immediate impact on antitrust analysis and has been cited by numerous courts, including the Supreme Court. Although Bork’s fingerprints are all over the opinion, Judge Leon departed from Bork’s doctrine by acknowledging that vertical mergers “are not invariably innocuous.”

But that’s why I think we need to shift back to a more Brandeisian conception of antitrust, where we consider values other than simply efficiency and low prices. If we think about the threat that the size of these companies poses, I think we would find that they threaten other values that we hold dear. Not just the question of privacy (that horse left the barn a very long time ago; deal with it, my GDPR friends) but I think there’s an argument to be made that the reason that these companies have thrived and achieved the status that they’ve achieved is that they have collected more and better data than their competitors, which creates the incentive to surveil even more, and to collect more data in order to preserve their competitive position.

Alas, we (as the consuming public) have failed to properly understand the new tech superpowers. Well, at least the Americans have failed. So there is little hope for stodgy and reluctant American regulators to grasp it or do anything. The scope of their influence is obscured by the sheer number of things they do and sell, or problems they purport to be solving, and by our outdated sense of what constitutes a monopoly. Fodder for a future post.