AT&T-Time Warner: The Big Questions Surfacing Over the Megamerger

AT&T chairman/CEO Randall Stephenson has unbridled, even infectious, enthusiasm for the potential of the marriage of the company he leads to Time Warner. To ease fears about the size and market power of the combined firm, Stephenson went so far as to codify his promises of what AT&T will and won’t do in a “Magna Carta” declaration distributed last week to the telco’s employees and investors.

“We entered this transaction for many reasons, but those reasons all boil down to one thing — we want to get the most content to the most people at the lowest prices, delivered on any screen, particularly mobile,” Stephenson wrote. “We are convinced that this merger will change the game in video by bringing innovation and investment to a media industry that is begging for both and to consumers who want a better video experience.”

Stephenson’s communiqué and a flurry of declarations from AT&T last week expressed the company’s promises to do all the right things, from a regulatory and consumer perspective. It vowed to protect the editorial independence of Time Warner’s CNN, to abide by all net neutrality regulations with its wireless networks, and to protect consumer privacy in its Big Data harvesting efforts.

Stephenson, an Oklahoma native, turned on a bit of folksy charm in trying to assure investors and Time Warner employees that he has no illusions of becoming a studio mogul overnight and displacing TW executives. “I know nothing of how to run a movie studio,” he told CNBC.

Stephenson even surprised the industry on Oct. 25 by unveiling a low $35 price point for the DirecTV Now streaming service, offering 100-plus channels. Previous indications were that the long-in-the-works OTT package would focus on quantity of channels rather than a skinny-bundle price tag. But that was before AT&T had a megamerger to guide through choppy waters in the Beltway.

Sen. Al Franken, D-Minn. — who was a forceful voice in the campaign against the failed merger of Comcast and Time Warner Cable in 2015 — was among the politicos who came out swinging against AT&T-TW. He cited the sheer size of the company the merger would create and the likelihood that consumers would pay more, not less, for video and wireless services. Even more unnerving to AT&T’s troops has to be the comment by Hillary Clinton that the deal “raises questions and concerns.”

AT&T has emphasized that the merger is a vertical integration of companies in distinct businesses, à la Comcast and NBCUniversal (which merged in 2011), as opposed to a horizontal deal of direct competitors attempting to grab more market share, à la Comcast-TW Cable.

But one area that was a roadblock for Comcast-TW Cable at the FCC and Justice Dept. could prove a big impediment to AT&T as well: The FCC decided that the fact that Comcast would have the technical ability to exclude OTT rivals (read: Netflix) or programming competitors from access to its cable pipes was enough to block the deal, regardless of what Comcast’s intentions were. (In the months since the TW Cable deal went south, Comcast has effectively become a Netflix distributor by incorporating the company’s app into the content navigation system of its latest set-top box.)

AT&T would have the capability to exclude content and services from rivals into its wireless mobile network, which counts 144 million subscribers worldwide. The presumption is that AT&T would have more incentive to do so as the owner of Time Warner than it would at present as the owner of DirecTV, which licenses channels from a range of providers. If the question of capability regardless of intent remains a mantra for regulators, that could be a big headache for AT&T and Time Warner.

“Once they get into the content business, they have an incentive to disadvantage content competitors,” says Jeff Blumenfeld, an antitrust attorney at Lowenstein Sandler who formerly worked in the Justice Dept.’s antitrust division.

Another flashpoint could be the data usage limits that AT&T’s wireless plans impose on consumers. Regulators will likely zero in on the potential for AT&T to favor its own assets by excluding viewing of Time Warner content from the usage limits, giving consumers more incentive to binge-watch programs on HBO or TNT than on Netflix or Hulu. AT&T already excludes viewing of authenticated streaming content via DirecTV from its usage caps.

AT&T, unlike cable broadband providers, does not have an unlimited option for its high-speed data services. That may change, as the company emphasizes its plan to roll out the more technologically advanced 5G wireless technology over the next few years.

Stephenson and Time Warner CEO Jeffrey Bewkes have hit the ground running to sell the benefits of the merger. At every turn, they have emphasized the deal’s ability to harness the assets of AT&T, DirecTV, and Time Warner to make the multiplatform world more seamless, less expensive, and more whiz-bang for viewers and content owners alike.

Wall Street analysis of the deal was more sober about the potential for innovation but recognized that the Time Warner assets would provide much-needed diversification for AT&T at a time when its core wireless business is fraught with challenges. Of course, that diversification will come at a price, hiking AT&T’s debt load to $170 billion-$200 billion, a leverage ratio to 3.5 times annual earnings for at least one year.

Perhaps the most comforting news AT&T and Time Warner received during the eventful first week of their engagement was the note issued by Moody’s debt rating service. It raised a slew of questions, but it didn’t set off a five-alarm fire. “AT&T’s plan to acquire Time Warner so soon after its [2015] purchase of DirecTV is a somewhat defensive strategy that gives more power to AT&T to mold the pay TV industry evolution in its own favor,” Moody’s wrote. It also noted that AT&T and Time Warner combined could stockpile $10 billion in cash to help pay down debt during the time it takes to secure regulatory approval of the deal.

Ted Johnson contributed to this report.

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