The judge who unconditionally blessed AT&T’s purchase of Time Warner’s content companies “rejected fundamental principles of economics”, according to a motion filed by the federal justice department as it launched its appeal of that decision…
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.
Google set two records yesterday: it was hit with the largest fine ever assessed by European Union anti-trust enforcers, which didn’t scare Wall Street because its stock price – actually, its nominal parent company Alphabet’s share price – hit the highest level ever.
The $5 billion fine was accompanied by an order for Google to radically change the way it markets the Android mobile phone operating system, according to a tweet by Margrethe Vestager, the EU’s competition commission and a former member of the Danish parliament…
Fine of €4,34 bn to @Google for 3 types of illegal restrictions on the use of Android. In this way it has cemented the dominance of its search engine. Denying rivals a chance to innovate and compete on the merits. It’s illegal under EU antitrust rules. @Google now has to stop it.
Google CEO Sundar Pichai shot back, also via Twitter, saying that the company will appeal.
The three business practices that Vestager says are illegal are:
- Requiring mobile phone manufacturers who install the Google Play store to also install the Chrome browser and Google Search apps.
- Paying manufacturers to give Google Search exclusivity, by not preinstalling other search apps.
- Requiring manufacturers who preinstall Google apps to pledge not to make, or even develop, devices that run alternate Android versions, aka Android forks.
Big manufacturers have tried to launch their own app stores and operating systems, notably Samsung with Bada and Tizen, but could not compete with Google Play’s ecosystem of apps, services and content. The only company that’s made any headway with an Android fork is Amazon, which installs the Android-based Fire OS on its own devices, and uses them to sell its own services. Amazon has also attracted Vestager’s attention and, like Google, hit a record high valuation yesterday.
2018 is shaping up to be a rough year for tech giants. Lawmakers in Washington, D.C. and regulators in Brussels are taking aim at them. Politics and protectionism might be behind it, but big, dominant companies are properly the concern of trust busters. They need to move cautiously and prudently, though, else the cure will be worse than the disease.
In a terse filing, the federal justice department gave notice last week that it is appealing a judge’s decision to allow AT&T to buy Time Warner’s content companies, with no strings attached.
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.
Perhaps. But federal trust busters won’t get anywhere by rolling over and playing dead either. Immediately after the decision, Comcast saw daylight and moved to add Fox to its menagerie of captive content. AT&T followed up with a price hike for its Internet video service, DirecTv Now, repudiating lawyerly claims it made during the trial that consumer costs would come down.
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.
It might be the least surprising telecoms story of 2018: AT&T is raising prices in a sneaky cash grab similar to what Frontier did last year. AT&T raised the “administrative fee” it tacks on to bills from 76¢ to $1.99 per month. That’s on top of whatever price it tells consumers they’re going to pay.
According to a story by Aaron Pressman in Fortune, AT&T’s explanation is that it pays for “items like cell site maintenance and interconnection between carriers”. In other words, standard costs of doing business. Which is what your monthly rate supposedly covers. But AT&T can tack two bucks onto your bill by burying it in the taxes it’s obligated to collect, so you think it’s something they’re required to do.
They’re not. AT&T figured out that that by scamming customers out of a couple of dollars a month they can add a billion dollars a year to the bottom line.
Some of AT&T’s price increases are upfront. The company just raised the price of its DirecTv Now online subscriptions by five bucks. AT&T’s explanation to Brian Fung at the Washington Post was “we’re bringing the cost of this service in line with the market — which starts at a $40 price point”.
In other words, if they raise their price to match the competition, no one can really do anything about it. That’s the kind of pricing strategy that monopolists use in a duopoly or similarly restricted market. They can’t extract the maximum rent from customers because there is some choice, but if everyone keeps ratcheting up their rates, they’ll still be clocking up profits above and beyond what they can get in a truly competitive market.
The DirecTv Now price hike is 180 degrees away from what AT&T told a federal judge would happen if it was allowed to buy Time Warner. The company trolled lower prices past the judge, who obliged with a green light and no conditions. Which means AT&T is free to do what it wants with its much bigger video business.
And pretty much everything else it offers, including broadband service, which it operates in a cosy duopoly with cable companies. Except where it doesn’t and it’s a monopoly.
Keep a close eye on your bill.
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”.
What the decision doesn’t do is examine AT&T’s ability to use its monopoly/duopoly control over consumer Internet access in the U.S. to freeze out competing programming and online content distributors, and to raise prices for captive subscribers. That concern is particularly high this week, with the end of federal network neutrality rules that might have prevented that kind of harm.
AT&T will use its online muscle to make the most of this $85 billion purchase, as Leon’s decision makes clear…
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.
A decision is expected by mid-June.
The $26.5 billion dollar proposed purchase of Sprint by T-Mobile can’t go forward unless it’s given a pass by anti-trust watchdogs. As a practical matter, that means the federal justice department’s anti-trust unit sits on its hands and doesn’t challenge it in court, and the Federal Communications Commission signs off on the license transfers involved.
In theory, the California attorney general could jump in. In practice, that’s unlikely. So let’s set it aside for now. Unless there’s some obscure wireline telephone asset involved – anything is possible, but I don’t think so – the California Public Utilities Commission isn’t in the game either.
It’s down to the feds. And the likeliest source of opposition is the justice department’s anti-trust unit. It took on AT&T’s acquisition of Time Warner, although its lawsuit appears to be on the ropes.
The question is whether combining T-Mobile and Sprint into one company makes the U.S. mobile telecoms market significantly less competitive. Right now, they are two of the four mobile carriers that are worth worrying about (the other two are AT&T and Verizon, but you knew that).
T-Mobile has 17% of the U.S. mobile broadband market; Sprint has 13%. Both are in the habit of making significant market gambles – unlimited data plans, for example – that the big boys, with roughly a third of the U.S. market each, are forced to match. That’s a significant benefit to consumers, even if it doesn’t warm shareholders’ hearts.
When you’re in imminent danger of falling off a market share cliff at any moment, you assess risk differently than someone with a comfortable third of the pie. Which is what the new T-Mobile would have. Allowing it that level of comfort would decrease the competitive pain of its new peers, as well as consumer’s competitive market pleasure. We’ll see if the federal justice department arrives at the same answer.
Update: the deal is done.
The competitive mobile broadband market might not be as red in tooth and claw in the near future. According to several media outlets, T-Mobile and Sprint, the number three and four mobile carriers in the U.S., are on the verge of announcing a merger. It’s the second time they’ve gone down this path. According to CNBC, this time it’s because the competition is too much for the smaller Sprint…
Talks most recently broke off late last year after SoftBank CEO Masayoshi Son decided he didn’t want to lose control of a combined company. Deutsche Telekom will own more than 40 percent of the new company, with SoftBank’s ownership just below 30 percent.
Several things changed over the last few months that led Son to change his mind, including greater synergies from lower corporate taxes, an increased understanding of how much 5G deployment will cost Sprint, and a rapidly changing competitive wireless landscape that now includes cable providers.
The big question – besides will they do it – is whether the federal government’s antitrust watchdogs will allow it. They scuppered AT&T’s 2011 attempt to buy T-Mobile because they deemed it anticompetitive. Duh.
This deal is more complicated. Arguably, a combined T-Mobile and Sprint would be a more formidable opponent for Verizon and AT&T, number one and two in market share with 35% and 33% respectively. Combined, T-Mobile and Sprint would have 30%, and be worth $26 billion.
On the other hand, it was the unlimited rate plans offered by the two smaller companies that forced the big boys to follow suit last year. Whether the merged company, with a market nearly even with the leader, would share have the same manic drive to catch up or would simply relax into a comfortable oligopoly is the key antitrust issue.
The marriage announcement, if it comes, is expected later today.
California is not the only state where lobbyists for mobile carriers and other big, incumbent cable and telephone companies are
giving stacks of cash offering somber advice to state legislators and getting huge gifts of public property in return. According to a couple of articles by Timothy Clark in Route Fifty, several other states are preempting local ownership of vertical infrastructure and municipal control of public right of ways.
In some states, the giveaway is even more generous than the California’s gift to telecoms lobbyists last year, senate bill 649. It was vetoed by governor Jerry Brown, who eased the pain by reinforcing AT&T’s and Frontier Communications monopoly in rural California with $300 million and, effectively, an end to similar subsidies for independent broadband projects. SB 649 would have set a blanket $250 a year lease rate for wireless broadband providers to attach cell sites and other equipment to city owned street lights. Depending on how you figure it, that’s something like one-fourth to one-half of the market rate.
In Texas, lawmakers went one better and sliced off a zero, setting the maximum municipal pole lease rate at $20 a year. The City of McAllen, Texas sued, claiming that the preemption violated the Texas constitution. McAllen is no stranger to fighting for municipal broadband rights, by the way. It drafted a “minority report” protest to the Federal Communications Commission over the way that industry lobbyists hijacked the Broadband Deployment Advisory Committee, and convinced San Jose and New York City to sign on.
According to Clark’s story…
“In our legal analysis,” [McAllen city attorney Kevin Pagan] said, “the law forces us to give gifts to private parties. It is forcing us to give access to our rights-of-way at far less than market value. What about other companies using the rights of way? They are paying higher rates, and why wouldn’t they say, ‘What about us?’”
The wireless telecom companies, he continued, “want access to the rights of way like public utilities, but they don’t want to be regulated like a public utility.” Pagan noted while the companies promote small-cell as cutting-edge wireless technology, the cells rely on a vast fiber cable network that comprises 90 percent of the system, largely strung on poles in the rights of way.
Georgia lawmakers also passed similar legislation, and a preemption bill is making its way through the Nebraska legislature.
As with subscriber numbers, there’s a big gap between the two biggest telcos in the U.S. – AT&T and Verizon – and the rest of the field when it comes to capital spending. Both companies are planning multi-billion dollar investments in their networks in 2018, according to a story by Sean Buckley in FierceTelecom, with AT&T planning to spend $25 billion on capital upgrades in 2018, while Verizon is looking at the $17 billion to $18 billion range.
That includes spending on their mobile networks as they move toward 5G upgrades. It’s a much different story for pure wireline plays.
Number three on the list – CenturyLink – barely hits a dime on the dollar versus AT&T, with $2.6 billion spent last year and a 2018 capital budget pegged at 16% of revenue, whatever that turns out to be. Its priority will be integrating newly acquired Level 3 Communications into its overall operations. According to the FierceTelecom story…
“We have to keep driving profitable growth,” said Glen Post, CEO of CenturyLink during the fourth quarter earnings call. “Most of it will be success based. The allocation of capital [will] shift harder in making sure it’s for return profiles that are higher, take advantage of our on-net footprint, and are predictable whether it’s a cost reduction or driving profitable margin growth.”
Translation: regardless of what we said in order to get regulatory approval of the deal, we’re going to bundle Level 3’s long haul fiber assets into CenturyLink’s monopoly business model. Adios dark fiber.
Frontier is a distant fourth, with a 2018 capital budget of between $1 billion and $1.5 billion and a number one priority of “finding ways to reduce costs”. In other words, it’s going to spend money on its infrastructure only when it absolutely has to – replace burnt out poles in Santa Barbara County, maybe? – or to meet self liquidating commitments, such as those it made to get $2 billion in federal Connect America Fund subsidies. Given Frontier’s possible plans to exit California, that might well be the best it can do.