The proposed AT&T and Time-Warner merger

The deal may “feel wrong” to a lot of people, but for the regulators it ought not to be a big deal:

AT&T’s proposed acquisition of Time Warner…is considered “vertical” because the two companies largely do not compete against each other but operate on the same supply chain.

This is the bottom line:

“By standard antitrust metrics, this deal should be O.K. in Washington,” said Paul Gallant, a technology, media and telecommunications policy analyst with Cowen & Company. “But the Democratic Party is moving left, and if Clinton wins, this could become an early test for her ‘tougher on business’ rhetoric.”

The negative arguments are speculative or quite a stretch:

AT&T could make it more expensive for its competitors to gain access to Time Warner’s content or give preferential treatment to its own programming, said John Bergmayer, senior counsel at Public Knowledge, a digital rights advocacy group.

That is all from Leslie Picker and Cecilia Kang at the NYT.  I would stress that “entertainment” and “content” are sectors where choices have exploded more or less without precedent.  If the goal is to stop Time-Warner content from spreading to multiple sectors of the consumer media universe, I don’t see this one as a winner.

More generally, it is hard to see where the efficiencies from the deal are supposed to come from.  About the recent Bayer and Monsanto proposed merger I wrote:

There is a well-known academic literature, dating to the early 1990s, showing that acquiring firms usually decline in value after tender offers, especially after the biggest deals. Mergers do not seem to make companies more valuable or efficient.

Why then do so many mergers and acquisitions happen? Well, some of them do pay off (Google buying YouTube), but also many managers engage in empire-building by increasing the size of their companies, even at the expense of the shareholders. Another possibility is what economists call “winner’s curse,” namely that the winner of an auction or contest or bidding war tends to be the person or institution most optimistic, and in fact overly optimistic, about the value at stake.

So from a social point of view, I doubt if there is so much at stake here.

Addendum: Matt Yglesias comments.  And here is FT coverage.



You are giving preferential treatment to "Cowen" & Co.

You guys will hate this, but this will be fine because .. net neutrality.

It is net neutrality, not antitrust that insures that "exploding content" can flow to all devices.

But isn't net neutrality why the USA has worse internet bandwidth than Korea and Japan? That last mile is expensive...

Quite the opposite. Evil local cable monopoly is one reason we have both slow internet and the need for net neutrality legislation.

And yet, verily, verily I say unto you if a regulator forces you to walk the last mile, go with him the two last miles.

Ask four nerds what "Net neutrality" means and you will get five different answers. Each of them loudly insisting that only their definition is correct.

The FCC's "final rule" of April 2015 has to be the reference, details of change can be argued from that.

AT&T and TWC are the only two ISPs in many markets in the midwest, including my own. I realize that both companies do many other things, but the authors of the NYT article completely neglect this because we are in flyover country and do not matter. Also "standard antitrust metrics" is a nebulous term, especially since the government has seemingly stopped caring about antitrust for the past 30 or so years.

Congratulations, you have noticed the wonderful impact such humble people as the owners of this web site have been so eagerly working to have, while being paid by the taxpayers of the Commonwealth of Virginia.

TWC (now Spectrum) is not part of this deal.

Like Jonathan said, Time Warner Cable and Time Warner Inc. are two entirely separate companies as of 2009:

Good callout. Didn't realize that.

I believe research has found that total value of the acquirer and acquiree does rise on average when a merger is announced, suggesting that mergers do tend to create value.

Could be, but given the fact that the acquirer declines in value, the consequences seem to be partly a transfer from buyer to target, as well as some increase in the target's value.

So why acquire?

My cynical guess is that many acquisitions are driven by the acquiring CEO's, and other executives, wanting to be seen as big shots, and enjoying the acquisition game much more than the drudgery of running the company. It's more fun to have expensive lunches with investment bankers than to spend time trying to figure out how to improve the product, increase sales, and so on.

It's the "I'm a big thinker" syndrome.

This is indeed cynical but in this case as it often is, the cynical is also accurate.

Have you looked at the fees going to various entities?

Value is extracted from the corporations (read: stockholders) that wind up in someones pockets.

As one wise man once said, "Follow the money."

"Value rose" after Aol merged with TW until a year later aol-TW did a $99 billion write off.

What destroyed $99 billion in "value".

I'm a child of the 60s, and see the value of a gallon of gasoline in how many miles I can travel, and the price falling from $4 to $2 in the past two years versus the price increasing from $1 to $2 then $3 then $4 did not change the value of a gallon of gasoline.

Higher fuel economy of a car will increase the value of a gallon of gasoline, but if applied globally will reduce the price of gasoline until the price of higher fuel economy is higher than the total cost of lower priced gasoline with lower value in a lower lower fuel economy car that has a lower price. But as economies of scale increasing by 100 in batteries brings the price of electric cars down, the value of a gallon of gasoline will fall to nothing for a significant part of the market.

Value is the short term invariant utility of an asset, which can increase but probably decrease in the long term as innovation creates higher value substitutes at equivalent price.

In any case, pretty much every merger involving Warner has pretty quickly led to Wall Street deciding the initial price inflation was wrong at which time the price is deflated followed by some assets being split off or written off.

Wall Street has made a bundled in all the M&A plus spin off ipo fees as the churn assets through Warner-something or something-Warner not to meant the fees for securitizing debt to fund the churn.

My guess is if the merger does happen, the next step will be another breakup. All the content creation will be split from content licensing from the fragmented distribution to get "pure play" without the cost of building capital assets like fiber distribution or installing dish receivers which have high churn and high customer acquisition costs.

'is considered “vertical” because the two companies largely do not compete against each other but operate on the same supply chain'

John D. Rockefeller is likely begging (or trying to bribe) any deity available to be allowed to be reincarnated in this brave new world. But then economists are not historians, and have no interest in learning from history either. As noted in the Standard Oil wikipedia article - 'Standard Oil dominated the oil products market initially through horizontal integration in the refining sector, then, in later years vertical integration; the company was an innovator in the development of the business trust.'

One can be confident, when someone finally figures out how to make trusts works in the current world, members of the GMU econ dept. will be cheering them on.

And what is interesting is just how easy it is to reimagine and update this tidbit from 1909 in terms of AT&T - 'Rebates, preferences, and other discriminatory practices in favor of the combination by railroad companies; restraint and monopolization by control of pipe lines, and unfair practices against competing pipe lines; contracts with competitors in restraint of trade; unfair methods of competition, such as local price cutting at the points where necessary to suppress competition; [and] espionage of the business of competitors, the operation of bogus independent companies, and payment of rebates on oil, with the like intent.

The lawsuit argued that Standard's monopolistic practices had taken place over the preceding four years:

The general result of the investigation has been to disclose the existence of numerous and flagrant discriminations by the railroads in behalf of the Standard Oil Co. and its affiliated corporations. With comparatively few exceptions, mainly of other large concerns in California, the Standard has been the sole beneficiary of such discriminations. In almost every section of the country that company has been found to enjoy some unfair advantages over its competitors, and some of these discriminations affect enormous areas.

The government identified four illegal patterns: 1) secret and semi-secret railroad rates; (2) discriminations in the open arrangement of rates; (3) discriminations in classification and rules of shipment; (4) discriminations in the treatment of private tank cars. The government alleged:

Almost everywhere the rates from the shipping points used exclusively, or almost exclusively, by the Standard are relatively lower than the rates from the shipping points of its competitors. Rates have been made low to let the Standard into markets, or they have been made high to keep its competitors out of markets. Trifling differences in distances are made an excuse for large differences in rates favorable to the Standard Oil Co., while large differences in distances are ignored where they are against the Standard. Sometimes connecting roads prorate on oil—that is, make through rates which are lower than the combination of local rates; sometimes they refuse to prorate; but in either case the result of their policy is to favor the Standard Oil Co. Different methods are used in different places and under different conditions, but the net result is that from Maine to California the general arrangement of open rates on petroleum oil is such as to give the Standard an unreasonable advantage over its competitors.'

But in our modern world, one can be exceedingly confident that if Netflix has any problems delivering its content over AT&T's 'pipeline,' there will be GMU econ dept. faculty blaming the FCC.

Yet again, in typical fashion, you evidently believe it carries the day intellectually to cut and paste large swaths of Wikipedia articles. Unimpressive.

Here I was, thinking that people could see how easy it would be, a full century after one of the largest vertical monopolies was charged in market manipulation involving how competitor's products were carried while extracting maximum profit from markets where competition had been destroyed, to just change a couple of words, and see exactly the same process happenening again. The three largest paragraphs are verbatim quotes by those investigating and charging Standard Oil, by the way, which admittedly is not really clear.

Nonetheless, it is so easy to replace railroad or pipeline or shipping points with 'data connection' or ' data hubs' without even needing to change other terminology - for example, 'restraint and monopolization by control of pipe lines, and unfair practices against competing pipe lines; contracts with competitors in restraint of trade; unfair methods of competition, such as local price cutting at the points where necessary to suppress competition.' Really, only the sort of economist that GMU is so full of would be unable to read that without already know exactly what AT&T has in mind. After all, it isn't as if AT&T doesn't know what it means to monopolize a market.

And as for 'You thought Justice’s jihad against Microsoft was a thoughtful exercise of power,' well I'm a Linux user since Redhat 4.2, and used OS/2 at work in an IBM affiliated software company. Everybody in Germany was quite clear about the Microsoft tax, which involved Microsoft claiming the right to have every PC sold by a manufacturer having to pay for a Windows license, whether Windows was installed or not. This extended not only to Microsoft denying anyone manufacturing PCs with Windows installed the right to sell PCs without Windows installed at a cheaper price based on the lack of needing to pay for a Windows license, but to Microsoft attempting, repeatedly, to legally claim that any PC manufacturer unwilling to sell PCs without a Windows license at all was engaged in active software piracy against Microsoft, as clearly, who could ever use a PC without Windows?

And let me guess: You thought Justice's jihad against Microsoft was a thoughtful exercise of power.

Microsoft was insufficiently reined in, probably because they offered backdoors to the government.

Think of the timing. Clinton administration. They had to open K street offices and funnel money to people in power.

Settled in 2001 as the war on terror and the need for backdoors increased.

Time for a mini-rant:

My objection to Microsoft's use of their monopoly is artistic. As a computer scientist I believe they held back the discapline for 30 years. All the while, they delivered crap, and called it innovation. Fan boys of the era believed that crap *was* innovation because a) Microsoft was winning, and b) crap was all they had ever known. They had never seen highly secure OSes, they had never seen distributed OSes, they had never seen self-organizing networks.

Even now a free copy of Debian is more secure that a high priced commercial copy of Windows and does not absurdly need add-on "products" to protect from malware, adware, etc.

It is wonderful that the turns of history brought MS down, and you can buy your parents or kids trouble-free and more secure Chromebooks for light computing, but it has been a longer road than necessary.

While Windows was of poor quality for many years, they could not have "held back the discipline" of computer science which doesn't depend on any particular computers. None of their competitors were secure, even Unix of that area lacked basic things like access control lists. To this date, it would be difficult to credibly assert anyone has made a useful distributed OS or self-organizing network.

I don't think you can prove Debian is more secure than Windows, and at this point Windows is effectively almost free. Any OS will be free of malware and adware unless the owner pirates software. I've never pirated and therefore never had a problem on any OS, although Windows includes anti-malware functionality that ironically duplicates most of the worst behaviors of malware for free.

MS makes perhaps the best development tools, and at this point isn't much worse than anyone else, although the Windows 10 team seems to want to compete with Windows 286 to undo the progress made from Win2k to Windows 7.

You seem to be complaining that only 99% of what I say is correct.

You have probably read Rob Pike on "why systems software research is irrelevant."

In part I reiterate his argument about dominant paradigms, in part I address that monopoly makes it much worse. Not only did MS control the world's API (to 99%), but they also had all the money.

You are saying someone should have broken Pike's dilemma with no money.

Note that Pike wrote that in 2000, as the world was settling into "if it isn't Microsoft it is UNIX(ish)."

It is absolutely NOT true that you only get malware or adware by pirating software. Where on Earth did you get that idea?

"brought MS down" - the hell?

At one time they were the most numerous OS in the world, now it is Android. At one time they were the richest OS delivering company, now it is Apple.

So yeah, they were brought down.

This makes no sense. The tech world moved on from Microsoft in such a way that the company is really (despite its size) a bit of an afterthought now. Would have thought the pearl-clutching about Microsoft would have engendered quite a bit more modesty from regulators and market-haters such as you and p.t. Alas.

Contradictory answer. You say we are post-MS, so MS did no lasting damage?

First of all we did have damage in those years of dominance, and second millions of people are still in unnecessary adware he'll.

Speaking of computer science, IOS and Android both seem to have followed neural networks too far .. when "hell" becomes "he'll" by default.

Discipline. Fixed that in my dictionary at least.

"But then economists are not historians": they'd make much better economists if they were.

Companies that own content and control distribution have an annoying tendency to want to use their power to squeeze the juice out of consumers who end up with wretched things like Cable-TV channel bundling, which was merely many companies colluding on wringing consumers dry rather than a single mega company. Does anyone think Cable-TV channel bundling was a really good idea, the supreme example of what capitalism should be? I don't. I think this merger will probably end up creating similar things.

'Does anyone think Cable-TV channel bundling was a really good idea, the supreme example of what capitalism should be?'

Welcome to Prof. Cowen's world, as he has written (in 2004, admittedly, and Prof. Cowen is certainly capable of changing his mind when required) in defense of just how wonderful cable bundling truly is, part of what makes capitalism so wonderful (though he tends to leave unsaid who is collecting the wonderful profit) - 'More plausibly, price discrimination is at work. Consider a simple example with two individuals. John values Disney at $100 a year and FoxNews at $10 a year; Sally has the reverse valuations. Without bundling, the cable company will offer each channel for about $99, and sell a channel to each consumer, reaping $198 in revenue (N.B.: I am assuming that the cable company has a good idea of demand in general, although it cannot identify which consumer is willing to pay how much for what.)

In lieu of this set up, sell the bundle for $109 to each consumer, reaping a greater revenue of $218. The company makes greater profit.

More importantly, aggregate welfare is higher. In this case each consumer receives two channels instead of one.

Monopolies, regulated or otherwise, tend to bundle commodities when demands are scattered and the marginal cost of additional service is low. In this context, once the program is made, you can sell it cheaply to additional customers. So why not try to get the entire package into everyone’s hands?

You can spin your own numbers, with varying results, but the overall lesson is clear. While there is a general problem with monopoly in the cable market, bundling can make that problem better rather than worse. So don’t complain next time you have to “click-remote” through those Farsi and exercise channels.'

I didn't read your entire example but I'd like to say unless you have kids, you don't need Disney and you probably don't need FoxNews, so as a matter of fact anything you pay for these two channels is money wasted. Take up chess, it stimulates your brain and it's cheap. Use the internet to get news.

Thanks for the explanation of things. I guess if capitalism is the best system available (which often looks to be the case) and cable bundling is the best that capitalism can give us then suicide is our best bet. There is no hope for the world.

Do they really not compete? Is that only because of the Time Warner Cable rename to Spectrum? In my market, the only two options in town for non-satellite TV and internet are AT&T U-Verse, Time Warner Cable / Roadrunner, and Google Fiber (but only within a relatively small section of town).

Spectrum is a completely different company. TWC is not part of this deal.

Ah, I didn't realize Time Warner Cable wasn't part of Time Warner. Go figure. So the TV & Internet players in my area are: AT&T (U-Verse or DirectTV), Charter Communications (which owns Time Warner Cable, now Spectrum) and Google Fiber. And maybe Dish Network, but that's TV-only and you'd still have to engage with one of the others to get internet access.

Well the deal doesn't change anything, but there is satellite Internet available everywhere except the poles from companies like inmarsat. Most places have wireless access from companies like T-Mobile, albeit at a slower speed but one which may be fast enough. TV is often broadcast, but I suppose it depends what you are trying to accomplish.

I don't see ATT benefiting from this at all. Anyone who doesn't like them isn't going to use their services, even if it means giving up some content, and someone who didn't like the content isn't going to watch even if for some reason they use AT&T.

While a lot of the public seems not to have noticed, the broader industry of communications (not just telephone and pay-TV services but also book, newspaper, and music publishing, "free" radio and TV, the movie industry, and the Internet itself) has been gravitating toward monopoly for at least 30 years. Most of it is now controlled by about 8 conglomerates, worldwide, and the one viewpoint that appears to unite all of them is a desire to reserve for themselves the ability to publish content and be paid for it.

I'm convinced that the Internet as we know it, and blogs like this one, only remain possible because those few giants don't yet have as much control as they want. Thus I patronize a local internet service even though I could get it cheaper from one of the giants; and I actively oppose any move by the giants to merge with one another. It is already much too hard for outsiders to enter those fields, and the giants aren't interested in expanding into each other's territories unless they can do it by buying out the existing system in that region, so they won't have to compete with it.

A strong case can be made that government has broken this marketplace. But the point is that it is broken, and we need to fight against it becoming worse.


AT&T must be having the last laugh.

Although not fully related,

Yes, we really must return to the era of a few large newspapers, broadcast networks, and movie studios, circa 1986. Those were the days.

"AT&T’s proposed acquisition of Time Warner…is considered “vertical” because the two companies largely do not compete against each other but operate on the same supply chain."
But wasn't it the case with movie studios and movie theaters chains, too?

Yep, at best you're looking at the same restrictions that NBC Universal and Comcast had to deal with.

Thanks, but what about,_Inc.#Douglas: "The case reached the U.S. Supreme Court in 1948; the verdict went against the movie studios, forcing all of them to divest themselves of their movie theater chains. This, coupled with the advent of television and the attendant drop in movie ticket sales, brought about a severe slump in the movie business, a slump that would not be reversed until 1972, with the release of The Godfather, the first modern blockbuster."
Can't vertical integration be seen as an impediment to free competition?

Oh, "at best" for the merging corporations! Now, I understand. Thanks.

Can't we just say "Mergers of this size are always bad" and be done with it? Is this much concentration of power in one organization EVER good? I am always stunned by TC's dichotomy between wanting a small government, and not caring at all how big and powerful the corporations get, which arguably have more influence and control over our lives.

"Big and powerful corporations" can't, at least in their own name, put you in jail for tax evasion, determine what substances operate your motor vehicles and refrigerators, what distant enemy your unevaded tax dollars will be used to combat and what molecules you can ingest into your own body. You can choose to use Microsoft or Ubuntu. You don't have a choice between the IRS and ? Nobody has more influence over our lives than government.

"Nobody has more influence over our lives than government"; but often government is just a bunch of hirelings of big businesses.

Predictable response.

"You can choose to have a service or not have it" is it's own form of oppression, especially if the service is vital to modern living like the Internet, or to being an informed citizen, like the media. I agree that the government is more oppressive, for the reasons you've stated - but "less than really f'ing awful" can still be "pretty f'ing bad".

I worry that very large communications companies end up having a lot of political and social power, because they can and do exert some level of editorial control over what people can see/hear/read, what news is visible, etc.

While related, it's mostly off-topic: WSJ is offering news division buyouts to employees. Another one hits the dust.

opps. should have said "bites the dust".

Both are true, I guess. It flew too high, so close to the Sun.
"In an email to staff on Friday, the Journal’s editor in chief, Gerard Baker, said it is offering 'enhanced” buyouts to all newsroom employees 'to limit the number of involuntary layoffs.'

'I regret of course the need for such a move, and I appreciate deeply the dedication all of you continue to show through challenging times,' he said. 'I’m confident this process is the right one to set us on the right footing for renewed growth in the years ahead.'" --

As a Literature Nobel Prize laureate once wrote, "the times, they are a-changin".

The problem with Bob Dylan's trite "one size fits all" (change) lyric is that, well, it can be trotted out to comment on all examples of things changing. Another reason to revoke the Nobel!

Well, change is the only constant in the universe (or the limit imposed by the speed of light or, if it can be violsted, the bureaucratic mentality maybe: So I guess it is good having a ready quotation to use when the tines they are a-changing, as they usually are. By the way, although I am still a little bewildered and anoyed with Mr. Dylan's Nobel, it is not his fault we (OK, I) abuse his work. We (thought he) was writing about a big change. The same happens with Yeats' "Things fall apart; the centre cannot hold". As Brazilian writer Machado de Assis wrote, "history is a meretricious lady". So is posterity. No man is responsible for the idiots who quote him. The evil that men do lives after them, the good is oft interrèd with their bones.

Time Warner is not in the cable business, it does not compete with ATT

May 2016 "Charter Communications completes purchase of Time Warner Cable"


"...but for the regulators it ought not to be a big deal "

LOL --- because the government "regulators" bureaucrats have no skin in the game and suffer no consequences for the negative effects (intended or unintended) of their bumbling actions.

>>> "Why then do so many mergers and acquisitions happen?" --- because it is an unintended effect of dumb government regulation.

Anti-Trust government interventions are economic nonsense. Trusts/cartels /monopolies can only exist long term if the government enforces them against market processes.

The mindless labyrinth of American government regulation is so complex that no one can decipher its true effects.

>> Anti-Trust government interventions are economic nonsense. Trusts/cartels /monopolies can only exist long term if the government enforces them against market processes.

So natural monopolies aren't a real thing then?

Normally I would say Kesseron's comment is an example of the Econ 101-level understanding of markets so often demonstrated in the comments here, except as you rightly point out, natural monopolies are taught in Econ 101.

...maybe Econ 101 as taught in year 1948, but the unproven "theory" of natural monopoly is widely controversial in the economics profession... having gone through a huge upheaval in the 1970s.

Malthus originated the concept of natural monopoly... with an ignorant speculation that certain French vineyards enjoyed a natural monopoly due to very good soil quality.

Austrian economists correctly reject natural monopoly theory, noting that all supposed natural monopolies are ultimately legal impositions of government.

I assure you that natural monopoly is still taught in the overwhelming majority of introductory economics courses (it's in Mankiw's Principles book, among others). I think that approach to economics is overly simplistic, but you are overstating your case by quite a bit.

Basic economic theory shows monopolise lower prices and increase production and choice. But the insane leftists in the Obama/Democrat world want to end monopolies just to strike a blow against capitalism.

For those who just naively hang their hat on the vertical theory that everything is fine if it is vertical, without considering other potential competitive effects, you might want to look at the Antitrust Division competitive impact statement in NBC/Universal settlement.

Claiming that they don't compete is 100% false. In many cities in the United States they are the only 2 internet providers to choose from. If you aren't on a temporary short term price deal both already gouge because of this, and now it's only going to get much worse.. For example I was paying $60 a month for a relatively slow 6 Mbps connection with AT&T until switching to a 15Mbps connection with Time Warner last week. After a year they will jack up the price as well, and I own a state of the art modem so that's with zero equipment fees. Do your research next time, they are clearly major competitors in internet and video (Time Warner Cable vs Direct TV). Can't believe I'm reading this inept of a claim they don't compete on a website I respect as much as this one.

As has been pointed out multiple times upthread, Time Warner Cable is (or rather, was) a separate entity from Time Warner. It was spun off in 2009 and purchased by Charter, which is rebranding it as Spectrum, this year.

Do your homework indeed, or just read the comments about the difference between TWC and TW.

Monopolies... The American system is the exploration of man by man, the Brazilian system is the other way round.

Amazing how quickly they respond after Trump calls attention to it.

There is an important difference between "acquiring firms do not gain in value" and "there is no social benefit to mergers." An acquiring firm bids an above-market rate for the outstanding shares of a company. The increase in value of the acquired firm is where the economic value is primarily captured. That is strange, but it is a peculiarity about negotiations, not about whether there is value created.

Vertical or horizontal, the effect is the same: a huge competitive advantage that constrains competition and therefore eventually hurts the consumer.

This deal would make a lot of sense if ATT were awash in cash like some companies today. The continuing uncertainty over the Employer Mandate in ACCA discourages investment in expansion because costs are impossible to predict, so companies retain cash, pay dividends, buy back their own stock, or look at M&A. But 90% of this deal will have to be financed and ATT already has enough debt. It will be several years before we really know if it was a brilliant stroke or just another AOL-type boondoggle.

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