I’m a fan of the “explain it like I’m 5” approach to writing.
When big, complex, powerful forces are at work (like AT&T wanting to buy Time Warner) it’s easy for a writer to abuse abstract concepts that few readers have an intuitive understanding of. You also get a lot of people jumping out of the woodwork, trying to convince everyone of how sophisticated they are, rather than trying to do a service to their readers.
When I heard about the news that AT&T’s proposed merger with Time Warner went through, I wanted someone to answer some very basic questions for me, all in one place, just so I could understand what’s going on. I couldn’t find it. So I decided to dig through the internet, figure it out myself, and pen the simple explanation I wish someone else would have written for me.
Enjoy!
(But, also, read the federal judge’s opinion. It’s interesting!)
Remind me, what all does AT&T do?
Their main business these days is essentially cell phone data plans, but they also sell traditional landline phone service, and they recently bought DirecTV, so they sell cable TV too. Individuals and businesses paid AT&T over $160 billion last year, and they made a profit of nearly $30 billion.
And Time Warner?
Time Warner owns a huge portion of the most valuable premium video content. The three main businesses are HBO, Warner Bros (movies like Harry Potter, the whole DC comics universe, The Matrix, etc), and Turner (cable TV channels like CNN and TNT - a huge part of this is live sports). They made $31 billion last year from advertisers, cable TV networks (like AT&T and Comcast), and consumers.
Why does AT&T want to buy Time Warner?
AT&T is a big, mature business that doesn’t have a lot of room to grow. Data is to some extent a commodity, kind of like air travel. There are very simple things you want (speed, low cost) and not a lot of creative room to differentiate. They’re facing a lot of pressure from low-cost competitors like T-Mobile to lower their prices.
In a nutshell, AT&T wants to offer Time Warner content to users through their data pipes for free, so they can charge more than T-Mobile (and the rest) and avoid commoditization.
Why did the government want to block the merger?
While a lot of people are concerned about the overall consolidation of power, the government’s case was actually pretty specific. (It had to be, because the legal standard for blocking mergers isn’t “this feels bad” - you have to prove specific consumer harm.)
Their case went something like this:
Right now, if Turner (remember - this is the cable tv division of Time Warner, the makers of CNN, TNT, etc) wanted to raise their price to cable companies to distribute their content, they have to keep the price somewhat reasonable, because if the cable network simply decides to say “no,” they’d lose a lot of money. Turner incurs all it’s cost in the creation of the content, and it costs them nearly nothing to distribute it, so they have every incentive to spread their content as widely as possible, and not charge too much.
The government believed that if AT&T owned Time Warner, they would have an incentive to make Turner start charging a lot more for their content. If the other cable companies (like Comcast and Spectrum) say “no”, it’s a big problem for them, because without being able to watch the NBA Finals or CNN, a lot of their customers would just switch to DirecTV (owned by AT&T). This kind of anti-competitive scenario would be a pain, and cost consumers money without adding any extra value.
Why did the judge say the government was wrong?
It’s pretty simple: if you actually do the math, it turns out it would be pretty irrational for Turner to jack up the price. They would almost certainly lose far more money than they would make.
There could be other reasons to oppose the merger, but most legal experts think the argument the Government made wasn’t a very good one. The bigger issue, according to people who oppose the merger, is that we don’t have a very good way to ensure competition and diversity, even when it’s hard to point to specific consumer harm.
But that’s an issue for another day.
Until next time,
—Nathan