Say goodbye to the AT&T-Time Warner merger.
The marriage of the telecom giant and television titan won’t be undone because of a lack of enthusiasm on Wall Street or confusion over its financial advantages. It’ll be scuttled by regulators, emboldened to throw a wrench into the deal due to mounting political pressure.
The Federal Communications Commission and the Department of Justice will spend the next year scrutinizing the deal to keep watch against anti-competitive behavior and ensure public benefit. Both presidential campaigns have been critical of the deal, with Trump vowing to stop it outright and Clinton promising rigorous review. The merger risks being compromised by populist politics. But some experts say the deal would encourage competition rather than undermine it.
“The zeitgeist in the country is anti-merger, anti-big business. On its merits, there’s nothing I could object to,” said Jim Nail, a principal analyst at Forrester.
The merger enables AT&T’s foray into content creation, allowing it to compete with other telecom companies. AT&T is feeling squeezed by upstart providers such as T-Mobile and Sprint. Meanwhile, chief rival Verizon is establishing itself in online content creation, with its acquisitions of AOL and Yahoo.
AT&T’s Time Warner acquisition is a counterpunch for survival – a way to inflate its sagging revenue and remain competitive in today’s marketplace.
“Unless you have a content strategy, you’re not going to have the profits you need to invest in your networks. Getting these mergers is very important to the future of these companies,” said Roslyn Layton, a visiting fellow at the American Enterprise Institute.
AT&T and Time Warner see the marriage as vertical integration, because the two companies do not compete against one another. AT&T owns the pipes to distribute content while Time Warner produces that content.
“It’s not a concentration of anything. It’s a vertical deal where there’s competition at both levels,” said Paul Cappuccio, general counsel of Time Warner, on a call with analysts this week. “So we feel very good about the deal being pro-competitive.”
Policymakers think otherwise, making the deal dead on arrival.
The closest analogue was Comcast’s 2011 acquisition of NBCUniversal, which also featured a telecommunications company buying a content behemoth. In that deal, the FCC forbid Comcast from withholding content from other cable operators or charging them more for it. The conditions also compelled Comcast to provide cheap broadband service for low-income families with children.
But with the lion’s share of both political parties expressing opposition to the deal, the FCC and the Justice Department will kill the merger.
“I’m looking at a world that has convergence. The FCC looks at rules from a telecommunications perspective that dates back to the transcontinental railroad,” said Layton. “They want to regulate the system with rules from a different era. I think that’s bad for consumers.”
Critics argue that the deal would amount to a consolidation of the telecom and media spheres that would be unfair to customers.
“As only commissioner to oppose Comcast-NBCU, I say the same re. AT&T-Time Warner: too much, too big, too powerful. Higher prices, no consumer benefits,” tweeted Michael Copps, who was commissioner of the FCC from 2001 to 2011.
In the unlikely event that the deal would be approved, some analysts are concerned that current FCC Commissioner Tom Wheeler, a Democrat, could impose unreasonable conditions.
“The FCC may require the combined company to divest its satellite communications business and a broadcast license owned by Time Warner,” said Joe Madden, principal analyst at Mobile Experts, LLC, explaining that the logic behind the FCC’s decisions are politically motivated and not aligned with market realities.
In an era of convergence between content and distribution, embodied by streaming services such as Netflix, this merger would have allowed AT&T and Time Warner to join the club.
“What I see is dynamic competition on the grand scale where they feel that if they don’t do this deal, they’ll be dead,” said Layton.