Last week, the Justice Department announced that it would sue to block the pending merger between AT&T and Time Warner. Just one day later, FCC Chairman Ajit Pai said that his commission would repeal Obama-era regulations around net neutrality. Both actions are far-reaching attempts to alter the trajectory of the media and technology industries. They are also shortsighted moves that will achieve the opposite of their stated goals.
In both instances, the administration claims it is promoting market competition. In its antitrust suit filed Monday, the DOJ argues that a post-merger AT&T could increase prices on the Time Warner channels, such as CNN, that it would sell to rival distributors. Similarly, Chairman Pai argues that repealing net neutrality would end the days of “micromanaging the internet,” leading to increased innovation by internet providers. Neither argument holds up under scrutiny.
First, AT&T would have little incentive to raise prices, because doing so would limit the distribution of Time Warner channels. Wider distribution means more advertising and affiliate dollars for the unified company to collect. Furthermore, AT&T would likely struggle to make competitors pay more in the first place. Generally, contracts between programmers and Pay TV distributors are structured as “Most Favored Nation” agreements, requiring programmers to sell to large distributors at the most favorable prices.
Allowing the merger would not limit competition, but blocking it certainly would. The DOJ’s decision could allow the major technology companies to gain unchecked market power at the expense of traditional players. Consider the recent aggressive investments in the video programming industry. Netflix spent around $1.5 billion on originals in 2017. Both Apple and Facebook announced $1 billion investments in original programming for 2018. By comparison, HBO also spent around $1 billion on originals in 2016.
Technology companies are pouring cash into programming to strengthen their already formidable distribution offerings. Combining such strengths could be a significant challenge to the major media companies. Google has used YouTube as a launching point for a streaming television service. Apple could leverage iTunes and its large hardware installed base. Facebook boasts some of the most engaged visitors on the web.
If traditional programmers are going to compete with digital providers wielding massive war chests, they will need scale and distribution. Time Warner sees vertical integration with AT&T as an opportunity to invest in programming while also distributing to AT&T’s millions of mobile and television customers. Separately, Disney is eyeing 21st Century Fox’s studio assets in the hope of adding prominent franchises such as X-Men to its planned direct-to-consumer service, which already faces an uphill battle against Netflix and Hulu. Blocking these efforts will limit the ability of major media companies to compete on equal terms with the tech giants, and give Google, Apple, and Facebook free rein.
The FCC’s move to repeal net neutrality would have a similar chilling effect on competition. The paradox of net neutrality is that deregulation leads to less competition. Without the regulations, internet providers could charge companies for access to “fast lanes.” While these costs would be punitive for startups, smaller businesses, and independent creators, digital behemoths such as Google, Facebook, and Amazon could bear them far more easily.
The internet has thrived as an incubator for entrepreneurship precisely because businesses of all sizes have been able to access it on equal terms. Digital players such as Instagram, Snapchat, and Spotify would have faced more difficulty competing if they had been forced to pay for “fast lane” access. Ultimately, however, removing the restrictions would consolidate power even further in the hands of a few technology companies.
Internet providers could also take advantage of looser regulations to throttle traffic from selected sites. To be sure, such action may not be in their long-term interest, given the potential for subscribers to switch over to new fiber networks—such as Google Fiber—or even 5G wireless-to-the-home in the coming years. However, the near-term temptation will surely exist. For example, an internet provider that owns a digital media company could slow down access to a rival publication. Here, the actions of the FCC and the DOJ appear to be at odds. Although the DOJ has voiced concern that a post-merger AT&T would be able to treat its own content more favorably, the FCC’s moves against net neutrality would give internet providers the legal freedom to do just that.
With its two actions this week, the administration has sacrificed an opportunity to promote innovation and competition in the media industry. The result will be greater consolidation in the hands of a few dominant players. It is a painful irony that administration officials are ushering in the very world that they claim they want to avoid.
Michael J. Wolf is co-founder and CEO of Activate Inc., a leading strategy and technology-consulting firm to major media, technology, entertainment, and information companies.