AT&T DirecTV Proposed Merger Raises Questions

With surprisingly little public reaction, on May 17, 2014, the American Telephone and Telegraphy Company (AT&T) and DirecTV (colloquially known as “Dish”) announced plans to merge. This would unite the country’s second largest terrestrial (ground-based) telecommunications provider and the largest direct broadcast satellite (DBS) operator. The new entity would have about 27 million video subscribers nationally—though only five million of them would be able to deliver interactive, “on demand” two-way programming, through AT&T’s U-verse system. The new company’s largely one-way subscribership would be slightly smaller than the newly expanded and largely interactive Comcast’s 30 million. But the on demand capability may be far more important than the total customers, for antitrust and regulatory purposes.

Expansion by merger is hardly new for AT&T. Less than two years ago it proposed buying T-Mobile cellular, only to be persuaded gently by the Department Justice that this would be an invitation to a massive litigation. T-Mobile was a straightforward merger of two telephone carriers. But the currently proposed merger’s combination of broadcaster (regulated under Title III of the Communications Act) with a cellular common carrier (regulated under Title II of Communications Act) may create additional issues. It was precisely the FCC’s application of Title II to non-carrier (broadband carriers) which led the D.C. Circuit in Verizon Corp. v. Federal Communications Commission (D.C. Cir 11-1355 January 14, 2014) to strike down the agency’s “network neutrality” rules at issue there. Similar issues may arise with the proposed merger, as to the FCC’s potential regulatory power over it.

Despite any analogies to Verizon, there appears to be no limitation per se on a DBS system being owned by a common carrier. An old and some opaque D.C. Circuit decision, National Association of Broadcasters v. FCC, 740 F.2d 1190 (D.C. Cir. 1984) approved FCC authorization of direct broadcast satellites for on-demand pay programming—and was not concerned with the fact that the broadcaster’s parent company was COMSAT, a classic common carrier. (The finances of the proposed operation turned out to be questionable, and it never was built.)

Most mergers or acquisitions, of course, generally involve transactions in the same or similar product markets—e.g., the Comcast acquisition. For that reason, the proposed AT&T/DirecTV situation is somewhat unusual, since it involves a broadcaster/Title III and a common carrier Title II entity on different sides.

This creates some problem in analyzing the antitrust impact of the transaction, in terms of product markets and firms’ market power. Without a clear or at least accepted definition of markets, it naturally is impossible to estimate what share of any relevant market is controlled by any firm.

AT&T basically has been a point-to-point common carrier for more a century—transmitting first audio, then data, and more recently video—for example, its on demand U-verse system. Today’s AT&T naturally is no longer the monolith that its first president, Theodore Vail, cobbled together at the end of the 19th century to send low-quality telephone conversations. After the divestiture of the old AT&T in 1984, the transmission business was bought up at a fire sale price by SBC, a very traditional telephone carrier.

The old AT&T kept very closely to its roots in the telephone business. Some historians have documented that the old AT&T routinely rejected what it viewed as risky or questionable businesses—including color television and two-way video transmissions (to be known as “Picturephone”).

Over the the last decade, new applications have combined video, voice, and data through the migration to digital transmission. Upscale computers and mobile services today, of course, routinely provide traditional telephone conversation, text and other data, and video. The digital migration also has been a game changer in another way; almost all of these “new” technologies routinely are available on demand—as evident from the large number of new Internet networks. This enables a wide variety of uses, such as programming on demand, interactive audio (or telephony), video and/or audio gaming. Under the old analog system, virtually none of these applications was possible. AT&T offers on demand services only to its five million U-verse subscriber; DirecTV offers it to none.

One possible product market would be any form of digital video, voice, or data—including cellular telephones, computers, tables, “the Internet of things” and many other products. Under this approach, AT&T probably would not be a dominant firm, because of the large number of other technological applications and industry providers.

On the other hand, when founded a little over two decades ago, DirecTV basically offered almost exclusively one-way video and audio transmission. The basic satellite technology and architecture make interaction virtually impossible. For the same reason that direct broadcasting satellites can offer much lower consumer rates than either cable television or fiber optic terrestrial (ground-based) lines, they are technologically incapable of providing interactive services. Since DBS must be in an orbit of 22,300 miles above the earth, in order to stay over the same terrestrial area, it is prohibitively expensive to switch a transmission from one customer to another. DBS has an extremely large bandwidth—enough for hundreds of high quality digital video signals and hundreds of millions of audio circuits. But there is no economically feasible way for a terrestrial customer to transmit a signal back up to a satellite and then down to another user. (Satellite phones exist and are used by journalists, of course, most notably in war zones; but the basic hardware costs several thousand dollars and service is similarly expensive.) In addition, the round trip from even the best satellite telephone to a terrestrial location takes up to one-half of a second, creating poor fidelity and awkward delays.

For the same reason, no cost effective technological way exists for consumers to interact with broadcasters to order individual programming in an “on demand” mode. As with terrestrial broadcasting, DBS customers can watch a program only at the time and on the channel designated by the broadcaster.

At first glance, the proposed merger looks very similar to the recently approved Comcast transaction. Both would result in rough 30 million subscribers and provision of high-quality digital programming. And because of DBS’ much wider coverage than terrestrial broadcasting or cable—almost 40 percent of the Earth’s surface—the new firm arguably could offer affordable, competitive rates. But this leaves out DBS’ inability to provide interactive communication.

DBS thus may live in a totally different market than terrestrial cable or fiber systems, because of its inability to provide either traditional telephony or on-demand programming. Under this approach, there would be at several different markets: (1) interactive material; (2) traditional schedule-driven programming; and (3) hybrid systems with partial on demand capability, such as Comcast.

If this bifurcated market were accurate, AT&T and DirecTV might be deemed to operate in two totally different markets—terrestrial telephony and high-bandwidth digital cable for AT&T, conventional non-interactive broadcasting for DirecTV. Under these circumstances, it is unclear whether a merger would create dominance in any relevant market, and the transaction might be viewed as a relatively benign combination of two substantial, but not monopoly firms in different lines of business.

More by | Michael Botein Michael Botein , Law.com Contributor
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