The Los Angeles Times called to ask about the contested merger between AT&T and Time Warner. Here and below is a provocative op-ed:
Sounding like heroes from the Justice League, U.S. Department of Justice officials announced that they will swoop in to protect Americans from economic predators and fight for their right to watch Game of Thrones. They will do this by trying to block AT&T’s proposed merger with Time Warner. But like Game of Thrones, the government’s case is set in a world of medieval fantasies, rather than the real law and economics of Hollywood.
The Department argues that if AT&T consummates its $85 billion purchase of Time Warner, the combined firm would “use its control of Time Warner’s popular programming as a weapon to harm competition… [which would] result in fewer innovative offerings and higher bills for American families.”
The case is remarkable because old Hollywood players and new media entrants like Hulu, Amazon, and Netflix are erecting studios, signing up talent, and working at a furious pace to create new programs for consumers. By invading the traditional market, they are splintering almost everyone’s power as they chase after the roaming eyeballs of fickle viewers. We imagine more than a few cable and studio executives have rushed to the emergency room at Cedars-Sinai complaining of chest pains and “cord-cutting.”
Consider: In 1970, the NBC Bob Hope Christmas Special attracted nearly two-thirds of television viewers, and his jokes were stale even by 1970 standards. When the president of the United States gave a speech, you could not escape – every channel showed his face. Because only a handful of channels existed. In 1983, 77 percent of televisions tuned in to a single show –the last episode of M*A*S*H. These days a big hit like Big Bang Theory grabs 2 percent of the audience.
We are living in the “Golden Age of Television” precisely because of the explosion of talent, platforms, and venues for viewing entertainment. The number of scripted series has jumped over 40 percent since 2010. Some consumers may complain of too many choices; channel surfing is difficult when the remote can jump through 500 selections. Further, this Golden Age must compete with non-television offerings. The League of Legends video game championships attracted 43 million streaming viewers last year. That is why, for all the critical acclaim, cable companies earn only about $7 a month when they offer HBO, which distributes Game of Thrones.
In this climate, is it likely that AT&T will be able to jack up the price of viewing Time Warner shows? If Time Warner programming were really “must-see TV,” Time Warner would have already raised prices to maximize profits. Merger economics teaches us that monopolists curb their output in order to boost prices. For example, when an airline dominates a city, it may cut back the number of available seats. But why would AT&T want lower ratings for television programming? Would fewer viewers allow it to raise prices?
Even before Star Spangled controversies hit the NFL, Wall Street analysts began worrying about declining ratings for ESPN, which suggest a more fragmented and fickle audience. The fact is talent, not the name of the television channel, commands the premium. Brilliant writers and showrunners like Shonda Rhimes, Greg Berlanti, and Tina Fey have more choices than ever, as Rhimes’s recent deal with Netflix suggests. Compare this to the era when Jack Warner called writers “schmucks with Underwoods.” Actors have more choices, too. Remember the iconic 1943 MGM photo of sixty-five famous contract players, including Jimmy Stewart, Katharine Hepburn, and Gene Kelly. MGM claimed to have “more stars than the heavens,” but those stars had no power to sign new deals with new studios.
The government’s case is weak enough that we wonder whether officials made an innocent mistake, like Gilda Radner’s hard-of-hearing character on Saturday Night Live who denounced “violins on television” and proposals to make “Puerto Rico a steak.” Are merger critics mixing up Time Warner cable (already sold to Charter Communications in 2016) with Time Warner programs? It is true that if AT&T had bought the cable company, that would have been a “horizontal merger,” a marriage of direct competitors, which could push up consumer prices. But AT&T is buying programs, a “vertical merger.” For the past 30 years, the government has approved vertical mergers (including Comcast’s purchase of NBC), and a wide-ranging Journal of Economic Literature study of businesses from motels to soft drinks to shoes concluded that the burden of proof should fall on those who want to block them.
Six hundred years ago, some medieval wag probably called Gutenberg’s printing press “new media” and tried to jam the screw and slow it down. We would encourage Department of Justice officials to step out of the past and leave the fiction and medieval fantasies to, well, television.