Troy Wolverton: AT&T-Time Warner deal bad news for consumers

By Troy Wolverton

The Mercury News

(TNS)

When two giant companies merge to form an even larger company, it’s best to watch your pocket book. As much as such combinations may make sense to the executives who construct them, they’re rarely good news for consumers.

That truism applies in spades to AT&T’s proposed acquisition of Time Warner. Announced last month, the prospective combination — which would be one of the biggest mergers in history — threatens to lead to higher prices, less competition and even more tracking of consumers’ online activities.

“The history of these deals shows they’re not good for users,” said Craig Aaron, CEO of Free Press, a consumer advocacy group.

For their part, AT&T and Time Warner executives counter that the deal will benefit both the companies and their customers. They say that merger would actually bring consumers more competition and lower prices.

“Anybody who characterizes this as a means to raise prices is ignoring the basic premise of what we’re trying to do here,” AT&T CEO Randall Stephenson said last week at a technology conference sponsored by the Wall Street Journal.

Whatever Stephenson’s intentions, there are good reasons to believe prices will in fact go up as a result of the deal.

Perhaps the biggest reason of all is the sheer amount of debt AT&T already has on the books and how much more it’s likely to take on if it buys Time Warner. As of the end of its most recent quarter, AT&T had $117 billion in long-term debt. To put that in context, the company had less than $6 billion in cash on hand at the end of the most recent quarter and had generated only about $14 billion in free cash so far this year after accounting for investments.

And that debt load will swell if the Time Warner transaction goes through. The Hollywood studio owes $23 billion in debt itself, an amount that would be added to AT&T’s books. What’s more, AT&T plans to use cash to pay for about half of the $85 billion purchase price for Time Warner, and that cash would come by taking on even more debt.

All told, the company’s debt total could be around $180 billion by the time the deal is over.

What’s that mean for you and me? Well, AT&T’s going to be under intense pressure to pay down that debt burden, and there are only a few ways it can do it. It can sell assets. It can cut costs, such as by firing employees or reducing the amount it spends to maintain and expand its network. It can try to roll out new products or services. Or it can raise prices.

It’s a good bet that whatever other options AT&T chooses, that last one will be part of its strategy. Just months after AT&T completed its acquisition of DirecTV last year — and took on a bunch of debt to do so — it raised prices on both its own and DirecTV’s pay TV services.

“It’s a simple matter of dollars and cents,” said Todd O’Boyle, a program director at Common Cause, an organization that promotes civic engagement in the political process and good governance. The deal “is going leave AT&T so heavily leveraged that consumers are going to end up footing the bill,” he continued.

But the deal also could affect competition. To hear AT&T and Time Warner executives tell it, there’s nothing but good news on this front. Unlike some other recent merger proposals, this one wouldn’t involve a company buying a direct competitor, so neither the number of big telecommunications companies nor the number of Hollywood studios will fall as a result of it. Meanwhile, executives argue the deal will help AT&T create a nationwide pay TV service that’s delivered over its wireless network that would offer a strong competitor to local cable monopolies.

But AT&T already offers a nationwide pay TV competitor in the form of DirecTV. And competition could be harmed even if it isn’t buying a rival.

By buying Time Warner, AT&T would be acquiring popular channels like HBO and TBS and a valuable film library that includes movies like Harry Potter. The company would have every incentive to tie its control of those video properties to its pay TV service and wireless network. In markets where its only rival in pay TV is the local cable monopoly, for example, it could potentially limit HBO to only its own service, giving it a huge leg up. Or it could charge prices for its channels that rivals couldn’t afford.

Similar incentives could also affect the market for internet-delivered video. AT&T could potentially give Time Warner’s movies and video offerings a boost by treating them differently than those from Netflix or HBO. For example, it could decide that data used to stream HBO Go won’t count toward the limited amount of bandwidth its internet and wireless customers get each month while that used to stream Netflix would. Arch-rival Comcast, whose acquisition of NBCUniversal five years ago served as a template for this deal, already does something similar.

“It’s clear that the combination of content and distribution creates all the wrong incentives,” said O’Boyle.

If that’s not enough, there’s another thing that’s likely to lose out in the deal: your privacy. In announcing the deal, the companies made clear that one of their motivations was the potential to gain new insights about their combined customers to better target ads to them.

“Our TV, mobile and broadband distribution and direct customer relationships provide unique insights from which we can offer addressable advertising and better tailor content,” Stephenson said in the statement announcing the deal.

In plain English, the combined companies will not only have a better ability to see what you are doing online, when you use your phone or when you watch TV, but they’ll be keeping track of all of it.

The companies want to join together “to gather a host of information about each and every consumer,” said Jeff Chester, executive director of the Center for Digital Democracy, a consumer privacy advocacy group. “This is all about tracking and targeting us regardless of whether we use a mobile device, PC or TV.”

After the deal was announced, public officials across the spectrum expressed skepticism and, in some cases, outright opposition. Let’s hope they follow through on their tough talk. Because from where I’m sitting this deal looks bad for all of us.