AT&T and Time Warner: A Dangerous Vertical Merger

Vertical Merger, Net Neutrality

Maybe I’m a bit behind on the news because I only recently found out that AT&T – a telecommunication giant – and Time Warner – a massive media conglomerate – are attempting an $85 billion vertical merger. I only found out because the U.S. Justice Department is suing to block the move. At first glance the deal appalled me; with the recent overturn of net neutrality protections in the U.S. wouldn’t it be disastrous for consumers if so much of the State’s broadband infrastructure found its way into the hands of one giant Internet Service Provider (ISP)?

The obvious answer, if my assumptions about the deal were true, is ‘yes, it would be terrible for consumers.’ But it turns out I wasn’t as informed as I thought and my assumptions were, in fact, incorrect. That being said, after educating myself I am still opposed to the deal, just not in the way I thought.

Let’s start with the assumption that this merger would put too much control of the internet in one place. Aren’t AT&T and Time Warner both major ISPs? Nope. Time Warner used to own a division called Time Warner Cable that supplied a large portion of internet to homes in the States, but in 2016 Comcast purchased that division and re-branded it as Spectrum (my excuse for not knowing this is that I don’t live in the States, not even on the same continent). Time Warner, as it remains, is a media conglomerate, owning a bunch of cable TV networks, archives of current and former shows, the Warner Brother’s movie studio, etc. As far as I know, they have no internet lines anymore.

So this merger isn’t actually a consolidation of power in the ISP industry as I initially thought. Instead it involves two companies that operate at different levels within the same industry – known as a vertical merger. These types of mergers generally involve companies that complement one another rather than competing with each other. A consumer might use AT&T’s internet access to watch Time Warner’s content.

From a business perspective, a vertical merger makes a lot of sense. Imagine a car manufacturer purchasing a tire producer to receive tires at cost instead of paying a marked-up price. They can even diversify their interests by selling tires to their competitors, resulting in lower costs and potentially higher revenue. An obvious win for the business and, in a highly saturated industry with fierce competition, a potential plus for the consumer: the car manufacturer may choose to pass the saving along to gain a competitive edge.

However, in certain scenarios a vertical merger can lead to a company obtaining too much control over a key resource that its competitors need. Perhaps the car company bought the only tire manufacturer and now it can bar access to or inflate the price of tires for its competitors thereby stifling competition. Or maybe the car company is sufficiently large that it can use its resources to influence the market price on tires despite the presence of tire competitors.

AT&T and Time Warner are pursuing this merger in order compete with the big Tech of Silicone Valley. Continuing the trend of the last decade, more and more consumers are streaming their content online as opposed to traditional cable networks. AT&T’s infrastructure provides Time Warner a strong, much needed access point into the world of online streaming in order to compete with Netflix and Amazon Video (not to mention their biggest rival, Disney, has plans to enter the world of online streaming in 2019). For AT&T, the popular content allows them to build an advertising platform to compete Google and Facebook.

And that’s my issue right there: Consumers have to use an ISP like AT&T to access sites like Facebook, Amazon, Netflix, and Google. AT&T is gearing up to compete with companies to which they provide access.

In a world with strong net neutrality laws there would be no conflict of interest because AT&T would not be able to dictate which content a consumer can access. But in the wake of the Federal Communications Commission’s (FCC) repeal of net neutrality regulations last December, the company now has the legal groundwork to deny a user’s access to any of Time Warner’s competitors. They could slow down access to sites like Netflix to such a degree that after half an hour of buffering consumers begrudgingly click away. They could outright block Google and Facebook from reaching a user’s phone. They could charge their competitors exorbitant fees in order to have their content streamed at an enjoyable frame rate – fees that these companies would surely pass onto the consumer making their products much more expensive than AT&T’s own Time Warner content.

Does that sound like the free market to you? Because it’s not. It’s one giant in a position of power bullying its competitors and helpless consumers in order to maximize its own profits.

I completely support the Justice Department’s decision to fight this vertical merger and will be watching the outcome with great interest.

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