In the wake of a federal appeals court victory, AT&T moved quickly to consolidate control over the Time-Warner media companies it now owns. The apparent strategy is to meet Netflix head on as a content competitor. The initial signs are not encouraging.
As well reported by Jessica Toonkel in The Information, the top executives of HBO and Turner, two of the three Time Warner divisions acquired by AT&T (the third is the Warner Bros. studio), are gone. According to Toonkel’s article, AT&T wants to crank up the content production pace…
HBO is one of Time Warner’s crown jewels, the top ranked premium cable channel long known for hit shows ranging from “The Sopranos” to “Game of Thrones.” But the growth of Netflix has spotlight how little HBO has evolved in recent years. The company makes a handful of shows, compared to the hundreds made by Netflix. It resisted small changes, such as putting all episodes of its shows on the air at once, unlike Netflix. Shortly after the AT&T takeover, AT&T executives began signalling they wanted HBO to make more shows.
I worked with HBO in the mid-nineties, as the company I was working for – U.S. Satellite Broadcasting – was launching what eventually became DirecTv, another AT&T acquisition.
HBO has evolved over the past 25 years, but its core remains unchanged: it’s a video packaging and distribution company that produces a relative handful of marquee jewels, but relies on the broader industry for most of its content. The same might be said of Netflix, except that its hand is a lot bigger and its tolerance for imperfect gems is a lot higher.
Netflix produces excellent films and series, but that’s fuelled by a blockbuster budget – $13 billion in 2018 by one estimate – that’s higher than any mainstream studio. It also has a reputation for giving producers and directors a free hand, with little interference from the suits.
Money and creative freedom are two of three essential ingredients to success in Hollywood. The third is personal relationships, something the old HBO excelled at building and maintaining. The business doesn’t work like a car factory. You can’t just add a second shift and send in the bean counters. With neither the budget or the corporate culture to match Netflix, AT&T is taking a huge risk by disrupting those relationships.
There’s a lot to chew over in the Federal Communications Commission’s latest report on broadband subscribers in the U.S. Just one of the many charts (pictured above) tells an interesting story about how people in the U.S. get fixed broadband service in their homes. Two conclusions jump out immediately: cable companies are winning the fight for broadband market share, but the availability of cable modem, fiber to the premise or other wireline service depends population density.
In other words, high density urban areas, and medium to high density suburbs are likelier to have high speed service via direct fiber or coaxial cable service, while people in rural areas are likelier to have to depend on fixed wireless or satellite providers.
DSL service, of whatever generation of technology, is fading into irrelevance. It is significantly less popular than cable modem service. Nationally, 62% of all fixed residential broadband service (defined as better than 200 Kbps in at least one direction) is delivered via cable modem, while telco style DSL accounts for 24%, and FTTP for 12%. But when usable service levels are examined, telco DSL craters, accounting for 13% of connections at 10 Mbps download and 1 Mbps upload speeds or better, and only 4% at speeds of at least 25 Mbps down and 3 Mbps up. The former is the FCC’s minimum for its $3 billion broadband subsidy program – the Connect America Fund – while the latter is the FCC’s and federal agriculture department’s minimum benchmark for what they call “advanced services” and what everyone else considers to be run of the mill Internet use in 2018.
The overall trend in California is the same, according to the study, which is based on reports filed by service providers as of 30 June 2017. It doesn’t break out residential and business connections, but market share figures for total connections tell a similar story: cable accounts for 64% of all broadband connections, telco DSL is at 28%, FTTP is at 8% and fixed wireless has about 1%.
Update: PG&E filed a request with the CPUC, asking to withdraw its application to become a certified, competitive telecoms company. More tomorrow.
It’s been more than 15 months since Pacific Gas and Electric asked for permission to get into the dark fiber business in a big way. In April 2017, it asked the California Public Utilities Commission to certify it as a telecoms company, which would allow it to lease its surplus dark fiber to commercial customers. It’s already in the dark fiber business, but it’s limited to leasing capacity to service providers that are already certified.
As is common practice, potential competitors and so-called consumer advocates jumped into the middle of the CPUC’s review – intervened, as its called. Instead of managing its own process, the CPUC was content to let these intervenors dicker with PG&E. It wasn’t productive. I attended a couple of those sessions as an observer – my clients include municipal electric utilities with fiber interests – and wasn’t impressed by the quality of the conversation. Now, those talks have broken down and everything was tossed back into the lap of the CPUC administrative law judge who currently has the ball (it’s been passed around a bit).
Despite the good faith effort of the Parties, it became clear that an agreement would not be reached on any of the issues and all settlement discussions ended on July 30, 2018…the Parties no longer believe that settlement will be reached on any of the issues in this proceeding.
Now, the ALJ hearing the case is asking PG&E to answer several pertinent questions about its quest to add telecoms to its portfolio. That would have been a fine thing to do a year ago.
We’ve already seen Southern California Edison’s fiber deal with Verizon collapse this year, due to the CPUC’s needlessly complicated process, and the misguided efforts of competitors, advocates and a CPUC commissioner to extract benefits, public or otherwise, from it. It would be a tragedy for Californian consumers – who need affordable broadband access as much as they need electricity – if PG&E’s bid to make the northern California telecoms market more competitive also fails.
The “assumption” the court criticized was the fundamental economic principle, recognized in case law, that the merged firm would maximize its corporate-wide profits (rather than instruct Turner and DirecTV to operate independently at the expense of overall profits to the parent corporation). This basic economic axiom of corporate-wide profit maximization forms the basis for much of corporate and antitrust law.
The brief opened with a stark warning about the danger of allowing AT&T to use its monopoly/duopoly control over broadband access to maximise its return on its Time Warner investment…
The government’s lawsuit challenging AT&T’s acquisition of Time Warner concerns the future of the telecommunications and media industries in the United States. Its outcome could determine whether the participants in these industries will be permitted to merge into vertically integrated firms that control valuable programming content as well as the means of distributing that content directly to end-customers in a manner that hurts competition and therefore consumers. If AT&T is permitted to control Time Warner’s most valuable media assets, the merged firm will have both the incentive and the ability to raise its rivals’ costs and stifle growth of innovative, next-generation entrants that offer attractive alternatives to AT&T/DirecTV’s legacy pay-TV model—all to the detriment of American consumers.
The Washington, D.C. appeals court agreed to the justice department request to put the case on a fast track. It set out a schedule for written arguments, with the final briefs due in mid-October. That’s just for the first round, though. If the appeals court decides to take up the case, a decision will likely be many months away.
The justice department didn’t outline a specific goal, but one possibility is that it wants AT&T to give up some of its new empire, perhaps Turner channels such as CNN. According to a story in Variety by Ted Johnson, it could turn out to be a risky maneuver…
Larry Downes, senior industry and innovation fellow at the Georgetown Center for Business and Public Policy, said that the Justice Department’s appeal carries risks for the government. Leon’s decision does not hold precedent, he noted, while the D.C. Circuit decision likely would.
“The court could use the opportunity to comment generally on the legal standards for opposing vertical mergers, for example, or reaffirm in broad terms the general principles of consumer harm that have guided antitrust law for the last forty years — rejecting, in effect, recent calls for expanding antitrust to take into account the economics of online platforms that don’t charge consumers and therefore don’t raise prices when they acquire other companies,” he said via email…
“The DOJ is really gambling — and could wind up losing not just this case but its ability to challenge future deals in a wide range of industries currently undergoing disruption,” he said.
Vertical mergers – where a company acquires its supply chain – aren’t always anticompetitive. But it always will be when dominant, monopoly model Internet service providers like AT&T and Comcast can manipulate broadband traffic to favor in-house content, as the end of network neutrality allows them to do.
A federal judge decided yesterday that AT&T may buy Time Warner’s video and motion picture content companies, including HBO, CNN and the Warner Brothers movie studio. Judge Richard Leon, who was appointed by president George W. Bush, put no conditions on the acquisition. He simply ruled “the government’s request to enjoin the proposed merger is denied”.
The 172 page decision does an excellent of outlining the current state of the video distribution market. AT&T wants to buy Time Warner so its DirecTv and other video services – delivered via satellite and mobile and wireline networks – can better compete with the likes of Netflix, Comcast (which also owns an extensive stable of content companies) and Amazon. Leon’s decision picks apart, and ultimately rejects, the federal justice department’s claim that the deal would “substantially lessen competition in the video programming and distribution market”.
AT&T witnesses testified that they believe the company’s future lies in the use of online and mobile wireless connections to access premium video. As John Stankey, the AT&T executive who will be tasked with running Time Warner should the merger proceed, explained, AT&T acquired DirecTV in 2015 not in an effort to double down on the satellite business—a concededly mature and indeed declining asset—but to “pick up a lot of new customers that we could work on migrating” to new, innovative products necessary to compete in the future.
It’s possible that the federal justice department will challenge Leon’s decision, and could ask an appeals court to put the deal on hold while it’s under review. That’s all speculative, though. As of now, AT&T and Time Warner can close the sale next week as planned.
It’s up to a federal judge to decide whether or not AT&T can buy Time Warner, and all the content and video channels that come along with it. The federal justice department tried to make the case that the deal would be anti-competitive and should be blocked. AT&T, naturally enough, claimed it wasn’t.
Some experts who followed the trial closely thought AT&T made the better case. The justice department has to prove that a vertical merger – when a company buys its supplier – would have the same destructive effect on competition as a horizontal one, when a company buys a competitor. That’s a tough sell, and it seems that justice department lawyers aren’t counting on total victory. In its closing brief, the justice department offered Plan B: a “targeted divestiture” – either allow AT&T to buy some of Time Warner’s content assets (HBO and Warner Brothers, but not Turner channels) or force it to give up ownership of DirecTv.
Usefully, the justice department argued strongly for a “structural”, rather than a “behavioral” remedy. The difference is that a structural solution involves a permanent change – divesting DirecTv or not acquiring Turner, for example – while a behavioral change only involves a promise not to do bad things in the future…
While structural relief eliminates the risk of harm, behavioral relief assumes regulatory conditions can effectively constrain a business’s natural incentives to maximize profits…Behavioral relief is also less effective at protecting competition than structural market-oriented remedies because it “can hardly be detailed enough to cover in advance all the many fashions in which improper influence [over the acquired company] might manifest itself.”
Just so. Behavioral remedies require ongoing oversight by regulators with little experience or interest in the business at hand, and lead to perpetual evasion by corporate execs and lawyers with all the incentive and resources in the world.
The CPUC is reviewing PG&E’s application for certification as a telephone company. Over the years, PG&E has built up an inventory of fiber optic assets, either because it had internal communication needs or because another telecoms company swapped fiber strands for access to PG&E’s electricity transmission and distribution infrastructure. It wants permission to put those assets on the market, either as simple dark fiber or the medium for lit transportation services.
ORA wants to ban PG&E from “using fiber lines installed in the power zone” of utility poles for its dark fiber and lit service business. The power zone is the uppermost area of poles, where wires used for electric service are installed. The area below it, where cable and telephone companies attach their wires, is the communications zone. But that’s only on poles used for distribution of electricity – low voltage, last mile service in telecoms terms. Poles used for transmission of electricity – middle mile, in other words – don’t have a communications zone. Any fiber installed on transmission infrastructure is, by definition, in the power zone.
The conditions proposed by ORA are in the context of utility poles used “for network distribution”. If what ORA wants and what PG&E is agreeing to only involves fiber installed on poles used for distribution, and not on transmission poles, or conduit of any kind, then it might be no big deal. PG&E might not have a significant amount of fiber in the power zone of local distribution poles. That’s an expensive proposition, compared to installing fiber in the communications zone, where safety concerns are fewer and construction costs are less. So it might not make a difference either to PG&E’s business plan or to its ability to be a competitive counterweight to telecoms incumbents with monopoly business models.
But if those conditions affect more than a trivial amount of last mile fiber, or in any way restrict PG&E’s ability (or willingness) to sell access to middle mile routes on its vast transmission infrastructure – the crown jewel of its network – then the CPUC should reject them. Instead, the CPUC should treat PG&E as the incumbent it is: all of its fiber should go on the market. Otherwise, allowing it to act as a telecoms company will not “enhance competition in the public interest”, as PG&E claims.
Three groups filed testimony with the California Public Utilities Commission opposing PG&E’s plan to put its 2,600 miles of fiber on the market, as dark strands and for lit service (links are below). Caltel, a lobbying group for telecoms resellers – CLECs – offered quibbling and self-interested comments. The two others – the CPUC’s office of ratepayer advocates and TURN, an old school utility consumer advocacy organisation – urged the CPUC to either reject the plan or cripple it with nonsensical restrictions, on the basis of an outdated and narrow view of what utility regulation is all about.
For TURN and ORA, it’s about micromanaging PG&E’s fiber in the same way as its regulated, monopoly electric and gas business. They give no thought to the benefits of having an independent source of dark fiber or lit service in northern California. ORA and TURN make one dimensional arguments about what might or might not be fair to PG&E’s electric customers and, remarkably, to big incumbent telecoms companies, while ignoring the fact that electric consumers are also broadband and telephone subscribers. Protecting broadband companies that exercise unregulated monopoly and duopoly control over prices and products from PG&E’s limited competition will only hurt consumers.
Dark fiber is a critical resource for independent, competitive telecoms operators. Thanks to the CPUC’s reliance on TURN and ORA – instead of exercising its own initiative – CenturyLink will be rolling Level 3 Communications’ previously independent dark fiber into its monopoly-centric business model over the next two years. Ironically CenturyLink controls a significant amount of the capacity on PG&E’s fiber routes, via its acquisition of Level 3-owned IP Networks. The CPUC would not be serving the public interest if it protected CenturyLink’s monopoly by locking PG&E out of the telecoms business, or restricting its ability to fully use the fiber it owns.
The CPUC has the responsibility to maximise value, quality and availability across a range of utility services for Californians, individually and for the economy as a whole. It should fulfil its responsibility by independently evaluating all the pluses and minuses of PG&E’s telecoms plan, and not relying solely on the arguments of narrow interests.
Last week’s other big broadband story offers hope of an even more effective counterweight to broadband monopolies: anti-trust law. When the federal justice department sued to block AT&T’s takeover of Time Warner, it made a clean break from recent practice and went after the root cause of the problem – pursued a structural remedy – instead of nibbling around the edges with temporary and often tangential behavioral restrictions on the companies. It’s a strategy – and philosophy – outlined in a recent speech to the American Bar Association by Makan Delrahim, the new assistant attorney general in charge of anti-trust enforcement…
Like any regulatory scheme, behavioral remedies require centralized decisions instead of a free market process. They also set static rules devoid of the dynamic realities of the market. With limited information, how can antitrust lawyers hope to write rules that distort competitive incentives just enough to undo the damage done by a merger, for years to come? I don’t think I’m smart enough to do that.
Behavioral remedies often require companies to make daily decisions contrary to their profit-maximizing incentives, and they demand ongoing monitoring and enforcement to do that effectively. It is the wolf of regulation dressed in the sheep’s clothing of a behavioral decree. And like most regulation, it can be overly intrusive and unduly burdensome for both businesses and government.
The justice department’s complaint called out the problem. When Comcast bought NBC-Universal – a similar deal – the justice department and the Federal Communications Commission extracted promises of good behavior. Some targeted direct, anti-competitive problems, while others went after unrelated side benefits, like discounted broadband rates for low income households. But it won’t matter much longer whether those promises did any good: they all expire next year. Comcast will be free to be, well, Comcast.
The broadband market in the U.S. is mostly a mix of outright monopolies and cozy duopolies, which are themselves collapsing into monopolies as cable companies outstrip telcos’ ability to deliver broadband at the federal advanced services standard of 25 Mbps download and 3 Mbps upload speeds. The Federal Communications Commission is determined to let that happen. With its new found zeal for trust busting, the justice department is the unexpected last line of defence.