DOJ Opposes AT&T / Time Warner Merger

The US Department of Justice filed an antitrust lawsuit against AT&T opposing the upcoming merger with Time Warner. The filing was surprising since it came so late in the merger process with the proposed merger on the table for much of 2017.

There are those saying that the DOJ objections are political, but the DOJ objections are all legitimate. Some of the major concerns of the DOJ include:

  • The merger could disadvantage AT&T rivals like Comcast and Charter by forcing them to pay hundreds of millions more for access to Time Warner programming.
  • The merger will slow the industry transition to online video through OTT and MVPD providers.
  • The vertical integration of last-mile network and programming gives AT&T the ability to create an unfair advantage over competitors.

I don’t think AT&T or anybody can dispute these objections with a straight face, and in fact, these findings are exactly what AT&T has in mind. AT&T already has major synergies between its various business lines. For example, the latest expansion of the AT&T FTTP network is largely taking advantage of fiber routes that are already in place to support the cellular network. It’s something that AT&T probably should have taken advantage of long before now. AT&T also is starting to take advantage of the synergies between its large acquired DirecTV customer base and its cellular products. It’s also the existing programming contracts of DirecTV that have enabled the successful launch of the MVPD offering DirecTV Now.

What this DOJ suit does not acknowledge is that AT&T is just trying to keep pace with Comcast. Comcast has already integrated programming with a last-mile network when the DOJ and FCC let the company buy NBC Universal in 2009. And now that Comcast is entering the cellular business I have a hard time seeing any real difference between what Comcast has today and what AT&T is trying to become with this merger.

The question that must be asked is if the DOJ is going to block the AT&T merger, then shouldn’t their next step be to ask for the divestiture of the Comcast business lines? If they are not going to pursue that, then this filing is largely political. But if the concern is monopoly abuse, as the DOJ document indicates, then they should pursue the only fully-integrated monopoly like the one that AT&T is asking to create.  In fact, Comcast has already gone far past where AT&T is headed and also bundles in smart home, security and even solar panels with other telecom services.

There is no question that Comcast, and AT&T, if they are able to complete the merger, will have a competitive advantage over any other last-mile network provider. Any other ISP that wants to offer video will have to pay significant amount of money to these two companies as part of competing with them. It can be argued that Comcast cable also has to buy the various Comcast programming – but the fact is that when calculating earnings all intercompany purchases cancel out, so whatever Comcast pays itself for programing is largely funny money. And this gives these big conglomerates an instant $5 / $10 advantage per month in costs over any rival.

It’s an interesting filing, and if the DOJ sticks to its guns this is likely to end up at the Supreme Court. My gut tells me that the courts are going to have a hard time saying no to AT&T for trying to create the same synergies that their primary rival Comcast already has.

We haven’t even seen the full power of the new Comcast bundle yet. The company has so many possible ways to tie down a customer and make it hard to break the bundle. Once Comcast has millions of cellular customers and millions of smart home customers they are going to be a fierce competitor against any newcomer. Combine this with the fact that they will soon have gigabit broadband available everywhere and they can match broadband speeds in any market (while keeping prices higher in non-competitive markets). That is the real power of the big conglomerate ISPs – the ability to compete unfairly in any one market by charging more elsewhere.

I doubt that the DOJ petition will hold up. We don’t really need another company with the same market power as Comcast – but stopping the second big conglomerate is already too late.

Some Regulatory Shorts

FCC_New_LogoAs to be expected our regulators stay busy regulating. Not all of their decisions have widespread impact, but it’s always worth keeping an eye on what’s going on.

WiFi Blocking: The FCC continues to come down on hard on those in the hospitality industry that would stop people from using their own hot spots in or near hotels or other gathering places. You might recall, last year the FCC fined Marriott for blocking access to guests using their cellphones for WiFi. Marriott is one of those chains that charges extra for WiFi and so they were operating jammers that interfered with the ability of a smart phone to act as a hotspot.

The FCC continued with that theme and recently fined M.C. Dean $718,000 for blocking WiFi at the Baltimore Convention Center. They also fined Hilton Worldwide $25,000 for “apparent obstruction of an investigation” in the case. In August the FCC fined Smart City Holdings $750,000 for using technology at 28 convention centers that blocked cellphone and wireless routers from acting as hotspots.

As somebody who travels and who generally finds hotel WiFi to be inadequate, this is a welcome move. But it’s even more so for groups that rent space in a convention center. Some of those locations charge 6 digits for use of a convention center’s WiFi system, and the FCC is telling the hospitality industry that it is never okay to block WiFi.

Do Not Track Requests: The FCC voted earlier this month to not require web sites to honor Do Not Track requests. The group Consumer Watchdog had petitioned the FCC asking them to force companies to honor such requests. Today web sites can voluntarily honor privacy requests, but only a handful of large web sites do so. The group had hoped that since the FCC had elected to regulate privacy practices for ISPs as part of the net neutrality rules that they might carry this forward to the web.

But the FCC declined to make such a ruling. They said that they are not in the business of regulating ‘edge providers’, meaning the companies that offer web content. I keep an eye on privacy and use web sites that don’t track people whenever I can like the Duck Duck Go search engine. But I am leery about the FCC getting into the business of regulating the behavior of web service providers. When you look at some of the consequences of such actions it’s not necessarily good for anybody. Even in England, which we always assume is a lot like us, the government has proscribed a large list of web content that is off limits unless people opt into them. I personally am glad the FCC doesn’t want to cross that line. I think back to all of the wasted effort they spent on the ‘seven dirty words’ on TV and radio and don’t think we need a repeat of that.

The FCC and Privacy. In what seems like an extreme order, the FCC just fined Cox Communications $595,000 for a security breach that exposed the records of 61 customers. That’s almost $10,000 per customer.

This is the first such privacy ruling by the FCC since this was always under the purview of the Federal Trade Commission until the FCC asserted primary responsibility for regulating ISPs as common carriers. I find the order to be puzzling. The breach was apparently due to a hacker. Cox self-reported the breach and said that they had processes in place that found the breach quickly and that limited it from happening to a larger number of customers. To me that sounds like what companies are supposed to do and I’m not sure that any company these days can be completed immune from hackers. I know we won’t know the details of exactly what Cox did wrong, but it doesn’t feel like this is a case where the punishment fits the crime.

One only has compare this to the way that the very massive data breaches have been handled for companies like Target, J.P. Morgan Chase and a number of other banks, and even from several branches of the federal government. None of them got significant fines and the general thinking is that the market itself provides a lot of punishment in lost business and in the cost of dealing with the data breach. The size of the FCC fine seems out of line, and because of that every ISP ought to be reviewing the way you store and protect customer data. You can’t afford not to, and perhaps that is the message the FCC was making.