Everything old is new again. Thirty-five years ago, the government forced AT&T into ending its telecom monopoly, breaking the company up into its component parts and touching off an era of rapid communications innovation and expansion. Rather than reassemble its former monopoly, AT&T has begun to verticalize itself within a telecom-entertainment delivery paradigm. After acquiring DirecTV for $49 billion last year, the telecom giant has all but locked up a bigger deal that will give them production studios and a large library of popular content across its platforms — Time Warner:
Looking to assemble an arsenal to compete against powerful technology titans Google and Apple, telephone giant AT&T is scrambling to seal a massive deal to buy a crown jewel of media — Time Warner Inc.
Time Warner owns HBO, CNN, TBS, TNT, Cartoon Network and Hollywood’s biggest television and film studio, Warner Bros. It has formidable programming, including the Harry Potter film franchise, DC Comics, blockbuster television shows such as “The Big Bang Theory” and “Game of Thrones,” and classic cartoon characters like Bugs Bunny.
The talks, confirmed by a person close to the situation, are moving at a rapid clip, and a deal could be imminent. The news sent Time Warner shares up 8% on Friday, placing its market valuation at nearly $70 billion. AT&T, however, would have to pay a premium, making the deal worth about $85 billion. Some analysts expressed skepticism that AT&T could pull off such a huge transaction just 15 months after the Dallas phone company swallowed satellite television service DirecTV — or even if a such a combination made much sense.
“It’s eat or be eaten,” said Amy Yong, a media analyst with Macquarie Capital. “Traditional competitors are no longer the real threat. You are really going up against huge Silicon Valley tech companies that have deep pockets and are willing to invest.”
According to Reuters, the deal has been reached “in principle” for $85 billion. This deal does not include Time Warner Cable, which got spun off in 2009 as an independent entity and was later acquired by Charter Communications. Had the cable network been part of Time Warner, the price would have been far too high, and the Department of Justice would have almost certainly intervened to block it on anti-trust grounds — to which we’ll return in a moment.
The move has some analysts scratching their heads, even if it does pass muster with the DoJ:
Cowen and Co. analyst Doug Creutz questioned the strategy of buying content instead of licensing it.
“What does it get them that they can’t get by licensing Time Warner content and at a much cheaper price than buying the whole company?” Creutz asked, noting it was unclear what savings could be gained “from stapling distribution and content together. It’s been tried. It never works.”
AT&T would likely be able to win U.S. antitrust approval for the deal, some experts said, but it is unclear whether certain conditions would be needed to win that approval.
The U.S. Justice Department “will look at it but they won’t stop it,” said Darren Bush, who teaches antitrust issues at the University of Houston. Bush predicted regulators as a matter of course would make a second request for information, meaning the review would last several months.
Let’s not forget that Time Warner played a role in one of the more spectacular merger flops of the last generation, when it partnered with AOL. Nine years later, the AOL unit finally spun off on its own again, only to get acquired by Verizon last year for a relatively meager $4.4 billion. This deal makes more sense, at least in terms of partnering production and content with distribution, but that was supposed to be one of the pluses of the 2000 merger, too. The advent of broadband largely killed the AOL-TW combine, and one has to wonder whether “cord-cutting” might have the same effect on an AT&T-TW combine in the long run, or whether it will protect AT&T’s DirecTV investment from it.
All that aside, this provides yet another moment for conservatives to mull over the implications of ever-larger mergers, anti-trust law, and the risk of increased rent-seeking behavior from fewer and more powerful corporations. Conservatives have traditionally taken a laissez-faire attitude to mergers and acquisitions, especially since the 1980s. However, the trend of acquisitions and mergers has created significant distortions in power, and that impacts other regulatory goals of fiscal conservatism and free-market advocates.
In theory, a bigger corporation is no different than a smaller corporation, only more successful. In practice, larger corporations apply outsized influence on politics, leading to increased regulation in order to distort markets and prevent smaller players from competing on price and efficiency. We need look no further than the financial-system bailouts and the “too big to fail” realities that pushed Washington into costly taxpayer interventions in order to keep our economic system from total collapse. There were a lot of other factors in play as well, especially government distortions of the mortgage markets and pressure on risky lending for political gain, but those were exacerbated by the ability to influence a smaller circle of players, too. Had the financial and banking systems not consolidated as much as they had in the previous generation, the damage might not have been anywhere near as bad, either.
Before now, conservatives have tended to see anti-trust enforcement as a question of intervention versus non-intervention. Perhaps we should look at it as a question of when intervention occurs, and in what manner. Do we intervene up front to keep economic power from distorting political power, or do we wait and watch as the political power intervenes to corrupt the free markets on which fiscal conservatism is based? And does the kind of vertical consolidation along a distribution chain trip the wire for intervention up front?
Those are good questions, and conservatives who see rent-seeking behavior as a threat to the first principles of free markets and competition need to start asking them — before we have more big players eating up smaller players, or in this case, other big players.