By Andrew Lippman

Why Antitrust Makes Me Dizzy

Two recent federal actions, each taken alone, are unhealthy prescriptions–but taken together they are fatal. Neither net neutrality nor the Time Warner/AT&T merger are good things, but how is it that no one has looked at what they mean as a pair? The merger decision allows content to be combined with carriage, which, along with the loss of net neutrality, opens the floodgates for delivery discrimination. Let’s consider each component in turn, then in ensemble.

The basis for antitrust law is prevention of harm to the consumer due to lack of competition.

The basis for antitrust law is prevention of harm to the consumer due to lack of competition. This dates from the Clayton Act, and as we all know, is written broadly and vaguely enough to be still useful 104 years after its passage. Most often, this is applied to horizontal mergers where direct competitors combine.

Vertical mergers are between different components of an industry. They are far less frequently contested, for several reasons: In some cases they improve efficiency and are therefore beneficial to the consumer. For example, Fruehauf (a trucking company) and Kelsey-Hayes (a brake company) combined in 1973, to make better trucks (or so we should believe). In other cases, it’s just a no-op—the impact on the market is assumed to be nil. Of course, there are also rare cases where they are simply prohibited; my favorite is the 1948 US Supreme Court opinion in Paramount v US that split movie theaters from movie-makers. It is instructive.

Before the Supreme Court decision, Paramount movie companies owned the theaters–and the actors, and the cameras, and the writers, and the directors. If you are old enough, you remember the elegant, Depression-era Fox or Paramount Theaters. Those palaces showed only Fox or Paramount movies, bought in bulk and with an allocation determining how much went to the property owner versus the company. The result was a steady stream of Hollywood movies released on schedules optimized for the studios, and predefined shorts that preceded them.

Onscreen was a Norman Rockwell America. Vertical ownership gave us a continuous stream of movies but only small art houses carried foreign fare. Godard, Mizoguchi, and Bresson were not available in Duluth. And the Hayes Commission’s censorship kept everyone sleeping in twin beds. No small-scale startup could upset the applecart, change the agenda, or challenge your thoughts, beliefs, or heroes. Panacea for an oligopoly: immunity from outside threats, with innovation strictly under control. A perfect example of the combination of content and delivery.

The principle of net neutrality is that the Internet should be regarded as a common carrier—open to all bits on a non-discriminatory basis. 

The principle of net neutrality is that the Internet should be regarded as a common carrier—open to all bits on a non-discriminatory basis. There is a lot of smoke and mirrors about how that will stifle innovation and reduce investment, but there is no there there. It is speculation and innuendo, viz., the claim that common-carriage law (which is very old law) has no relevance to the modern Internet, or the vague threat that a carrier will not perform if hobbled by consumer-friendly restrictions.

Here the situation is a bit different from movie theaters. Because the carriers operate by dint of a public franchise, they have de facto monopolies. You can always buy real estate to open a new theater, but it is not feasible to dig up every street to become a new wired broadband provider, nor can you buy spectrum that is not for sale. The big players, a duopoly of Verizon and AT&T, own the airwaves with Sprint and T-Mobile struggling to stay alive. If you don’t believe this picture, consider that when financial manipulations like buyouts are the only path to survival, then you know the industry is immunized against technical or operational novelty. That’s the situation facing T-Mobile and Sprint.

Now let’s look at the bigger picture with respect to net neutrality and Time Warner/AT&T. First, we combine content and carriage, a supposedly harmless vertical combination, then we abandon control over carriage. Applying transitivity to this, we have just remade the 1942 movie industry: Time Warner content and its delivery is squarely under the control of one party. Nothing prevents AT&T from being the only place where CNN is available at whatever rate they choose–just like the Fox Theater.

Admittedly, this is an imaginary future. There is no reason to think that situation will actually come to pass. It is far more likely that CNN will still be widely available, even though AT&T could throttle competitors on its networks or prohibit others entirely.

But here’s where I get dizzy. AT&T’s argument for the merger was that studios are facing competition from Netflix, Amazon, et al. In what universe does that make sense? The mere threat of competition in the content industry doesn’t support the argument that those industries should merge with a carrier. How does combining carriage and content provide a better consumer universe or level the playing field–unless they intend to use their position to limit consumer choice via a non-neutral network? Would we let Macy’s or Nordstrom buy UPS because they are facing competition from Amazon?

Remember the twin beds and lack of foreign films (except in small art houses…). Well, today, the equivalent is outside intruders. Take that to mean Internet-based behemoths who know that media is a juicy market. Forget your animosity towards Silicon Valley newcomers for a moment and consider that the spicy fare that is now available on your screen is what made their intrusion work. In the era of three networks where was the Breaking Bad, the Westworld, or the Stranger Things?

In other words, we’re back to pure pap. Nothing that could alienate or challenge the massest of the mass market. Don’t get me wrong–I am not a fan of the half-truth fringe news outlets or those that merge commentary with reportage. But I am a great fan of their right to exist. The way to combat them is not to manipulate them out of existence, it is, simply, to outdo them at their own game. No matter how much I like CNN, I don’t want to structurally entrench them in the market by dint of their AT&T ownership. That obviates the people’s first amendment right to hear a diversity of information (as said by Byron White in Red Lion).

The only rationale for a carrier to want to own the content is to return to the era of movies in the 1940s: to own the audience and guarantee a market for its content against all comers. And that only happens when vertical media mergers and the end of net neutrality are combined. That’s the big picture. It’s not about your wireless or cable bill, it’s about your right to learn. The cost to you? You’ll never know what you are missing.