The AT&T and Time Warner Merger Explained in Layman’s Terms

In Featured, Industry Insights, James Powers by Impact Admin

– By James Powers –

Last week saw the arrival of one of those Big Important News Items – you know, the sort of thing that you hear a lot of vague references to for about a week, and during that week you’re like “hmm I should really go to a Reliable News Source and see what this Big Important News Item is all about,” but then you never do and it turns out you’re none the worse for it. Well anyway, one of those happened last week, and it’s definitely the sort of thing that a pop culture enthusiast is prone to ignore. But it’s also definitely the sort of thing a pop culture enthusiast should know about, even if it’s all about appellate courts, antitrust laws, corporate structures, industry integration, and all that other blah blablah blablaaaah.

I’m talking specifically about the big fat merger between AT&T and Time Warner that finally managed to get out of court and into the real world last week. Time Warner is a key player in this whole thing, so we can automatically intuit that the kerfuffle has some sort of bearing on film and TV. If you keep up with Variety or The Hollywood Reporter you’ve probably seen a few headlines about it. But for most of us, the legal red tape surrounding a corporate merger is just not interesting enough to merit reading about. But guess what I’m gonna try and get you suckers to do? Read about this Big Important News Item and think about what it means for the world of film and TV – because it potentially could mean a great deal.

Ok so what happened?

In brief, as you probably recall hearing, last year AT&T and Time Warner tried to join forces in a huge merger. AT&T has been a telecommunications juggernaut since basically forever, being one of the nation’s largest providers of cable and Internet and mobile data and I don’t even know what else. Time Warner is a media conglomerate that owns CNN, HBO, and Turner Sports, which holds broadcast rights to both NBA and MLB games, as well as March Madness and (for your boring rich uncle) the PGA Championship. Since both companies are so gigantic, and therefore merging them is likely to have major economic repercussions, the government got involved. Specifically, the Department of Justice claimed that the merger violates federal antitrust regulations – a series of laws put in place around the turn of the century, when big corporations first started to become a thing, to keep them from becoming too much of a thing.

We all learned about this in US History back in 10th grade, but I know I had mostly forgotten about it until a business course last year reminded me. So we’ll get to that in a second. But long story short – after lots back-and-forth and mountains of paperwork, the final verdict from Judge Richard Leon of the DC district court is that the DOJ is overreacting, the merger is actually a good idea. So now AT&T has officially absorbed Time Warner, rebranding it WarnerMedia. And…lots of people have lots of feelings about the whole thing.

Why all the drama?

The first thing to note is that the AT&T and Time Warner merger is an example of vertical integration. This is notably different from the horizontal integration that tends to lead to monopolies, and that antitrust laws are therefore very quick to shoot down. If Coca Cola decides to buy Pepsi, and Pepsi agrees to the merger, then that means that pretty much the entire beverage industry is suddenly on the same team, since the two biggest competitors are now one. And theoretically, this is bad news for soda drinkers everywhere: now that Coca Cola has monched Pepsi, it no longer has to worry about winning customers’ loyalty over Pepsi, which reduces their overall drive for excellence as a brand. Hence why nobody likes monopolies (of course, in this fictitious example, Dr. Pepper would undoubtedly rise up and show SuperCoke what’s what because it is in fact far superior to both Coke and Pepsi, but I digress…).

As I mentioned above, however, the vertical integration that AT&T and Time Warner are going after is a bit different. The two companies are not direct competitors, but they’re still closely connected within (broadly speaking) the same industry. Basically, they’re different steps on the same assembly line, that of entertainment. Time Warner creates content (news, sports broadcasts, sitcoms, TV dramas, feature films, etc) and AT&T controls a huge pipeline through which that content is distributed (data, internet and cable infrastructures). It’s more or less like the relationship between manufacturer and vendor. Vertical integration isn’t usually seen as a threat to a competitive market because it technically doesn’t take any players off the field – there’s still the same number of big telecom companies and big content creators after this merger as there was before, so there’s still healthy competition going on. This is why, historically, the government hasn’t tried to block vertical integration all that much. The theory is that having the same player in multiple games isn’t a problem. If anything it’s hard on the player.  

A highly sophisticated economic metaphor

But what’s different now? Well, to keep using the game metaphor, I think the issue is that the tech/media landscape has been looking more and more like Calvinball lately than any recognizable sport – the rules keep changing, which makes it pretty hard to referee. Or at least, it makes it pretty hard for an organization as slow and cumbersome as the US government to referee. The boundaries of what entertainment is (and how it’s delivered) have been shifting crazily in the past decade, and so it’s kind of understandable that when two hUgE companies in that industry decide to pull a dramatic merger, the DOJ is gonna get spooked, even if they wouldn’t have worried about such a thing in the past.

So what does all this mean?

But was the DOJ right to be spooked? In suing AT&T and Time Warner, were they actually onto something, or were they just trying to flex? The realistic answer is that only time will tell – by federal court standards, this is all very uncharted territory. But there are two general possibilities for how the new merger could play out, and I have a rough guess as to which is more likely.

In Scenario 1, AT&T and Warner leverage each other’s strengths to basically fight dirty and squash a lot of smaller, more innovative companies Netflix, Amazon and Sling. This is what has the Department of Justice (and Mr. Patel) is afraid will happen.

Alternatively there’s Scenario 2, where these titanic companies choose to play more by the rules – specifically, rules that have recently been rewritten by their newer and smaller competitors. Disney is kind of trying out this approach already with the imminent launch of their own streaming service – which may or may not beat Netflix at its own game.   

Scenario 1

Let’s look at Scenario 1, where AT&T and WarnerMedia become a Godzilla and scorch all the little guys off the map. Nilay Patel of The Verge argues for this outcome in his exhaustive and often-hilarious roast of Judge Leon’s decision, asserting that it was based on fundamentally wrong assumptions. Basically, Leon sees the merger as a necessary concession to allow these older, larger companies to keep up with the younger and nimbler competition. What’s special about Netflix, for example, is that they produce their own content and distribute it. Which makes them – guess what – vertically integrated! So, Leon concludes, why shouldn’t AT&T and Warner be able to do the same thing? Well, Patel says, the problem with that conclusion is that they’re really not the same thing. Netflix and Amazon may distribute their own content, but in order to do so they depend on, you know, the Internet. And guess who controls a huge chunk of infrastructure for the Internet?

Yup, AT&T. Mwahahaha. So if WarnerMedia has AT&T’s infrastructure at their behest in a way other media companies do not, well…you can start to see the problem. And by the way, WarnerMedia has HBO, which is arguably the single most successful TV network at the moment. So AT&T could make HBO shows available on their own networks exclusively, and use that as bait to lure customers to their data plans and away from Verizon’s or T-Mobile’s. Conversely, if HBO is prioritized over other content creators on AT&T’s networks, then AT&T customers will start to tune into HBO more than Netflix or Amazon. These are just a couple of the possible unfortunate outcomes, but you can already see what a tangled mess it is.

And this all seems probable enough; Internet providers like AT&T can technically get away with such stunts now that net neutrality is no longer a thing. So suppose they try it. Suppose that AT&T starts giving WarnerMedia an unfair advantage on its cable, broadband and data networks, and consequently Joe Schmo starts streaming HBO more than Netflix because it’s cheaper and easier. Joe Schmo uses HBO pretty much just for movies; now that Game of Thrones is over (this is in the near future fyi) he’s not really interested in any of their shows. Although their libraries are different, both Netflix and HBO have a wide array of features available, so Mr. Schmo doesn’t really care which service he has.

Meanwhile, however, Jane Doe is a longtime AT&T broadband customer, and she’s really hyped for Season 3 of Stranger Things, as is pretty much everyone at the nerdy Catholic film school she attends (again guys, near-future). When AT&T suddenly makes HBO cheaper to stream and Netflix more expensive (and therefore Stranger Things less accessible), Ms. Doe is mad. Not necessarily enough to switch providers, cuz that’s a big hassle, but definitely enough to start talking smack about AT&T to all her friends. Turns out her friend Joan is sick of T-Mobile and is trying to figure out where to switch, and when Joan hears Jane go off about AT&T, she knows one thing for sure – definitely not them!

Now take both of these anecdotal examples and multiply them across the country. The question of whether or not AT&T/Time Warner can successfully make Scenario 1 happen depends, very roughly, on whether there are more Joe Schmos or Jane Does in the overall consumer base. I’m no market analyst, so I can’t say for sure, but I think a lot of us have become so accustomed to such a broad array of content that we wouldn’t take it well at all if our provider started playing favorites with what content we could or couldn’t access. Most of us, I think, are more like Jane Doe. And unless it’s an airport convenience store, a business can’t afford to make its customers that mad, not en masse. So while Scenario 1 is still a theoretical possibility, it strikes me as unlikely – and that leaves us with Scenario 2.

Scenario 2

The details of this one are a lot murkier, but to make it a little more clear, recall that both WarnerMedia and AT&T are well-established, old companies, founded under business models that, with some adaptation, have proved successful for a pretty long time. But in the past 10-15 years, radical change has exploded across media and telecommunications and challenged established models. Scenario 1 has these legacy companies fighting back, re-asserting their dominance and putting the brakes on this innovation. Scenario 2, however, has them trying to adapt instead, opting to play the game under its rewritten rules rather than trying to enforce old ones.

And when I look at Scenario 2 as the merger’s intended endgame, I think it makes more sense than Scenario 1. AT&T has already proven itself quite adept at evolution – it would not have survived the last 20 years otherwise – and Time Warner, feeling the pinch as streaming starts to encroach on both their cable channels and their box office receipts, recognizes it as a valuable ally because of that.

So – FINALLY – what effect should we expect all this to have on content, on movies and TV and the ever-proliferating panoply of web-based whatever? Well…I don’t think it’s going to slow it down. I really doubt that Scenario 1 will happen and snuff out the “little” (lol) guys like Netflix. Instead, we’ll probably see WarnerMedia working extra hard on mobile and web versions of their cable and TV networks, until those same networks finally phase out of cable and TV altogether. AT&T might start offering streaming bundles – eg Hulu, Netflix and HBO for one monthly rate. It’ll be horrendously expensive at first, but soooo convenient. And eventually – gulp – Warner Bros. might start releasing some of their feature films to theaters and streaming on the same day. Then we’ll look back on the whole Roma snafu and laugh.

And I think, with the support of huge and powerful companies behind it, the streaming revolution of the last decade will soon settle into the new norm. Which has dramatic implications for how our stories are told. It makes a difference, a big one, whether you encounter a story as a novel, an essay, a song…a 10-minute webisode, an hour-long drama, a 90-minute feature. A generation raised on theatrical films and vinyl records will view the world differently than one raised on Netflix benders and Spotify, never mind what the respective movies and music are about. We’ve been in a state of flux in our narrative norms for a solid decade or more now. If AT&T and WarnerMedia stake a claim in the new landscape, rather than trying to preserve the old one, it might mean that the flux is over and the new era is officially here.

In the meantime I’m just curious to see what HBO does with themselves after Game of Thrones finally ends…

About the Author

James Powers is currently earning his MBA in Film Producing at JPCatholic as a member of the class of 2019.

For all articles by James, click here.