ONE of the biggest problems facing America’s economy is waning competition. In the home of free enterprise two-thirds of industries have become more concentrated since the 1990s, partly owing to lots of mergers. Fat, cosy incumbents hoard cash, invest less, smother new firms that create jobs and keep prices high. They are rotten for the economy.
Boosting competition should be a priority for whoever occupies the White House in 2017, and for Congress. Now a test case is waiting in the in-tray. AT&T, America’s fifth-biggest firm by profits, wants to buy Time Warner, the second-biggest media firm. The $109bn megadeal isn’t a simple antitrust case, because it involves a firm buying a supplier, not a competitor. But there is a strong case that it will limit consumer choice in a part of the economy that is rife with rent-seeking and extend a worrying concentration of corporate power. It should be stopped.
Dial M for monopoly
The business of what Americans watch and how they communicate has seen waves of change. In 1984 AT&T’s national phone monopoly was broken up. In 1990-2010 the rise of the web and mobile phones led to manic dealmaking. Today people are buying fewer bundles of shows from traditional TV firms and instead viewing online, including through Netflix and Amazon (see article). They are watching their phones more and TVs less. AT&T, which makes 80% of its sales from “pipes”—mobile and fixed broadband and voice lines—says it wants to buy Time Warner, which owns HBO and Warner Brothers, among other assets, to bulk up in the media business.
Antitrust authorities have recently blocked “horizontal” telecoms mergers, in which a firm seeks to buy a rival. They stopped AT&T from buying T-Mobile in 2011, and Comcast, a broadband firm, from buying TWC in 2015. But they have been easier on “vertical” mergers, in which a firm ties up with a supplier—such as when pipe companies buy content firms. Comcast was allowed to buy NBC Universal, a broadcaster, in 2011, albeit with the condition that it made its content available to all its rivals and kept its pipes open to other content, so that customer choice was not hurt.
There are two reasons why trustbusters should now take a tougher line. First, the telecoms industry is already a rent-seekers’ paradise. Americans pay at least 50% more for mobile and broadband service than people in other rich countries. For each dollar invested in infrastructure and spectrum, American operators make 28 cents of operating profit a year, compared with 18 cents for European firms. That reflects the lack of competition. AT&T and Verizon control 70% of the mobile market, and are the only firms that reach 90% or more of Americans with high-speed services. Half of the population has no choice of fixed-broadband supplier. The lack of downstream competition in pipes could distort competition in upstream content.
A combined AT&T and Time Warner might seek to limit what any near-captive customers watch, for instance, thus denying other content providers viewers. Safeguards of the sort attached to the Comcast-NBC deal are not much use in practice. One way round them is “zero-rating” plans, in which pipe firms exempt some TV services from people’s monthly data caps, making them more attractive. Another is altering the placement of content in on-screen menus in order to bury rivals’ material. AT&T says this is not its aim, but why else would it pay a $20bn premium for Time Warner?
A second concern is that AT&T-Time Warner would have vast political and lobbying power, allowing it to bend rules over time, including any antitrust remedies that it agreed with regulators. It would capture 28% of the media-and-telecoms industry’s pre-tax profits and 2% of all corporate profits, making it America’s third-biggest domestic firm. Media and telecoms regulation is already intensely political, and AT&T today is no shrinking violet, being a vocal opponent of net neutrality, the rules that ensure that all online traffic is treated equally.
Precedent suggests that the trustbusters in the Department of Justice (under the auspices of the president), and not the Federal Trade Commission (a creature of Congress), will have the biggest say on the tie-up. This means the deal is being struck just as there is a change of leadership at the top. Those advising on the merger may be gambling that this makes the authorities unlikely to initiate a strong line on vertical mergers. That is all the more reason to be bold. Politicians and regulators may eventually resolve to open up the industry more, for example through “unbundling”, which lets upstart firms use others’ pipes. Until then they should block the AT&T-Time Warner deal and make clear that competition, not consolidation, is the way to get America’s economy working better.