The Washington PostDemocracy Dies in Darkness

The epic technological transition that explains this year’s spate of tech mergers

(Joe Raedle/Getty Images)

Insiders are calling it "merger mania."

First came Comcast's announcement in February that it intends to buy Time Warner Cable: a massive deal that would turn the nation's largest cable company into — well, the nation's largest cable company by a longshot. Then this month, AT&T declared that it was looking to buy DirecTV, potentially making AT&T a much bigger player in the world of television. For consumers like you and me, these deals would change the face of media forever and have huge implications for the Internet.

For the regulators tasked with approving these proposed deals, it means a heck of a lot more work — and we haven't even gotten to the rumored acquisitions that are still waiting to be unveiled. Sprint is widely expected to make a bid for T-Mobile this year, as part of an effort to take on Verizon and AT&T. And the nation's second major satellite TV operator, Dish Network, will probably try to find a buyer too, before all this is over, analysts say. 

Now is an amazing time for mergers. Not just because they're all happening at the same time, but because they're taking place amid a grand convergence of all media onto a single platform: the Internet. Voice, video, data — sooner or later, it will all be carried over broadband. These companies know it. And they're preparing themselves for the epic slugfest ahead.

Everything will be bits

In "The Idea Factory," Jon Gertner's history of the famous AT&T research division called Bell Labs, we learn what made the first communications satellites possible: a unique combination of new technologies, each its own prerequisite. When researchers finally mastered the transistor, the solar cell and microwave communications, they were able to put it all together and create Telstar 1, which ushered in a new boom in global connectivity.

Something similar is happening with the Internet. We're fast approaching the point at which multiple Web-related technologies reach maturity, enabling another major leap. While exciting, it also means the companies behind it will be forced to deal with each other in new and complicated ways.

One area where this is playing out is in the cellular market. Mobile data is getting faster and faster all the time; Sprint believes that with the right investments, LTE speeds could reach a mindboggling 200 megabits per second. (For comparison, in 2012 mobile broadband speeds averaged 2.6 Mbps.) Selling Internet access is going to be a key part of the wireless industry's future — and the graph below helps explain why:

Wireless carriers are making less and less money selling their traditional product — voice service — and an increasing amount of money selling mobile data. If Sprint gets its way, mobile data will eventually become a real, viable alternative to fixed broadband.

Even as the wireless business moves more into broadband, the cable industry is eyeing a lateral jump into the wireless business. Comcast, for example, could someday join the likes of T-Mobile and Sprint by launching a cellular carrier of its own. Phone calls placed on the network would be treated as data (much like a Skype call) and routed over Comcast's growing network of Wi-Fi hotspots. As a customer, you'd only pay for cellular service where you couldn't find Wi-Fi.

"This could be a game changer," said Craig Moffett, a telecom analyst at Moffett Nathanson. "That's an overused, hackneyed phrase but in this case, it's warranted. I don't think you can overestimate just how big a deal this could be."

On some small carriers already, Wi-Fi calling can cut monthly prices to as little $5 a month, down from the $100 or so most of us are accustomed to paying for cellular voice and data. While questions remain about Wi-Fi calling's reliability, it's got a bright future over the long term. 

The pipes that carry broadband traffic, meanwhile, are about to get a lot bigger, too. AT&T in particular has its eye on this trend. Part of the reason it's buying DirecTV is because it wants to take DirecTV's content and serve it to customers over wired broadband and wireless LTE.

So wireless is converging with broadband. Cable is converging with wireless. And data-intensive video will increasingly be available on all three.

Everyone's watching each other

When you step back and look at how many companies stand to be affected by this convergence, it's a little staggering. There are four major national wireless carriers, five cable companies with 4 million subscribers or more, two top-tier satellite TV providers, and thousands of local, over-the-air television stations (including five major commercial networks).

Media and telecom companies are racing to snap up firms that could give them an edge in this new Internet era. It's as much a move to snuff out would-be rivals as an effort to fill new capability gaps that have opened up as a result of the broadband convergence. (Fifty years ago, phone company execs would probably have scoffed at the suggestion that they ought to be in the video business.)

Standing at the intersection of content, broadband and wireless technologies, the cable industry stands to be affected most, according to some analysts.

"The entire cable television market is in the process off reinventing itself," said independent analyst Jeff Kagan. "Cable has been a stable, growing business over the last several decades. But in the last several years, you have new technologies breaking into this space, winning their customers and changing the definition of entertainment. Watching television on TV is just one slice of the pie now."

This is how we get deals like the Comcast-Time Warner Cable merger, a $45 billion deal that would put Comcast in about a third of all pay-TV households. Many view the Comcast agreement as a follow-on acquisition to a bid the cable giant made in 2011 for NBC Universal. That deal was all about content: Among NBC Universal's holdings are the Universal film studio, cable channels such as MSNBC and CNBC and other lucrative programming. With the Time Warner Cable merger, Comcast would be able to distribute that content far more widely. A more powerful Comcast would result in substantial consumer benefits associated with scale, the company's executives argue. Critics say the deal would give Comcast too much power in its negotiations with other companies.

Regulators at the FCC and the Justice Department must decide whether to approve the merger. Analysts say they are likely to weigh not just the merit of that deal and its impact on the market but its relationship to the other acquisition on the table: AT&T-DirecTV.

AT&T is looking closely for signs from regulators about the likelihood of Comcast getting the approval it seeks, according to analysts. If the FCC strikes a skeptical tone, it could mean a much harder fight ahead for AT&T, too. One point in AT&T's favor? If regulators approved a Comcast agreement, then AT&T could argue that its purchase of DirecTV would better position it to compete against an even larger cable giant.

Could consolidation beget more consolidation?

Overseeing one merger is hard enough. But the addition of AT&T-DirecTV means regulators must now do a lot more to justify their positions on either merger — which will also affect the prospects of as-yet unannounced deals.

If they rule on each deal differently, regulators will need to explain what distinguishes one from the other. If they come to the same conclusion, they'll need to develop a theory as to what unites them.

That the lines separating once-distinct industries are blurring only draws greater attention to the connections across proposals.You could argue that regulators should rule one way on Comcast-Time Warner Cable and another way on AT&T-T-Mobile, because they're different deals: one is a simple merger between two cable companies while the other involves a phone company leaping into television. At the same time, you could also argue that regulators should rule based on the idea that both deals will affect the pay-TV market in powerful ways. Or you could argue for a judgment based simply on the number of major companies that will be left competing in pay-TV after the mergers. Depending on the standard you use, you might arrive at radically different conclusions.

Whatever justification the regulators settle on will need to be applied consistently to any future mergers still to come this year. And there likely will be more, analysts say.

"Everybody is trying to get through the door at the same time," said Daniel Berninger, a network architect and analyst at the Washington-based Voice Communication Exchange Committee. "Nobody wants to be left out without a dance partner."

Sprint has made little secret of its interest in T-Mobile, and some analysts believe it has a higher chance of approval if it can leap atop the pile of other proposals. So far, however, the FCC seems skeptical of a Sprint-T-Mobile merger, in part because it would involve going from four national providers to three.

But remember how Comcast was hinting it could enter the wireless market? If it were really serious about such a move, the cable company might wind up strengthening Sprint's argument for buying T-Mobile, if it could demonstrate that Comcast's entry would preserve the four-carrier system. This is something of a long shot. Still, it's an indication of how subtly these proposals are related to each other.

Regulators are at risk of being overwhelmed

Different forms of communication are increasingly combining over broadband. Broadband technologies, some of which used to be faster than others, are themselves finally reaching parity. That's put the companies that provide the technologies in new competitive positions. But it also puts new demands on federal regulators who are being asked to predict how entire industries are likely to behave given one, two, three or more moves on the regulatory chessboard.

"Since the 1996 Telecom Act onward, it's just been a narrative of policymakers scrambling to keep up with technological change and market shifts," said Jeff Silva, an independent telecom analyst. "It's hard to predict the future. No one can do it."