AT&T-Time Warner Merger Will Help Fund 5G

The AT&T-Time Warner merger is needed to help fund the deployment of 5G technologies, which will be both extremely costly and harder to achieve as a result of the primary focus of regulators in recent years.

A vertical merger between AT&T and Time Warner (not Time Warner Cable) shouldn’t be a big deal since for the most part neither firm competes with one another. Time Warner produces film and television content, and AT&T helps deliver it to consumers. Newspapers and television (cable and broadcast) have combined content and delivery for years.

Sen. Ron Wyden (D-OR) nevertheless fears that such a merger “could dramatically increase the use of broadband data caps and zero-rated content.” In his view, AT&T will have an incentive to treat Time Warner-produced video preferentially, by exempting it from data usage caps.

Exempting certain traffic from data caps is becoming common throughout the mobile wireless industry. It saves consumers from having to pay overage fees. It possibly could be viewed as anticompetitive if it were practiced on an exclusive basis, but AT&T allows any company the option to pay for the same service.

Data caps, Sen. Wyden added,

are artificial limits on how much data can be used in a month, to squash competition and gouge consumers under the unconvincing guise of limiting network congestion.

Data caps are a practical application of the principle that the more one consumes the more one should pay. They make Internet service more affordable for customers who consume less of it by charging heavy users a higher rate that better reflects the costs their heavy usage imposes on the network. Data caps allow companies like AT&T to offer predictable monthly bills that many consumers prefer, to the majority of their customers.

Unlimited data plans will make more sense as viewing habits converge — i.e., when the vast majority of customers use their Internet connection both for Web browsing as well as for streaming high definition video to roughly equal degrees — provided there is enough network capacity for all traffic to travel at an optimal speed. This is the purpose of the AT&T-Time Warner merger.

AT&T anticipates that by 2021 it should be able to go “head-to-head” with cable operators using fifth-generation mobile wireless technologies under development now.

“Where today’s wired and wireless networks force customers to choose EITHER high speed and capacity OR mobility,” observed Chairman Tom Wheeler of the Federal Communications Commission in September, “5G’s promise of gigabit mobile connections at any location will open up hugely disruptive new value propositions for the users of networks.”

But 5G will require massive private investment. One analyst estimates that AT&T will need to expand it’s network from 70,000 to around one million cell sites. Time Warner will provide a new stream of revenue that will help offset the cost.

For the past several years, regulators have been promoting more price competition in the mobile wireless marketplace. This was the rationale for blocking both AT&T and Sprint from acquiring T-Mobile in 2011 and 2014, respectively. “The evidence suggests that T-Mobile is the primary competitor on price. It provides the pricing discipline for the other carriers,” a government lawyer commented in 2011. If T-Mobile had been acquired, the “maverick competitor” would have been eliminated.

T-Mobile started an industry price war beginning in early 2013 by introducing a series of pricing innovations that included the elimination of two-year contracts with early termination fees. Prices have declined 9% on average throughout the industry in that time, but some of the profits that fuel capital investment have also declined. Whereas annual capital investment increased 21% between 2010 and 2012, it fell 4% between 2013 and 2015.

Though well-intentioned, the policy of the regulators to promote price competition at the expense of capital investment has had unintended consequences — it may delay the “hugely disruptive new value propositions” that 5G portends, and it provided the incentive for AT&T to make a bid for a company like Time Warner.