AT&T, the nation's second-largest wireless carrier, is buying Time Warner, the storied media titan that owns HBO, CNN and TBS. In an unprecedented step, the deal is going to combine a gigantic telecom operator — which also happens to be the largest pay-TV company — and a massive producer of entertainment content.
It means that for millions of Americans, AT&T will control both the pipes of distribution and much of the shows, movies and other content that travels through the pipes. It's hard to overstate the significance of this move, both in terms of scale and in terms of the ripple effects this will have on Hollywood, the cable industry, the cellular industry and the broadband industry.
In other words, AT&T may be about to own a huge trove of some of the most recognizable names in media. This is a big moment, because anytime you watch anything owned by Time Warner, that'll be money in AT&T's pocket. It'll put AT&T in direct competition with companies such as Netflix and Amazon, giving it a big incentive to use its content and distribution platform as leverage against them. And it could spur a frenzy of other acquisitions, driving even more consolidation in the industry.
Does this mean there will be more options with Time Warner's cable packages?
Whoops — you're probably thinking of Time Warner Cable, which is actually an entirely different company.
Time Warner, by contrast, is almost purely a content business. You don't buy cable service from them. It may help to think of the two by their stock symbols: Time Warner goes by TWX, and Time Warner Cable went by TWC — until April, that is, when TWC sold itself to Charter Communications.
OK, so AT&T is going to be massive. Does anyone think this is a bad idea?
The deal is already drawing loud protests from politicians on both ends of the ideological spectrum, at a time when national conversations about inequality have made critiquing large businesses a matter of populist appeal. U.S. lawmakers are already calling for an antitrust hearing on the issue.
The reaction from business analysts seems mixed; while many agree that buying up content is a natural move for telcos in an era of rapid convergence, some, such as Craig Moffett of MoffettNathanson, say it has only a 50-50 chance of succeeding with regulators.
As for the presidential candidates — who by appointing government officials will help shape the regulatory bodies charged with overseeing the deal — both appear wary of letting AT&T get what it wants too easily. Donald Trump has said he'd try to block the deal. Hillary Clinton "certainly thinks regulators should look at it," according to spokesman Brian Fallon. Reviewing the acquisition will likely be the Justice Department and possibly the Federal Communications Commission. More on that below.
What kind of content does Time Warner actually own?
Take HBO for example. Underneath the HBO umbrella are shows like "Game of Thrones," "Westworld" and "True Detective." Got HBO Now? The $15 a month you pay could soon belong to AT&T.
Do you watch CNN for coverage of missing planes, political debates and enormous hurricanes? All the ad revenue will go toward AT&T's bottom line.
Ever log onto the Bleacher Report for sports news? Read anything in the DC Comics universe? Play the "The Witcher" series of video games? Watch the Harry Potter films, or the "Lord of the Rings" films, or anything else produced by Warner Bros.? AT&T wants to own all of that stuff.
Whoa. So AT&T would have a huge role in media and entertainment.
Precisely. From the creative process at Time Warner to the production of content to the distribution and marketing of that material to consumers, AT&T would be a major player from start to finish. It'd involve some new costs for AT&T — it's never been involved in content production like this — but the company is betting it can recoup those costs many times over.
In two main ways. First, it wants to make AT&T's wireless network the best place to find all of Time Warner's content — and lure in customers that way. Americans are shifting a huge amount of their entertainment consumption to mobile screens. If AT&T can get its tablet users to stream HBO Now as opposed to content it doesn't own, AT&T effectively gets paid twice: Once for the use of cellular data, and once for the subscription revenue from HBO. Extend that across all of AT&T's 133 million cellular connections and numerous content sources it'll own through Time Warner, and that's a lot of new potential revenue.
Second, it'll earn even more money by studying its customers' content consumption. Because AT&T collects a ton of data about how its customers use its services, that behavioral information could help AT&T sell targeted ads that are more lucrative than standard advertisements. With Time Warner's assets, AT&T will learn even more about people's preferences.
What will this mean for competition and choices?
Here's where it starts to get really interesting. AT&T could charge other companies for the rights to air, say, "Inception" on their networks, or for the use of the Superman brand. Left unchecked, AT&T could abuse this power and force other Web companies, other cable companies, other content companies or even consumers to accept terms they otherwise would never agree to.
This is why AT&T's deal will receive close examination from federal regulators. If things go the way Comcast's purchase of NBCUniversal did in 2011, AT&T's deal could be approved if it agrees to several conditions aimed at making sure the deal doesn't harm competition.
What might those conditions look like?
Hard to say; they're usually specific to the deal. But they could, for example, ban AT&T from saying to consumers, "Look, come to our wireless service and we'll let you stream as much HBO as you want at no charge." Or it could try to disadvantage its competitors' own content on AT&T's platform. Regulators may conclude that these kinds of arrangement could disproportionately hurt AT&T's rivals.
There is a twist to this, though: Some antitrust experts say that in order to impose the most effective conditions, the FCC has to be involved in the review. It's not entirely clear, however, whether that will be the case here. That's because the FCC only reviews acquisitions in which there are assets at stake that it regulates. In this case, Time Warner owns just one TV station in Atlanta that it could easily spin off, excluding it from the deal and effectively cutting off the FCC's jurisdiction over the acquisition.
Because the FCC is better equipped to create limits and continue to monitor anticompetitive business practices from AT&T — as opposed to the Justice Department, which generally looks at the makeup or structure of a deal — losing the FCC from the process could weaken the government's ability to ensure that adequate competition is preserved.
If the outcome is so hazy, why is AT&T proposing the deal now?
Any deal like this is going to attract scrutiny, no matter what. And with network operators like Verizon and Comcast increasingly buying up content, the race is on to acquire the best content — and quickly. The more consolidation occurs, the harder it may become for deals to be approved. Besides, the sooner AT&T makes the deal, the sooner it can hope to start making money off of Time Warner's assets.