Commentary by Grimes and Sagers: Regulators Approve AT&T’s Acquisition of DIRECTV — A Step Backward for Competition

In a brief one-page announcement, the Chairman of the Federal Communications Commission  announced that he has circulated an order to the Commission calling for approval, with conditions that sacrifice competition for difficult-to-enforce regulation, of AT&T’s acquisition of rival DIRECTV. In an even shorter three-sentence statement, the head of the U.S. Department of Justice (DOJ) Antitrust Division announced that the acquisition would “not pose a significant risk to competition” and would not be opposed.

The agency decisions are short sighted. They will ensure a world of less competition and more regulation. Because competition is by far the best way of assuring meaningful choices, effective service, and low prices, the decisions are bad news for consumers.

When a merger this large is proposed, the deck is stacked against vigilant enforcement. The firms and their top executives have invested reputation and tens of millions of dollars in putting the deal together. The private lawyers representing the firms, often attorneys who were former enforcers, stake their reputations on getting the deal done.

The regulatory agencies tend to be risk averse. They often prefer to negotiate a settlement that at least partially addresses competitive concerns rather than risk a resolute stand protective of competition that could be attacked in court. More often than not, what ensues is compromise that sacrifices the public interest. Compromise in maintaining competition cannot be an acceptable way of enforcing the antitrust laws, particularly in a critical industry such as telecommunications.

Of course, the telecommunications industry today is nowhere near the competitive ideal. The 100 million subscribers to cable TV pay ever-increasing monthly fees for enormous bundles of channels, only 17 or 18 of which the average household watches. Roughly half of the revenue goes to pay for sports programming that most viewers don’t watch. Meanwhile, cable cord cutters (or those who never subscribed) are increasingly turning to Internet streaming.

Some Americans, however, have no access to high speed Internet. Most do, but have only one or two choices for this service. That’s not adequate competition. The same firms that distribute cable programming are also providing Internet service. They are raising prices on Internet service in an effort to make up for some of the loss from those who shun the highly inflated costs of a cable subscription.

A competitive telecommunications industry would provide meaningful choices to consumers, including multiple firms offering: (1) access to cable TV programming; and (2) high speed access to the Internet. In addition, the noxious channel-bundling practices would end, allowing consumers to choose what they want to purchase. Consumer sovereignty would not necessarily lower costs for everyone. But competition, not abusive conduct by power-wielding firms and not government regulation, would best ensure the proper mix of programming and the proper distribution of wealth.

The conditions that the FCC would impose on AT&T are a decidedly mixed bag, and a clear step toward more regulation, not toward more competition. For cable TV subscribers, there is a clear loss. For any consumer currently served by AT&T’s U-verse cable service, the deal will decrease by one (typically from 4 to 3) the number of available distributors. That undermines consumer choice and makes lock-step packaging and pricing by distributors all the more likely. In a modest way, DIRECTV has been a force for independent packaging, refusing, for example, to carry the Pac-12 network and saving a $2 monthly fee that otherwise would have been forced on subscribers in the western United States.

The FCC would require AT&T to expand its fiber optic network to include 12.5 million potential subscribers, allowing each a possible second choice (beyond their cable carrier) for high speed Internet access. This is a positive step, given the increasing reliance of Americans on high speed Internet access. There is, of course, an irony in having a regulator “order” more competition. Competition ordered by regulation is industrial policy. There is sound reason to wonder how genuine that competition will be when AT&T did not choose that route, arguably one that has long been available to it.

There re already millions of Americans that have two choices for high speed Internet access, and most have found that prices for Internet service continue to climb as the two rivals price in lock step. Meaningful competition almost certainly requires more than two choices, and the settlement offers no promise of achieving that.

In other respects as well, the decree is a step toward more regulation. The FCC would place further restrictions on AT&T to make sure that it does not discriminate against non-affiliated video providers. Any data caps on video providers would have to apply equally to all firms. AT&T would also be required to report to the Commission any interconnection agreements. And an independent “officer” would be appointed to ensure compliance with these conditions.

Absent from the decree are any steps that would genuinely allow smaller distributors to compete. There is no requirement that AT&T wholesale at competitive rates an unbundled high speed Internet service.

FCC Chairman Wheeler says the Commission’s “strong measures will protect consumers, expand high-speed broadband availability, and increase competition.” Any competition that will result from the regulatory decree will be comfortable, oligopolistic pricing and service that will enhance AT&T profits. Yes, some regulation can increase competition, but the history of government regulation is laced with examples of evasions and abuses.

Even well meaning regulators are inevitably many steps behind the firms who are the targets of regulation. The historic AT&T divestiture in 1982 came as a result of former Assistant Attorney General Baxter’s conviction that the vertically integrated firm would continue to abuse rivals and consumers by favoring its own affiliates.

How quickly we forget.

**Warren Grimes and Chris Sagers are Senior Fellows of the American Antitrust Institute and co-authors of the forthcoming third edition of Sullivan, Grimes, & Sagers, The Law of Antitrust: An Integrated Handbook.