Let’s not rush to judgment on AT&T-Time Warner merger

This month, AT&T announced that it was going to acquire Time Warner in a blockbuster deal worth approximately $85 billion.

Almost on cue, the objections from so-called public interest advocates came in fast and furious.

{mosads}For example, the Consumer Federation of America blasted out that with this merger, AT&T, Verizon, Comcast and Charter will cement “a tight oligopoly across all four communications markets (video, broadband, wireless and business data services), further entrenching their control.”

Similarly, Public Knowledge stated that “there are good reasons to be skeptical that further consolidation in the communications industry could be good for consumers.”

And former FCC Commissioner Michael Copps, now a special adviser to Common Cause, complained that “allowing a communications behemoth like AT&T to swallow the Time Warner media empire should be unthinkable” because further “entrenching monopoly harms innovation and drives up prices for consumers.”

(To be fair, it should be noted that the sophistry is not limited to the left; Republican nominee Donald Trump blurted that he would seek to have his Justice Department block the deal “because it’s too much concentration of power in the hands of too few.”)

Not to put too fine a point on it, but this Pavolvian populist pouncing on the deal is yet another example of the lack of seriousness in telecom policy today.

Rather than give the Department of Justice — and, assuming jurisdictional issues are resolved, perhaps even the Federal Communications Commission (FCC) — an opportunity to look dispassionately at the facts, law and economics of the transaction, these consumer groups are going for the political jugular.

But then again, who can blame them? As FCC Chairman Tom Wheeler has actively encouraged such conduct by steadfastly choosing to ignore substance and view every major policy initiative from net neutrality to set-top boxes to municipal broadband through a political lens, this playbook appears to be quite successful.

Still, ignorant sophistry is no excuse for ill-formed policymaking.

In my view, given that the merged parties have not even had a chance to set forth their theory of the case, any rush to judgement about the proposed merger — positive or negative — is extremely premature at this point.

That said, there are a couple of things we do know about the state of affairs which can inform the policy debate at this early stage of the merger review process.

First, we know that this transaction is not a horizontal merger (i.e., two firms in the same market combining); it is a vertical merger. Thus, contrary to the inflammatory statements above, the AT&T/Time Warner deal will not lead to increased industry concentration: The merger will not eliminate a competitor in the upstream programming market and the merger will not eliminate a competitor in the downstream distribution market.

Second, because this is a vertical merger, we know that case law dictates that we need to balance the potential benefits against the potential harms under a “rule of reason” analysis.

In terms of the potential for harm, there are legitimate concerns that AT&T post-merger will have both the incentive and ability either (a) to give undue preference to its own content on its network and/or (b) to refuse to make “must see” content available to rival distribution platforms.

These concerns ae probably unfounded, however. As the Supreme Court has recognized, “Antitrust analysis must always be attuned to the particular structure and circumstances of the industry at issue.”

In this particular case, this means that we cannot ignore the fact that the FCC has a host of regulations on the books specifically designed to protect against this exact type of strategic, anticompetitive vertical conduct. These regulations include the FCC’s program access rules, the FCC’s program carriage rules, the FCC’s Open Internet (aka net neutrality) rules and the FCC’s just-adopted privacy rules.

So, either we trust the FCC to enforce the existing rules on its books competently or we don’t — regardless of any pending merger.

In terms of potential benefits, there appears to be some very legitimate efficiency arguments for the merger.

Like it or not, as we at the Phoenix Center have repeatedly pointed out, broadband is increasingly becoming “commoditized” as consumers become more ambivalent about the source of their internet access.

What is crucial to understand is that as commoditization of broadband becomes more prevalent, the incentive to invest in network infrastructure goes down. Thus, if network investment is to continue, then broadband service providers (BSPs) must look to alternative sources of profits.

The problem for BSPs is that for the last eight years, the Obama administration has launched a systematic campaign to transfer profits from the “core” of the network to the “edge” of the network, leaving BSPs to scramble for ways to differentiate their products and seek additional revenue streams.

These anti-investment policies include, among others, the FCC’s controversial Open Internet rules which establish “zero-price” regulation on BSPs that prohibit them from charging edge providers for imposing costs on their network and the FCC’s just-adopted privacy rules that set up an asymmetrical regulatory regime that allows edge providers to collect customer data with impunity but subjects BSPs to a stringent ex ante regulatory regime.

Which brings us back to AT&T’s motivation for acquiring of Time Warner. As everybody in America who wants a cell phone now probably has one, wireless growth is fairly flat.

It would seem, therefore, that AT&T’s CEO Randall Stephenson clearly views access to content (just as the CEOs of Comcast and Verizon have similarly found with their respective recent content acquisitions) as an excellent way of differentiating his company from his competitors and thus a source of new business to drive further network investment.

Finally, we know that AT&T’s and Time Warner’s competitors will attempt to use the merger review to extract concessions wholly unrelated to any transaction-specific harm.

As the Obama administration has taken the ability to coerce such extractions from merging parties to an art form, it should come as no surprise that the barbarians are already at the gates in the AT&T/Time Warner deal.

Very soon, Americans will elect a new president. While the first 100 days of any administration are usually spent implementing the candidate’s major agenda items, sometimes you get hit with something out of left field — i.e., a major merger — that requires immediate attention.

Let’s just hope that the new administration — regardless of party — rejects the politicized approach to telecom policy favored by the Obama Administration and returns to first principles: an honest, rigorous and dispassionate review of the transaction.

Spiwak is the president of the Phoenix Center for Advanced Legal & Economic Public Policy Studies, a nonprofit 501(c)(3) research organization that studies broad public-policy issues related to governance, social and economic conditions, with a particular emphasis on the law and economics of the digital age.

The views expressed by contributors are their own and not the views of The Hill.