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Troy Wolverton: AT&T-DirectTV deal poses threat to consumers

May 11, 2015


AT&T’s bid to buy DirecTV has been floating under the radar, drawing neither the scrutiny nor the scorn of Comcast’s recently abandoned proposal to buy Time Warner Cable.

But that doesn’t make the deal any better for consumers.

AT&T’s proposal to acquire DirecTV has been in the shadow of the Comcast deal ever since it was announced a year ago, on the heels of Comcast’s proposed tie-up. That’s starting to change. Now that the Comcast-Time Warner deal is off the table, regulators, consumer groups and others have begun to turn their focus to the AT&T merger. Earlier this week, for example, Netflix submitted a letter to the Federal Communications Commission urging it to reject the deal "as currently proposed."

Such sentiments may be too little and too late. If the reports and rumors coming out of Washington are true, federal regulators are likely to wrap up their review of the AT&T-DirecTV merger soon, and are likely to approve it.

That would be a grave mistake. Having allowed way too much consolidation in the past, regulators should be pushing for more competition in the telecommunications market, not acquiescing to less.

Less competition is exactly what you’d get if AT&T and DirecTV are allowed to merge. In the Bay Area, the two companies compete head-to-head for pay-TV customers, and we’re not alone. AT&T offers video services to more than 20 percent of the households in the country; in pretty much all those areas, which include major markets like Los Angeles, Houston and Chicago, DirecTV is a competing option.

But the combination of AT&T and DirecTV could have bigger implications on the pay-TV market than simply reducing the competition by one player. As Netflix pointed out in its letter to the FCC, the merger would give the combined entity — which would be the No. 1 pay-TV operator and the no. 2 Internet provider in terms of subscribers — both the means and the motivation to throttle competition from Internet-delivered video services like Dish’s Sling TV, Hulu and Netflix itself.

And that’s not a theoretical concern. AT&T, Comcast and Verizon all throttled Netflix’s service in 2013 and 2014, making it difficult for consumers to watch high-quality videos from it, in a bid to pressure Netflix to pay for its connections to their networks. As Netflix noted, AT&T took part in the throttling even before it had a dominant national pay-TV network to defend and even though it could arguably have won broadband customers from Comcast by promising a better Netflix connection.

Reportedly, regulators are focusing far more on how the pay TV market might evolve in the future than what’s happening right now. There’s some speculation coming out of Washington that regulators might try to impose conditions on the merger that would attempt to protect competition from online video providers.

But that focus on how the market may play out ignores a thorny reality. The vast majority of American households — well more than 80 percent — still subscribe to a traditional pay-TV service; one that’s delivered by a cable company, a satellite provider or a telephone company.

For all the talk of cord-cutting over the last several years and for all the millions of people who have signed up for Netflix, the actual number of people who have shut off their pay-TV service in favor of an online-only offering has been minimal — about 0.2 percent of households in the last two years, estimates Bruce Leichtman, who closely covers the telecommunications industry for Leichtman Research Group. For most consumers, the online options still really aren’t a true substitute for a traditional pay-TV service.

The prevailing sentiment in Washington seems to be that regulators can address the merger’s potential harms by simply imposing some conditions. But what we’ve seen from past deals, such as Comcast’s acquisition of NBC-Universal, is that those conditions are often hard to enforce and rarely achieve their policy goals.

In evaluating deals like this, regulators look not only at potential harms but also at the potential benefits from the deal. And here, AT&T is dangling a huge carrot: The company says that the cost savings it will see from merging its business with DirecTV’s will allow it to extend its high-speed broadband network to millions of additional households. That’s almost certain to tempt regulators at the FCC, where increasing broadband penetration is one of the agency’s primary policy goals.

But it’s highly likely that AT&T will expand its broadband network no matter what happens to its deal with DirecTV. With Google’s competing Fiber service going into new cities and Comcast bumping up its speeds in many of the cities that AT&T serves, the company is under pressure to invest in its broadband service no matter what.

So the regulators ought to just flat-out reject the merger. Any potential benefits it may offer to consumers are questionable at best, and the potential harms are all too certain.

 

 


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