On Wednesday November 29, 2017 ATT disclosed that, in order to get the Department of Justice (Justice) to drop its opposition to its merger with Time Warner, it had offered up a seven-year ban on blacking out competing distributors.
This concession gets to the heart of Justice’s concerns with the merger, which is that control of Time Warner’s content positions ATT to force programming, terms or costs onto other distributors and restricts the choices of consumers and will allow ATT to charge them unjustifiably higher fees.
The market apparently agreed that ATT’s concession was meaningful and on-point. Shares of AT&T rose 2.8% to $36.39 in afternoon trading while Time Warner shares rose 1.3% to $90.82.
In addition, influential media analyst Craig Moffett of the independent research firm MoffettNathanson LLC, stated that this concession made it “reasonably likely” that the merger will ultimately be approved. MoffettNathanson had previously been on record stating that the merger only had a 50-50 chance of going through according to its original terms.
A bit of background is necessary to understand why the concession offered up by ATT increases the chances its merger with Time Warner will be approved.
As Justice explains in its complaint, a typical television program goes through three layers of large corporations in the process of reaching mass distribution. First, a studio like Warner Brothers creates the show. Second, a programmer (individual channels or networks of channels) like the NFL channel or the CBS network, purchases the right to include the show as part of its slate of programs. Third, a distributor (or ‘video distributor’) like AT&T/DirectTV or Comcast, purchases the right to include the programmer’s shows in one or more packages that it sells to customers.
Programmers naturally bargain with video distributors to have their channel or networks carried. The current video distribution market is broken down into the following categories.
– MVPDs, or traditional multichannel video programming distributors (MVPDs) like ATT and Comcast.
– Virtual MVPDs, like Sling TV, which delivers their channels to consumers over the internet, often through “skinny bundles”—cheaper packages with fewer channels – that require less equipment and no long-term contracts. For example, Sling TV currently offers a package of 30 channels for $20 a month.
– SVODs, or subscription video on demand services (or “SVODs”) like Netflix and Amazon Prime, which similarly offer their programming online (on demand).
The gist of Justice’s problem with the ATT Time Warner merger starts with the fact that cable television (including bundled cable/internet/telephone access) is already a largely uncompetitive industry dominated by ATT and Comcast. Unlike most technology based service industries, these companies have been able to aggressively increase their prices over the past few years based on their oligopoly power. The typical cable bill in America is over $103-per-month and according to the Leichtman Research Group, rose 39% from 2011 to 2015—roughly eight times the rate of inflation.
Justice fears that the innovators in this space that are offering lower prices, like Sling TV, are exactly the type of competitor that will be put at risk by the ATT Time Warner merger. Post-merger, ATT could, for instance, choose not to provide Sling TV access to ATT customers at all, or provide access to them at uncompetitive rates or pursuant to uncompetitive terms including, for example, that Sling TV carry a requisite amount of Time Warner programming. Such a requirement would necessitate Sling TV increasing the prices it charges to pay for the Time Warner programming it was forced to buy.
ATT could accomplish this because many of its customers purchase cable television, internet access and landline and cellphone service in combined packages. So even if Sling TV only offers internet distribution, it needs a deal with ATT to reach ATT’s internet customers.
These concerns are not theoretical. ATT stated justifications for its merger with Time Warner include insulating itself against the Sling TVs of the world who will otherwise use technology to weaken the strength of ATT’s grip on its customers. Justice’s complaint against ATT is replete with many recent unambiguous statements by ATT articulating the pitched battle they are in with MVPDs and SVODs who would ‘deteriorate the value of the bundle’. ATT’s own words make it clear that tying programming to distribution is one of the ways that ATT can ‘lengthen its runway’ i.e. preserve the status quo against the forces of competitive innovation.
This is where ATT’s renouncing of blackouts for 7 years becomes relevant. Blackouts are increasingly common ways that distributors negotiate against programmers. If a programmer does not agree to the distributor’s terms, the distributor can simply choose to not make the programmer’s product available to its subscribers.
Concerns about the misuse of blackouts are not theoretical either. On March 23rd of this year, the U.S. Justice Department settled a lawsuit with AT&T, resolving claims that not only did ATT blackout a new cable sports channel by the Los Angeles Dodgers, but that DirecTV executives illegally colluded with other pay TV companies in Southern California to blackball the channel and prevent its rollout.
The blackout concession that ATT is offering on the Time Warner merger then is that, for seven years, it will not resort to blackouts against MVPDS (like Sling TV). Presumably if a distributor like Sling TV could not agree to terms with ATT, ATT would not be free to deny Sling TV access to ATT’s customer base. Rather, the dispute would be taken to arbitration or to litigation, where the parties or a judge would ultimately decide who owed who what based on the equitable theory that neither party should be unjustly enriched at the other’s expense.
The market and reputable experts seem to believe that this concession is meaningful and on-point. The first hearing before a judge in this case is on Thursday December 7. This hearing should provide some indication of the disposition of the federal judge with respect to the concession that ATT has offered and Justice’s official reaction to it.
Hopefully, anyone attending the hearing hoping to hear catty remarks regarding CNN and President Trump will be disappointed. This merger is too important to too many ordinary consumers to not be handled with thoughtful care.