Analysis: AT&T and Time-Warner – a media/communications monster of a future kind

A US federal court decision has allowed the merger of AT & T and Time Warner, in an unprecedented bringing together of electronic pipelines and a vast cascade of content. This merger will undoubtedly be beneficial and profitable to the new company, but it may not be quite so nice for consumers, or the world.

There was a time, not so very long ago, that AT & T, American Telephone and Telegraph, was mostly seen by Americans as the corporate equivalent of a kindly grandma who made delicious chocolate chip cookies. Or perhaps it was mom and her justly famous and thoroughly reassuring and comforting macaroni and cheese casserole.

In fact, what with all its subsidiary and allied companies and parts, it was popularly and colloquially known as “Ma Bell” in memory of its creator and its role in American life. Ever since Alexander Graham Bell had developed the telephone and helped turn it into a commercial and technological marvel and success, American Telephone & Telegraph, or AT&T as its symbol appears on those ubiquitous stock price electronic tickers, had gone from strength to strength for a century.

It had even survived a temporary nationalisation during World War I when it was determined to be a national security emergency asset (as with the railroads). In its corporate history, it went through a number of complex mergers and reconfigurations as it slowly and steadily absorbed most of the independent telephone companies in the country. But it endured and prospered.

The government had approved what effectively became a country-wide, privately owned monopoly in its position as an absolute national necessity of a communications network. But, crucially, this was in accord with the reciprocal understanding universal access to its phone service was effectively a kind of universal citizens’ right and AT&T was honour-bound to offer it to all within the limits of its technological capabilities.

With this certainty of income, corporate security of its existence, and the ever-growing demand for its product, AT&T shares of stock became the gold standard of a safe investment for widows and orphans. It was where grandma’s hard earned money from years of saving and scrimping should be placed to ensure she would have a safe – albeit less vigorously growing than some more speculative – investment that could never go wrong, leaving her penniless and living on the kindness of strangers.

Safe as houses?” Naw, the smarter thing still was to put most of your money in AT&T. AT&T was going to be around forever, comfortably paying dividends and always immediately saleable for cash, if times were tough.

Oops, almost forgot one other thing. Besides having a virtual monopoly on phone service as a whole, AT&T had yet another way to make money. These guys were smart, eh? You did not buy a phone from them (or anybody else) and plug it into their network, once you had a number assigned to you. You RENTED your equipment from them forever. It said so right there on the instrument, stamped right into the plastic.

Okay, if the instrument broke down, they replaced it for you and that was nice, but you shelled out money to them every month – until doomsday – for the right to receive or make a telephone call on their machine. This was like a licence to print money and then make you use it or else. Sweet.

Then, in the 1970s and 1980s, something began to challenge this enormously cosy arrangement. Or, rather, more correctly, several things started to happen. There was the creeping entry into everyday life of the first commercially available cellphones via various competing networks.

Then there were increasing demands by customers to allow them to plug in their own fax machines, new-fangled telephone instruments, low-cost switchboards and PBX boards.

And then there was the introduction of fibre optic cabling across the nation to replace all those microwave relay towers that carried long distance calls. Eventually, too, there were even the first whispers of the possibilities of data networks for ordinary people via telephone lines.

Thus the question was being asked: Would AT&T continue controlling it all, just like they had done with that boring old-style telephony? With all these things on the go, there was a growing sense – especially among government officials responsible for anti-trust activity and communications regulatory affairs, along with private citizens, and interest groups acting on behalf of potential competitors – of concern about the permanent, perpetual monopolistic stranglehold AT&T seemed to have over the nation’s communications grid.

And so, back on 8 January 1982, after lengthy (and costly) court proceedings (these things take a lot longer in real life than they do on television), the final settlement of the United States v. AT&T antitrust suit that the Department of Justice had initiated some eight years earlier was reached.

Under the terms of this final settlement, good old monopolistic “Ma Bell” agreed to divest itself of its local exchange services subsidiary operating companies across the entire country, in return for a chance to escape any further litigation and allow it to enter that new-fangled computer business.

As part of this settlement, Ma Bell was dissected into seven totally independent regional companies, aka, the “Baby Bells” and AT&T for long distance communications, together with the famed Bell Labs. (The Western Electric subsidiary, the manufacturing giant that made all those phones, basically withered away since no one had to rent them any more and people bought newer, snappier ones from elsewhere.)

AT&T, now reduced in value by about over two-thirds, continued to run all its long distance services, although it was beginning to lose business to new competitors such as MCI and Sprint. Indicative of the ill humour some in the Bell companies felt about how things had developed for this once industrial and commercial giant, there was an “anonymous” sign posted in many Bell facilities that read:

There are two giant entities at work in our country, and they both have an amazing influence on our daily lives ... one has given us radar, sonar, stereo, teletype, the transistor, hearing aids, artificial larynxes, talking movies, and the telephone. The other has given us the Civil War, the Spanish-American War, the First World War, the Second World War, the Korean War, the Vietnam War, double-digit inflation, double-digit unemployment, the Great Depression, the gasoline crisis, and the Watergate fiasco. Guess which one is now trying to tell the other one how to run its business.

Life can be ironic, however. In the fullness of time, one of Ma Bell’s children, Southwest Bell (a name familiar, perhaps, to Telkom staffers and shareholders), began to be first among equals. Eventually it swallowed up most of the other Baby Bells and even – ultimately – AT&T itself, to largely reconstruct the old company.

But in the meantime, the communications landscape had changed greatly. Cell/smartphones have taken a major share of the business of person-to-person communication, VOIP has become an increasing share of communication as well, and the internet itself has grown into a major part of the country’s overall communications network.

Over time, delivery of phone, video, radio, and internet connections has streamed into homes and businesses via companies like AT&T networks. Entire industries such as online shopping (think Amazon), social media (think Facebook, etc), online data searches (think Google), and the streaming of a multitude of video, audio and “print” sources is now available via those connections.

The resurgent AT&T was now eager to be more than just a boring old pipeline for all this exciting stuff. Instead, it wanted to become the originator, owner, and seller of such material. With all this content pouring into millions of homes via their pipelines, AT&T could leverage revenue from the content as well as the attendant advertising connected with this streamed content – and it also could charge others to use this increasingly rich, profitable pot of gold.

Not surprisingly, AT&T began conversations with Time Warner. (It was a company that was itself the result of various mergers such as between Time-Life – publishing – and Warner Brothers – film and television - and CNN – 24 hours all news. Time Warner was the survivor of a messy and unfortunate takeover by AOL when the latter was the go-go company of the internet, before it pretty much evaporated.)

And so, the negotiations began for a merger of AT&T and Time-Warner in 2013. Ultimately, it was opposed by the Trump era department of justice.

Federal judge Richard Leon, however, ruled on 12 June 2018 that, as “The Economist” has noted, “…that the firm [AT&T], which has largely been put back together in recent decades, can acquire Time Warner, an entertainment giant. Assuming no appeal by the Department of Justice (DoJ), which brought the lawsuit against the merger, the deal will create a colossus able to sell HBO, CNN and other TV networks over its own wireless and satellite connections. A frenzy of dealmaking is expected, as other infrastructure firms join forces with those that create content. Comcast, the largest broadband provider in America, has entered a bidding war with Disney for much of 21st Century Fox. Verizon, AT&T’s arch-rival in wireless, may move to buy CBS and perhaps Viacom.”

Thus a new era of vertical consolidation in the communications and content businesses is about to be ushered in. Some may see the court decision as a politicised one. Trump, after all, has been flagrantly critical of CNN’s coverage of his administration and his justice department is widely suspected of trying to punish the players in the proposed merger as a result of that animus.

In truth, however, Judge Leon appears to have based his decision on other thoughts. He bought into the idea emanating from AT&T and Time Warner that the nation’s media landscape has undergone a massive change and conventional firms now face unprecedented challenges from companies like Netflix streaming their products directly into consumer homes, rather than through cable-TV packages, even as Facebook and Google are pinching ad revenue as well.

The judge did not buy the justice department’s assertions that the combined communications/content behemoth would be in a position to withhold its content from other service providers in order to hike prices arbitrarily to increase its revenue.

The Economist further argued that the court should have gone the other way because “Vertical mergers can be dangerous for consumers if one of the parties already wields too much power in its own industry. Ideally, infrastructure firms would face enough competition to keep prices low, and content firms would battle to sell services over that infrastructure. America is moving in the opposite direction.

Two in five American households subscribe to an AT&T service. The deal gives it a powerful incentive to favour its own content over that of rivals. AT&T’s unspoken long-term goal is probably to sell expensive bundles of infrastructure and content to near-captive customers. The repeal of rules governing net neutrality, which took effect on June 11, compounds the problem by letting infrastructure firms favour their own content.”

However, given this crushing defeat for government in court, it is likely the Trump administration will forego opposition to other proposed, similar mergers in the future.

But a good case can be made that the country, as it did back in the gilded age of the late 19th century and early 20th, and then again in the mid 20th century, actually needs a more vigorous approach to anti-trust actions.

Since the beginning of the 21st century, anti-trust regulators have dropped such cases from around 16 a year in the period 1970-99 – to just 3 a year since then. Instead of less choice, the country actually should be the recipient of more choice in broadband and wireless markets.

Local governments should also be able to build their own civic fibre networks so as to pass on to residents more high-speed broadband options and – crucially – in order for the country to stay competitive in this sphere – the government should be pushing the industry as a whole to launch into the construction of a 5G wireless network.

Otherwise, this decision will be the starting point for a decline in competition in a rapidly evolving, growing industry.

In the wake of the decision, The Washington Post’s Steven Pearlstein argued, “Nowhere is this tendency toward excessive consolidation more apparent than in telecom and media, where rapid technological change, huge economies of scale and our natural inclinations to be part of the same networks has created monopolies and winner-take-all competition.

These developments have revealed the inadequacy of our antitrust law, whose statues and case law were meant to deal with a manufacturing economy of an earlier era.”

And an article in the law journal, Milken Institute Review, “Size Does Matter”, by scholars William Galston and Clara Hendrickson, argues the American constitutional order of vibrant federalism continues to argue for a vigorous use of anti-trust rules and values on behalf of the nation.

The challenge going forward is that in the wake of the recent decision on the AT&T/Time Warner merger, the new giant company has announced its formation and plans to stitch things together. The pressure to lead to a whole list of similar electronic giants bringing together content and delivery will only grow, and individuals will find themselves confronted by less free choice – and even higher prices, just when the possibilities for more content and new products should be growing.

Startled by this development, CNN business broadcaster Richard Quest, signing off after reporting on the settlement, announced quizzically, “This is Richard Quest, now working for the telephone company.” One has to wonder just how such new relationships will alter the way reporters will be able to cover complex, challenging stories. DM