By Rahul Telang and Michael D. Smith
March 16, 2018

Next week, the Department of Justice is taking AT&T (t) to court to block its $85 billion bid for Time Warner (TWC). While this mega-merger would certainly shake up the industry, the DOJ’s decision to block the acquisition reflects a poor understanding of today’s media landscape. With digital distribution platforms like Netflix (NFLX), Amazon (AMZN), and Google (GOOG) vertically integrating into content creation with little opposition or oversight, it’s hard to argue that the DOJ should prevent AT&T from competing by doing the same.

For nearly a century, power in the entertainment industry was concentrated in the hands of six major studios (including Warner Bros, a division of Time Warner). These studios controlled the financial and technical resources necessary to create content and, as a result, had enormous leverage over distributors: the movie theaters, television channels, video sellers, and other middlemen who delivered entertainment to consumers.

In this traditional environment, a merger between Time Warner (a leading content producer) and AT&T (a dominant content distributor) could be a threat to competition. As the DOJ’s complaint against the merger argues, the resulting conglomerate might “use its control of Time Warner’s popular programming as a weapon to harm competition” by raising the prices it charges other cable networks for Time Warner entertainment or limiting distribution of content from other producers.

The problem with applying this narrative to today’s market is that it ignores three recent transformations that have forever shifted power in the entertainment industry. First, whereas studios once controlled the tools and resources necessary to create content, professional-level production tools are now available to anyone with a laptop and a few hundred dollars to spare. This democratization of content creation has resulted in an explosion of creative voices producing entertainment. Second, new channels have arisen to accommodate these new storytellers. Google’s YouTube fostered a generation of homegrown stars, and streaming platforms like Netflix and Amazon offer a wide array of original content. Whereas a handful of major television networks once decided what shows viewers would watch and when they would watch them, today’s consumers can access almost any type of content they desire, at any time, on any device. Third, the digitization of content has led to widespread piracy, eroding the profitably of Hollywood’s once stable business model.

Together these changes have shifted market power away from the firms that own content toward the digital platforms that control a new scarce resource: the customer. The ability to command viewer attention and use data to better target and serve consumers is now the lifeblood of the entertainment industry. While content creators once held the power, they now serve as suppliers to the increasingly dominant digital distributors.

This is why major studios that faced very little market entry for over a century are now confronting significant threats from firms like Netflix, Amazon (via Prime), and Google (via YouTube), as well as potential content plays from Facebook (FB) and Apple (AAPL) on the horizon. These technology companies are leveraging their control over consumer attention and customer data to vertically integrate upstream into content creation, spending billions per year on original content to compete head-to-head with the studios. Netflix, for example, already outspends many traditional networks like CBS (CBS) and HBO on content, and recently poached megaproducer Shonda Rhimes from ABC for a multi-year development deal. The company announced plans to spend up to $8 billion on content in 2018, putting it on par with Time Warner.

 

The DOJ’s failure to understand this new reality may leave new media titans like Amazon, Google, and Netflix free to vertically integrate into content creation while preventing legacy media companies from responding in kind. While quashing traditional media mergers like the one between AT&T and Time Warner might produce greater competition and lower cable costs for a few years, it will cement control over the future of the entertainment industry in the hands of a few large technology companies.

The DOJ appears to be refereeing the game based on an old set of rules that no longer apply. While the agency is worried that the AT&T-Time Warner merger could increase the cost of basic cable for those consumers who have yet to cut the cord, they should be far more concerned about ensuring competition in the new online distribution space. Their myopic view of competition will ultimately harm consumers in the long run by preventing legacy firms from competing for customers in the new digital entertainment marketplace.

Michael D. Smith and Rahul Telang are professors of Information Systems at Carnegie Mellon University’s Heinz College where they co-direct the Initiative for Digital Entertainment Analytics (IDEA). They are coauthors of the book Streaming, Sharing, Stealing: Big Data and the Future of Entertainment.

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