May 20, 2014 Bloomberg View - Just when you thought the information infrastructure industry in America couldn't be consolidated any further, AT&T has announced another merger. It's one more megadeal that promises to provide the giant carrier with more opportunities to increase its profits, while not moving the country any closer to being competitive on the global informational stage. We can do better.
This time the target is satellite TV operator DirecTV, for $48.5 billion. The arrangement is good news for DirecTV: The satellite business isdeclining, and it's unlikely that the Department of Justice would let it merge with the only other member of that sector, Dish. It's also good news for AT&T, because adding more video subscribers means greater leverage in negotiating with the highly concentrated programming industry. And the cash produced from DirecTV customers will help AT&T sustain its extraordinary shareholder dividends.
What's really going on is that companies are recognizing that the satellite industry can't survive. U.S. cable operators have an unbeatable bundled product -- pay TV and data -- that satellite companies simply can't provide. (Sending data 22,000 miles into space is never going to provide the immersive, interactive connectivity that humans crave.) And unless the two satellite companies combine, they'll never have the scale to pay less for programming than a combined Comcast-Time Warner Cable will.
Given this reality, DirecTV needs to be rescued. And AT&T, having grown about as big as it possibly can as a U.S. wireless company, is looking for growth opportunities that will allow it to sustain its payouts to shareholders for a while.
Meanwhile, AT&T wants to maintain the status quo. Although it is primarily a wireless company, AT&T still has some wired operations, and is looking to hang on to the customers it already has in a quarter of the country for U-Verse, its bundled pay TV and data product. At the same time, it plans to abandon (rather than upgrade) many of its other wired customers, sell them on its more-profitable wireless services instead, and cede wired subscriptions in the rest of the country to the dominant cable operators. We'll become two Americas: poorer people and people in rural areas depending on wireless smartphones, and richer people paying through the nose for expensive bundled services.
None of this is evil. It's just the result of a decade of deregulation and consolidation. AT&T isn't planning capital investments that will upgrade the 76 million households it serves with wires to fiber. Instead, it's selling a second-rate wire (legacy copper wires connecting homes to neighborhood fiber nodes) and wants to lower its costs of providing pay TV programming over that wire. Buying DirecTV will lower AT&T's per-subscriber programming costs because distributors get bulk discounts. These discounts won't necessarily be passed on to subscribers.
Buying DirecTV also allows AT&T to offload the pay TV portion of its U-Verse bundled service, now made up of video plus data and available in a quarter of the country, onto satellites. That will free up the entire pipe for data, which will make AT&T's bundle slightly more competitive with bundled products now offered by cable services, such as Comcast and Time Warner Cable, which also plan to merge.
We should be on an entirely different trajectory. AT&T, Verizon, Comcast and Time Warner Cable made $1.4 trillion from 2009 to 2013, and invested just 15 percent of that amount on capital improvements. Rather than merely overseeing mergers and abandoning Americans to those companies' rational incentives to divide markets and harvest increased profits, we should set a high standard for an upgrade to ubiquitous fiber connectivity and shape our policies to make sure this happens.
That includes mandating infrastructure financing, tax incentives, uniform federal standards and policies eliminating carriers' power to bundle content with conduit so as to ensure that we have both vibrant competition in urban areas and cheap open fiber connections to as many Americans as we can. That will unleash innovation across the country and create an enormous market for new high-capacity online services.
China expects to have fiber available to 200 million households by 2015 and to 300 million by 2020. We can compete with that. Right now, we're not even trying.
To contact the writer of this article: Susan P. Crawford at email@example.com.
To contact the editor responsible for this article: Christopher Flavelle at firstname.lastname@example.org.