The Justice Department, hunting for a rationale it can use to block AT&T’s proposed $85 billion acquisition of the prolific TV-and-movie distributor Time Warner Inc., has worked to come up with inspired arguments it hopes will sway the U.S. District Court to agree the combination will harm consumers. (The trial began in March.)
That is to say, Justice has been hunting for something more substantive than an admission that the challenge is very possibly based on the personal whims of the president, who has made clear his dislike of the flagship news channel, CNN, which is owned by Time Warner’s Turner Broadcasting unit.
What Justice has come up with, based on legal briefs filed in advance of the trial and arguments made in court, is that most dependable chestnut of antitrust challenges:
Costs. Will. Rise.
According to the DOJ filing, you’ll pay more for what you’re already getting for less: “For current consumers of traditional pay-TV content, economic modeling shows that the merger will mean paying for the equivalent of 13 months of Turner content per year, while getting only 12. That’s pure overcharge consumers will have to pay without getting anything in return,” the department states.
A pause for you to collect yourself because, yes, dear TV-watcher, it is true. If AT&T buys Time Warner, the amount of money you pay for your cable/satellite video subscription will go up.
Left out of the document are corresponding observations Justice could have included, but chose not to, probably to save paper. Which, as a public service, I will list herein. It’s true costs for pay television service will rise if AT&T buys Time Warner. It’s also true costs for pay television service will rise if:
- You place an ice cube on the searing-hot asphalt surface of a parking lot outside a 7–11 store in Amarillo, Texas in August and the ice cube melts.
- Dogs bark.
- Your meeting runs late.
- Avocados taste uncannily like avocados.
The predictability which cable companies and their competitors raise rates for service (once a year, usually in January and almost always by low- to mid-single digit percentages) is only slightly less reliable than the precision-ticking of the atomic clock. They all do it. They did it this past January, the January before that, and the January before that. They’ll do it again next January, whether or not AT&T owns Time Warner’s crown jewel TV networks including HBO and TBS. They do it because the TV channels they depend on charge higher rates, and instead of swallowing reduced margins, your pay-TV provider passes the higher costs on to you. As a side note, this is what happens in almost every other sector of the free economy. The shirt maker charges the store more for the shirt than it used to, and the store marks up the price. Who said capitalism is fair?
The big (really big) picture
It is precisely the certainty of this economic progression that makes Justice’s warning about price increases feeble. And all the more disappointing, because it obscures the bigger question here, which is about the appropriateness of pairing content with a distribution platform used to deliver that content.
The more disruptive impact of vertical integration, and of this particular merger, won’t involve price increases that are going to happen anyway, but will instead turn on a more meaningful concept of program exclusivity.
The background is this: The pay television industry’s biggest problem today is the tyranny of sameness. Basically, everybody sells almost exactly the same product. The ESPN some people get from the nation’s №4 pay-TV company, Dish Network, is the same ESPN others get from Comcast, the nation’s №2 pay-TV company, and is identical to the ESPN available over Verizon’s Fios TV network, which neatly mirrors the ESPN the next-door neighbor with DirecTV (which happens to be owned by AT&T) is watching.
Get it? They’re all the same channels. Everybody has them. The sameness of the pay-TV market, coupled with the zero-sum reality of a saturated market, has produced the most dreaded of economic realities, which is commoditization. The most innovative thing happening in today’s pay-TV industry revolves around price, not product. YouTube TV, Sling TV, PlayStation Vue, Hulu with Live TV and the rest of the merry band of “virtual” cable companies that are currently poaching market share aren’t revolutionizing the world with new forms of video storytelling or 8K video resolution or disruptive twists on monetization models. They’re just discounting the price, taking margins to zero and praying they’ll make it up on volume.
Meanwhile, every video distribution platform is coalescing into the same creature. T-Mobile, the wireless carrier, is about to launch a nationwide pay-TV service that will compete with Charter Communications, which is trying to outshine DirecTV, which is fending off incursions from Verizon, which hopes you’ll buy its wireless phone service instead of the new one from Comcast, which now competes with Sprint, which is also now delivering video over its network (look, kids: free Hulu!).
Within this sobering terrain of me-too-ness, there is one strategy that has promise of separating winners from also-rans.
It stars Brendan Gleeson (the roughish Irishman from Braveheart and In Bruges, among other solid films).
Gleeson is the actor who plays the brooding, retired detective in the TV adaptation of Stephen King’s gripping and disturbing 2014 novel, Mr. Mercedes. The 10-episode series (recently renewed for another season) can be seen not on a traditional TV channel like TNT or A&E or CBS but on a little-known but promising TV gizmo called The Audience Network. It’s a collection of original and acquired TV shows that adds up to a nice little entertainment package, with the marquee program being “Mr. Mercedes,” which was recently renewed for a second season and earned a mostly positive review last summer from the New York Times.
If you want to catch “Mr. Mercedes” (the TV series, not the book), you have to subscribe to one of AT&T’s video platforms. These include:
- DirecTV, the aging but venerable satellite TV service
- The new Internet-powered offshoot DirecTV Now, or
- AT&T’s cable-like U-verse TV, which is available in selected markets
The point here is more about what you cannot do, which is to fire up the Audience Network if you get your video service from Comcast or Charter or Cox or Cable One or Dish or MediaCom. It’s available only over an AT&T service (with one slight caveat…they do stick a couple of episodes online for free sampling).
This is actually a thoughtful way out of the sameness thicket. The very idea produces a reason to think that over time a pay television industry that seems “mature,” in economic parlance, might find a second life. Think out loud with me. Why are we destined to pick a nominal video provider whose main product is a bundle of identical-to-the-other-guy channels we may not even want? Instead of buying a $79/month, all-inclusive video package, why can’t we buy a $1.99 Discovery Channel special exclusively from Charter, a $4 ESPN documentary series only from Dish, a special three-month deal on A&E from AT&T Wireless and/or an original, exclusive series from PlayStation Vue for $1 per episode? In the same way the women’s activewear clothing line JoyLab can be found only at Target retail stores, a particular TV show might soon find its way exclusively to a particular TV distribution platform.
Unless the government says otherwise — and the Justice Department positions seem unclear at this point — this model is the future of pay-TV in the United States whether or not the merger du jour goes through. The ability to create a sense of differentiation by making selected programs or channels available exclusively from a particular pay-TV provider — a deliverer of video connectivity to your glass screens — is the barely contained secret strategy of the industry going forward. It’s why the nation’s second-largest cable company, Charter, recently engaged two big TV network companies, AMC and Viacom, to make new shows exclusively for Charter’s audiences. It’s why AT&T is already putting big money into original series like “Mr. Mercedes.” And if you’re following along, it might just be why Time Warner is so important to AT&T going forward.
In its legal filings, Justice only dances around the broader concept here. It raises the specter, oddly, that AT&T might uniquely discriminate against emerging Internet video providers, but it ignores the bigger, broader question: What would happen if AT&T, having tucked Time Warner inside its corporate balance sheet, determines that it’s a smart business strategy to make its channels available only inside the AT&T delivery platform? Forget about discriminating against Sling TV. What about discriminating against the whole bloody band? It’s a question Justice unfortunately skirts, focusing instead on the odd and unlikely possibility that AT&T would uniquely deny Time Warner’s content to the new breed of “virtual” cable companies as a class.
Here’s the language:
“Unlike an independent Time Warner, the merged firm would share with Comcast (NBC Universal’s parent company) a strong interest in slowing or blocking disruptive new entry by virtual MVPDs. The firms could advance this shared interest by withholding from virtual MVPDs Turner and NBC content — two of the most important network groups for virtual MVPDs — or restricting their use of that content (e.g., by prohibiting inclusion of channels in skinny bundles).”
Translation: AT&T might allow Time Warner to keep doing business with its existing bank of cable/satellite affiliates, but might stop the new guys from thriving. This seems an odd argument, or at least an oddly stated argument. I don’t think AT&T has any intention to do what the government apparently fears it might do, which is to withhold Time Warner’s programming categorically from the only growing segment of the video industry. Generally, product distributors like to have their products sold in as many places as possible.
But: What about new content Time Warner or its Turner group might produce? This is the more interesting terrain. AT&T discloses outright in its filing that it intends to support Turner’s initiatives to produce a new channel or two. Here’s guessing these new “channels” — or more likely, discrete slices of programs and series that live outside the normal confines of linear television — will find a quick home within AT&T’s networks, and possibly nowhere else. The production prowess, storytelling skill, Hollywood relationships and other content-creation acumen Turner possesses will, if the merger happens, realize their destiny exclusively over AT&T’s delivery networks, in my educated opinion. You’ll still get TBS and TNT and CNN from your current cable/satellite provider, don’t fret. But the new stuff? It’s yours only if you subscribe to an AT&T delivery platform.
Will this change the entire TV ecosystem as we know it? Not so much. Here’s what I think: that vertical exclusivity — making content available only over your own distribution platform — will become a nice way to add a modicum of differentiation to the video equation we outlined earlier. But it won’t bring the entire TV industry crashing to the ground.
By the way, what I’m talking about is a perfectly legal approach. FCC rules demanding that most national satellite-delivered cable networks had to be available over third-party cable/satellite platforms were allowed to sunset in 2012, with the caveat that case-by-case reviews could be applied as warranted by the FCC. And recent federal rules demanding similar behavior from Comcast, which owns NBC, expired (or in one case will expire) this year. (It’s reasonable to wonder why these rules, which were demanded of Comcast by the FCC and the Justice Department as a condition of Comcast’s 2011 NBC acquisition, wouldn’t also apply to AT&T if its bid to buy Time Warner survives the court challenge. Just sayin’.)
Exclusivity is also being carried forth as a signature strategy all over the changing video industry, albeit in different guises. Netflix is now making a living from exclusivity insofar as you can only watch “Narcos” or “Stranger Things” from…Netflix. Apple is about to unleash $1 billion worth of original television programs on the world. Guess what you’ll have to own in order to watch them? If you said a Samsung phone that speaks Android, I’m thinking you’re wrong. Try an iPhone or iPad or Apple TV instead.
The difference, of course, is that Netflix and Apple don’t own broadband Internet pipes. AT&T does. The question Justice could bring to the forefront is one that’s barely addressed in its legal filings: Is it proper and lawful going forward for the company that owns the delivery network to offer unique content exclusively over that network? If the government’s position is that this sort of vertical exclusivity is anticompetitive, then the TV industry had better get busy rewriting five-year plans.
This is my complaint with Justice’s position. There’s too much focus on a hazy sort of view that AT&T might be tempted to a) charge more to existing distributors for Time Warner’s channels; or b) intentionally choke off the blood supply for the budding virtual MVPD category; or c) raise prices eventually. Lacking a foundation for nixing vertical integration of any sort, Justice is batting away at hypotheticals around collusion and issuing stern warnings that prices will increase. These are thin arguments for opposing (or at least giving the appearance of opposing) a thunderous media industry combination that will reset expectations for the category one way or the other. The fact that costs will increase is, in the words of Supreme Court Justice Neil Gorsuch’s late mother Anne Gorsuch, “a nothingburger.” In focusing on this aspect of the deal, and ignoring the more consequential ideal of combining a large TV delivery platform with a potential source of exclusive programming, Justice may be missing the bigger part of TV’s changing picture.