What the AT&T-Time Warner Merger Might Mean

The last two years have been characterized by horizontal mergers in the PayTV/Broadband industry.  And, with the exception, of the Comcast-Time Warner Cable (TWC) deal, regulators have approved them.  Looking forward, this may be the year of the vertical merger, partly out of mutual necessity, partly due to the fact that there are few horizontal pairings left that regulators would approve.       

Video distributors and content owners need each other.  So, when AT&T, one of the largest distributors of content (via PayTV, broadband and wireless) brings content in house, the concern is that competitive content providers (e.g. Viacom, 21^st Century Fox) will be disadvantaged, particularly in terms of access to customers.  In recent years, carriage disputes between distributors and content owners have become more commonplace and nastier.  A vertically-integrated distributor with a large national footprint increases its leverage in these negotiations.  (Comcast bargains from a much stronger position than Altice USA (Cablevision).)  Could this merger stem the tide of rising programming costs that are largely to blame for higher cable bills and cord-shaving/cord-cutting?  Doubtful.  What is certain?    Lower prices, more choices, and innovation will come from more competition, not less.  The good news is that consumers are “going outside the box” and getting content from indirect competitors.  The reality, however, is that those competitors still need to get to customers via the pipes controlled by the likes of AT&T and Comcast.  (Note: Google Fiber is slowing its expansion.)

Another risk is in the other link of the supply chain.  It could be argued that competitive distributors (e.g. Charter, Verizon) could be withheld access to the vertically integrated media giant’s content at reasonable prices.  For regulators, this was one of the major concerns with the Comcast-TWC merger.  AT&T’s strategy of increasing its breadth with its DirecTV acquisition before its vertical stretch into content may have been in consideration of what went wrong for Comcast, a vertically-integrated firm (with valuable NBC Universal content) trying to expand its subscriber base.  

The Street