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April 30, 2017

Newsonomics: Will the Phone Companies 'Own' the Internet?

In 1982, the AT&T consent decree seemed like the last word. That’s when the Department of Justice used the nearly-century-old Sherman Antitrust Act to force the break-up of Ma Bell. No longer could one company – for a long-time considered key to the national interest, a next-gen Post Office – monopolize long-distance phone service, local service and equipment sales.

Now we see a history in replay, rhyming (as Twain likely said) rather than repeating. The new AT&T (great pictorial brand history here) that ultimately emerged from that 1982 battle, both the namesake and logical next-generation daughter to the original, announces a deal to buy Time Warner for $85.4 billion. Again, the big question, with perhaps profound societal impact: Would the new combination unfairly dominate markets in the 21st century?

 

First published on Oct. 24, 2016 at POLITICO Media

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My god, has it really come to this: the phone companies running the Internet, the supposedly freeing innovation of all time?

AT&T will now aim to own a good chunk of the Internet. Not literally, of course – the Internet can’t really be owned (or can it?) – but so much of the media that the Internet now delivers to us is manufactured and distributed by relatively few companies. Think of this as “ownership” in the way that big, dominant companies often come to believe they “own” their markets.

In this deal, we see the now-voracious appetite of distributors to own the content they’ve already cornered the markets on distributing.

AT&T follows immediately in Verizon’s footsteps, which bought Yahoo in July, a year after acquiring AOL/Huffington Post.

AT&T and Verizon form a duopoly in the wireless distribution business today, controlling 67.5% of the market, with Verizon leading the market by about three percentage points. Remember that term duopoly and the market share domination stat; we’ll return to it below.

Both “phone companies” took their cue from Comcast, which bought full control of NBCU more than three years ago. That deal reversed the conventional thinking, which ran thusly: Why mess with all the vagaries of running content-producing companies when distributing everyone’s content was proving so profitable?

Comcast’s dream of becoming a media company – the aspiration of those who know the business only from afar – whetted industry appetites. The consolidation was on, and we believe, if the market winnowing doesn’t get upended by regulators, will now pick up further speed. Plenty of media companies, feeling the hot breath of Netflix and Amazon, will take the money and run, if they can, as Time Warner CEO Jeff Bewkes has been angling to do for a long time.

In the world digital disruption has created, the trick has for more than a decade been to own the pipes rather than the water they carry. That “water”? That’s “media”, that vast expanse of news, information, movies, music, books, and entertainment, now globs of content to be monetized, the culturally rich nuances between and among all of those necessarily obliterated by the force of digital business models.

It’s a world where business models have become quite uniform. What I can sell you for under $10? What can I bundle for you? If I can sell you this at a loss, or narrow profit, my analytics tell me how much more stuff you’ll buy from me – at a much higher margin.

Quite by historical accident, the power of the pipes has overwhelmed content-producing companies, with the pipes companies increasingly dictating the terms to the media-creating companies. It’s an historic imbalance found in every trade from newspapers and magazines to books and music.

(The biggest anomaly: the massive “retransmission” fees paid by cable TV providers to broadcast TV channels to carry their programming on their services. We have good reason to wonder how secure those revenue streams will be in just a few years – another massive shift in the industry that is best set aside for now.)

Let’s be clear, this isn’t just a matter of legacy companies – AT&T and Time Warner, in this case – mating. Comcast, through NBCU, hedged its bets by investing heavily in Buzzfeed and Vox Media last summer [“NBC-U and the ‘digital dozen’ seek perpetual youth”]. It’s a matter of the pipes companies putting in their sights all manner of “content” companies.
Then, there’s the flipside of pipes power, that other duopoly formed between Google and Facebook. The 85% number has been quoted so many times this year it’s become a cliché. That’s the percentage of new digital ad dollars that the combination of Google and Facebook take this year in the U.S. The new money is great, but it’s their underlying dominance that’s more noteworthy. Together, the two take about 64% of the total U.S. digital ad market, with their shares clearly growing each year.

So, there’s the pipes parallel, and it’s a striking one. In their spheres of business, the two sets of duopolists look amazingly alike.

Verizon and AT&T command the wireless marketplace, as smartphones become adjuncts to our brains, with 67.5% share of the market.

Google and Facebook command 64% of the digital ad market – the ad type that will surpass TV this year to become the leading ad type in the U.S., with a market value of $72B.

So the approaching question of pipes supremacy becomes a near-universal one across all sectors of the media industry, as the companies that provide us access to the goodies of the (digital) day overwhelm all others with their financial power.

The road ahead for approval of this mega-deal is a long one, likely to last well into next year. As we’ve watched regulators (and laws made for 20th century technology) try to deal with this question of market domination in the digital age, we’ve seen a fair amount of futility. The old rules, ones written with some bipartisanship and efforts at common sense, no longer apply, and those in power have been largely unable to respond with the kind of nuance or political objectivity that understanding of the new terrain requires.

How do we think about the question of bigness and consolidation? It’s absolutely clear that modern technologies drive hyper-efficiencies, and the rationale for business leaders is very much based on that logic.

The societal good is the tougher question here.

It’s worth breaking down Time Warner into its parts to examine that question. Time Warner now contains three groups. Warner Bros. is a major film and TV producer and distributor; HBO is its own group, and under TW management has maintained its edgy, boundary-breaking work over the years. It is the third division, Turner, which poses the biggest question in the news world.

CNN fits into Turner. Long underestimated by print journalists, the 4,000-strong organization is a major player in news in the U.S. and worldwide. When it allows itself to wallow in superficiality, it is maddening, but in this Trump-challenged media year, it’s shown some courage, calling out outright lies.

AT&T has already pledged to keep CNN “autonomous” and to not interfere with its journalism. That only makes sense, economic and otherwise.

Yet, we can paraphrase a recent Nobel winner: “Autonomy, who really cares?”

The fact is that having fewer and fewer companies with ultimate news-deciding authority mitigates against a free press.

In the voluminous arguments to come, political nonsense will enter. The likelihood, though: This biggest issue here isn’t the probability of a conservative or liberal slant. That issue is corporate cautiousness, as all companies’ aim is to reduce risk.

At some point, inevitably, national and world events will test the resolve of CNN’s independent work, or HBO’s truthful storytelling or (TBS’) Samantha Bee’s in-your-face hilarity. Push will come to shove, at some unpredictable point in the future. The phone companies will find themselves confronting issues they never imagined, as the bright glint of media fades from their eyes. And that will test their inherent cautiousness.

Ted Turner put the journalism DNA into CNN, and it has survived there, sometimes unevenly, for 36 years. Time Warner may be an entertainment (and formerly an entertainment–cable company, pre-split), but it’s a media company. Leadership has known what that means in terms of basic journalistic standards. Being a leading news player sometimes means having the cojones to stand up to the unexpected bad hombres who come out of nowhere.

With a Trump-like President in the White House in future years, or a Pentagon Papers-like existential challenge, do you think the new Ma Bell is likely to willingly put itself at risk? That’s the difference between a journalism company, or a media company sufficiently grounded with some journalism DNA, and all the many other kinds of companies that may savor the notion being a media company.

Not today, and maybe not tomorrow, but some day, the challenge will come, and we have no idea how the then-AT&T management would respond. Of course, that’s worst case – but we’ve got to build, and support, our best news media for the worst cases. We can sense how appallingly close we’ve come to worst cases this very year amid news-media assaults and threats of lawsuits.

Further, “autonomy” doesn’t buy a promise of resources. Corporate owners budget resources – the journalist jobs and the tech to support them – and that’s another key here, as regulators noodle the case.

Ironically, that’s also the best journalistic case for an AT&T takeover, and we can borrow it from Verizon’s AOL buy. Verizon’s deeper pockets have bought AOL executives more time to get their business and product models right. Yes, the stress of media companies living quarter to quarter on challenged financials is taking its toll as well, and it would be foolish not to acknowledge that cost. The phone companies can provide a financial buffer – but at what longer-term risk?

Finally, there’s the question of why the pipes companies play Follow the Leader here in buying media companies.

“Now you think about the new world we’re in of video, we feel really strong that we are going to have a competitive cost structure, a best-in-class cost structure around the largest element, and that’s content,” AT&T CEO Randall Stephenson said last month.

Video. Cost structures. Content. The mantras of the day.

But what will that mean? The mind reels at all the ways a carrier like AT&T could advantage itself with its own owned content (well-described here by David Z. Morris in Fortune). For consumers, wireless bundles that included a deal on an HBO subscription would make a lot of business sense, and certainly AT&T would love to treat its “data” differently from competitors’ content it would distribute. There, though, regulators could tie the company up in knots, citing issues surfacing in Comcast’s short history owning NBCU. It is exactly that strategy – call it illegal favoritism or smart business – that will slow down or kill this deal.

So there are undoubtedly real synergies, and imagined ones. There’s also fashion. When your pipes competitors are buying media, you’re going to do it, too. The market may expect it.

CEO Stephenson believes he can’t miss the next supposed wave of plenty: “mobile video”. That, along with AOL CEO Tim Armstrong’s ad machine, drove Verizon’s purchase of AOL. And yet we have to wonder how big that wave will really be as research show Millennials preferring reading text to video, and the video market showing some signs of slowing.

In the shorter term, though, these phone-centric pipes companies need revenue growth. Their core businesses are mature. The saturation of phones, cord cutting and the inability (so far) to turn Triple Play service packages (TV, Internet, phone) into Home Runs have limited revenue growth. As consumers, we provide AT&T and Verizon surpassing cash flow. But investors want growth.

Randall Stephenson’s buy of satellite player Direct TV has brought that kind of growth more recently, but he needs more (“AT&T quarterly results give hints on urgency behind Time Warner deal”).

As big maturing companies stumble on revenue growth, there’s one universal cure: Keep buying companies and year-over-year revenue growth is assured, for those who don’t look too closely at the “same property to same property” results. (In the daily newspaper world, Gannett’s serial acquisitions have served that purpose well.)

Stand a distance from this deal, and you can pick your prism. Are the AT&Ts and Verizons, as media virgins, likely to mangle the management of these new properties, and end up divesting themselves of them down the road? Is our concern about this concentration, this bigness, absolutely well-placed, or alarmist? How do we assess the impact on this kind of deal of the asymmetrical business warfare led by the Amazons, Apples and Netflixes for customers and cash flow?

We may even hear of new efforts to separate out “distribution” from “creation,” a revival – by resurgent Democrats? – of a digital Glass-Steagall Act.

In the old world, good walls, and fences, we’re told, made good neighbors. Now, in our digital lives, we loathe fences, and want to pass through our digital doors as effortlessly as possible. That’s the invisible driving force of the age, and as much in evidence here as the age-old capitalist appetite for deal-making.

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