AOL Time Warner Should Not Capture AT&T's Cable warns AAI

Contact: Albert A. Foer, 202-244-9800
Date of Release: December 6, 2001




"When the Board of Directors of AT&T assembles this weekend to consider whether to download its cable business, one prediction ought to be accepted outright: a deal that puts AOL Time Warner, the second-ranked cable company, in control of the first-ranked cable company, will be fought vigorously by the nation's consumer and antitrust advocates," said Albert A. Foer, President of the American Antitrust Institute, an independent non-partisan education, research and advocacy organization.

According to reports, three companies have made offers to AT&T - Cox Communications, Comcast Corp., and AOL Time Warner. The latter is not only the largest cable operator, it is also the world's largest media company. From an antitrust point of view, there are two principal concerns: discrimination against rival content providers seeking access to the cable and monopsonistic buying power that ultimately reduces diversity of programming. In the near term the effect will be felt most directly in the multichannel television market, but as data flows increasingly through cables to the home and businesses, it will have a large impact on high speed access to the Internet.

The question of non-discriminatory access arises frequently in the telecommunications industry. Before AOL merged with Time Warner, it was a strong advocate of mandatory fair access to AT&T's cable. Although AOL lost its commitment to this position when it no longer had to worry about access to cable (because of Time Warner's holdings), fair access was indeed the centerpiece of the FTC's terms and conditions for permitting that merger. In other words, the issues are already quite familiar to the industry and to law enforcers. Simply put, if there is a company that contains both a large part of the nation's cable capacity and also a large part of the capacity for creating and assembling content that is brought to the consumer through cable, the company has both the ability and the motivation for pushing its own programming through the conduit and either excluding other content providers or putting them at a competitive disadvantage by discriminating in terms of pricing or quality of service.

The potential for vertical harm is amplified by the horizontal market power the merged company would have. In many antitrust cases, the problem is that the merger will create a horizontal overlap in local markets. This is not much of a problem here, as cable companies tend already to have local monopolistic franchises. (That is, this merger will not create local monopolies.) But the all-important programming-the product that is transported on cable-- tends to be purchased centrally, so the fact that the merged company would have in the neighborhood of 40% of the national market, combined with its monopoly control over numerous important metropolitan media markets, would yield tremendous buying power vis a vis content providers, including both mighty players like Microsoft and Disney and also, most especially, the independent sector. In effect, the merged company would have both the power as the leading buyer to push down the price it will pay for content and, the power to give advantages to its own in-house content providers.

The likely result would be to reduce the amount of programming that is put into the marketplace, and this would ultimately mean less diverse content for viewers. In some cases, the exercise of buying power can lead to lower prices for the consumer, if the buyer participates in competitive markets. But when it comes to cable, the consumer is nearly always faced with a monopoly. (As satellite TV, with around 15% of the total market today, increasingly competes with cable, there is some hope that competition will change this, but even now there is the threat that EchoStar will be allowed to purchase DirecTV, leaving only one satellite provider.) The cost savings found in paying below-competitive prices to program providers will therefore likely be enjoyed by shareholders of the merged company rather than passed to consumers.