Should we worry about the AT&T-Time Warner merger? Maybe not

Should we worry about the AT&T-Time Warner merger? Maybe not, since we have seen this type of deal before.

What is the issue? The Wall Street Journal recently reported that "A letter from 11 Democratic senators to Attorney General Jeff Sessions in June said the deal would give AT&T “unmatched control of popular content and the distribution of that content,” which could lead to higher prices and few choices for American consumers."

The key is "control of content and distribution." This type of criticism was levelled at the Time Warner-AOL merger back in 2000.

Salim Muwakkil, columnist for the Chicago Tribune, wrote "It brings together the resources and expertise of a company with global holdings in all aspects of media and entertainment with one that has mastered the newfangled intricacies of the Internet."

Norman Solomon, of the media watch group Fairness & Accuracy In Reporting, said similar things on the PBS News Hour when the merger was announced.

But Time Warner-AOL failed. According to Columbia business professor Rita Gunther McGrath, the cultures of the two companies did not mesh and internet technology changed from dial up to broadband.

According to her "the total value of AOL stock subsequently went from $226 billion to about $20 billion." The new firm had what she calls a "transient advantage; namely when a combination of capabilities that at one point made a firm a leader, erodes and is replaced by the next form of competitive advantage."

  

Who knows if this will happen with the AT&T-Time Warner merger? But I doubt those 11 senators have the foresight or knowledge to know.

What Gunther McGrath describes is very similar to the process of "creative destruction" inherent in capitalism as explained by the great 20th century Harvard professor Joseph Schumpeter. For example, the car destroyed the horse and buggy age.

Cars, along with airplanes, also brought competition to the railroads, which seemed so powerful and monopolistic that we created the Interstate Commerce Commission to regulate them in 1887.

  

But, as Nobel Prize winner Milton Friedman pointed out in his book Capitalism and Freedom, cars and planes "reduced the monopoly element in railroads to negligible proportions."

We should not view every large company or new merger as something dark and sinister. New technologies and competition often arise to destroy the seemingly omnipotent incumbents. It was not that long ago when people complained about Blockbuster video and Borders Books driving the small establishments out of business.

Where are those companies now? New competition arose from Netflix, Red Box, Kindle, etc. Why aren't 11 those Democratic senators talking about how well this served the consumer?

  

There is a concern that AT&T will favor Time Warner content over content from other media companies. But that potentially was an issue back in 2000 with AOL as well.

This is also a vertical merger as opposed to a horizontal merger. In the former, a firm buys a supplier (Time Warner will supply AT&T with movies, etc.). The latter is when firms producing the same good merge.

Reuters reported recently that vertical mergers are normally “approved with no major concessions.” Yet, despite this, and the lack of damage caused by the Time Warner-AOL merger, this one is viewed fearfully.

Another reason these fears can also be overblown is that the top companies are not always able to stay on top forever. Economist Mark Perry reported that only 12% of the Fortune 500 from 1955 are still there.

Competition is why so few are left. So, we should trust the process of creative destruction a little more than we do now.