By Greg Ip
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (March 22, 2018).
In the 17 months since AT&T Inc. and Time Warner Inc. announced their merger, here is what their internet rivals have been up to: Amazon.com Inc. won three Oscars, Hulu won the coveted Emmy for best drama, Netflix Inc.'s market value surpassed Time Warner's, and Facebook Inc. was ensnared in an electoral manipulation probe.
You wouldn't know this from lawsuit the Trump administration has filed to stop the AT&T-Time Warner merger. The suit, which went to trial this week, seems conceived in a world before the internet became a gigantic petri dish for video content.
This isn't a trivial omission. At the heart of every antitrust case is the potential for a company to hurt its competitors and consumers through its dominance of a market. If old media such as Time Warner ever possessed such power, it is ebbing fast as the clout of new media grows.
The Justice Department will win if it can persuade the court that the merger's effect is "significantly to lessen competition," an inherently uncertain and subjective judgment. Yet the economic test is more straightforward: For AT&T to exercise monopoly power in the sale of content such as HBO and CNN, alternative suppliers of content must face steep barriers. Those barriers are falling.
Since 2005, University of Minnesota economist Joel Waldfogel has shown, plunging prices for high-end digital cameras slashed the cost of producing high-quality filmed entertainment, leading to an explosion in the volume of new movies with no loss of quality. Meanwhile broadband internet has provided a distribution alternative to movie studios, television networks and cable. Since 2009, the number of original scripted series produced by online houses such as Amazon, Netflix and Hulu has soared from one to 117, now accounting for a quarter of all U.S. studio-produced series.
Online video is also quite "sticky": Subscribers spend an average of 124 minutes a day on Netflix, compared with 96 minutes on Comcast properties (including NBC) and 46 minutes on Time Warner channels, according to Steven Cahall and Mark Mahaney, analysts at RBC Capital Markets.
They attribute this in part to their relatively high quality: For every dollar of customer revenue, Netflix spends twice as much on content as its next closest competitor. The analysts conclude Netflix has plenty of room to raise prices. The stock market seems to agree: In 2009 Netflix, then mostly still a distributor of disks by mail, was worth 8% as much as Time Warner in 2009; it's now worth 84% more.
The Justice Department argues that a combined AT&T-Time Warner will have both the incentive and the ability to charge rival distributors, both traditional and internet-based, more by threatening to withhold content. AT&T says this is ridiculous: Cutting off other distributors would cost it dearly in lost revenue, and its leverage is minimal, because "an expanding array of content sources" means no content is "genuinely essential for any given distributor."
The Justice Department largely dismisses that prospect. Such mistrust of free-market dynamism is unusual in a Republican administration, particularly one that prides itself on taking the shackles off business. It is also strikingly at odds with the Justice Department's fellow Trump appointees at the Federal Communications Commission. Last year the FCC rolled back "net neutrality" rules that had barred internet providers from charging more for faster access to their networks.
The commission concluded that net neutrality discourages internet providers from experimenting with different business models or expanding broadband capacity. That is what the antitrust suit may do, if AT&T's rationale for the merger is taken at face value. By delivering its content over AT&T's wireless network, Time Warner would, as Amazon and Netflix now do, gain valuable insight into subscribers, which it can use to improve its offerings. That isn't feasible with Time Warner's existing model, AT&T says.
"AT&T's overriding economic objective is to encourage consumers to use its networks, no matter whose programs they watch," the company adds. If owning Time Warner accomplishes that, its network becomes more valuable -- and encourages it to expand.
More than just economics, of course, hangs over this trial. President Donald Trump, no fan of CNN, opposes the merger for, he says, concentrating too much media power in too few hands. The Justice Department says that played no role in its decision to sue, but the claim still resonates, on the right and on the left.
Yet blocking mergers to preserve political diversity gets dicey fast: Whose voices should be preserved? What degree of cross-ownership is permissible: should Verizon Communications Inc. be allowed to own Yahoo, or Walt Disney Co. to control FiveThirtyEight? What if cross-ownership preserves otherwise financially fragile political voices?
If you're worried about monopoly power over political speech, there may be more fruitful places to look. According to the Pew Research Center, 43% of Americans get their news from social media and news apps, more than do from network, local or cable television. Online platforms like Google and Facebook are closer to monopolies than any old media counterpart. And as the revelations over the use of Facebook data in political campaigns shows, they can be weaponized in ways television never was.
Write to Greg Ip at [email protected]