On Wednesday, Fox increased its bid for the 61 percent of Sky it doesn’t own yet, at a price that values the British pay-TV company at $32.1 billion. Meanwhile, Comcast swiveled away from fighting Disney for control of Fox, then fired back at Fox with a $34 billion counterbid for Sky—and news broke that the Antitrust Division of the US Department of Justice is appealing last month’s decision by Judge Richard Leon approving the merger of AT&T and Time Warner.
All of these things fit together: Comcast wants to buy Sky for the same reason that the Department of Justice is still fighting AT&T. Both Comcast and AT&T want to be high-risk, high-reward media companies, and that’s bad news for every other part of the entertainment/data ecosystem—including consumers.
Let’s start with AT&T. Judge Leon’s opinion on the merger with Time Warner, which would put content plus distribution in the same hands—was looney, in my view. (AT&T knows this too, which is why they agreed not to merge their operations with Time Warner in such a way that the two companies could not be unwound in the event of an appeal.) Leon plainly thought everything AT&T said was right—including AT&T’s howler of a claim that Time Warner’s content companies, which include HBO and Turner, would continue to follow their own distribution strategy, regardless of ownership. In other words, he believes that it will make no difference if Time Warner is owned by a dominant distributor with the incentive and ability to constrain access by other distributors. He bought AT&T’s argument that AT&T would never consider the success of the company as a whole when carrying out content negotiations.
But why, if you’re the New AT&T, would you refrain from using your valuable content as leverage to make life hell for competing distributors? The long-term value of new subscribers to AT&T packages—subscribers who switch to AT&T when their existing video packages get too expensive or too threadbare, both possible consequences of a bulked-up AT&T—far exceeds any short-term program-licensing revenue AT&T might get from being a gentle negotiator. So why on earth would AT&T as an integrated, content-rich negotiator play fair with other distributors? What would be the fun of that?
It’s such a big, basic point. Leon seemed to completely miss AT&T’s role as a distributor of data over wireless and wired networks, and almost willfully failed to understand the nature of the market he was dealing with. At one point, he blandly said that Amazon and Netflix were already “vertically integrated” just as AT&T wanted to be. That was AT&T’s big pitch in the case: “We have to have lots of content in our stable so we can compete with Netflix!” But Amazon and Netflix aren’t vertically integrated; they sell content, but they don’t control the physical pipes that deliver it into homes or the wireless transmissions into handsets. Leon’s opinion was certainly long, but that doesn’t mean it’s right.
In fact, juicy coverage last week revealed that, just as the antitrust authorities predicted, AT&T is trying to tell HBO what to do. “It’s going to be a tough year,” HBO’s new AT&T overseer, John Stankey, said to his new underlings.
This makes total sense if you’re AT&T. AT&T doesn’t want to be a mere transmitter of data, because that’s a gravel pit job, in their view. Sure, gravel pits make steady, low returns, but AT&T wants much more out of life. It wants both Wall Street and consumers to see it as a source (in time, an exclusive source) of high-production-value entertainment, with commensurately high margins that continue to fuel the high, steady dividends for which AT&T is famous. To get to that point, it wants to combine its power in distribution with can’t-lose power in content—in a context in which it can bend, package, and wield all of that power with impunity when it comes to the rest of the world. By the “rest of the world,” I mean both other distributors (including upstart distribution competitors) and online content not affiliated with AT&T. Both categories of players will feel pain from AT&T’s withholding, shaping, and prioritization shenanigans; ultimately, all of that pain will be passed on to consumers in the form of higher prices and fewer choices.
Comcast wants Sky (and used to want Fox) for an expanded version of the very same reasons AT&T wants Time Warner. If you squint, Sky has a lot to offer Comcast: It’s a widely known content brand in the UK, Germany, and Italy, with many exclusive or near-exclusive agreements to distribute premium sports games and other shiny video there—including HBO, Disney, and Fox, as well as key sports rights. Some analysts believe that Comcast wants to morph into a Netflix-like over-the-top powerhouse, and that it sees Europe as a beachhead for making that transition. Comcast wants to be the online aggregator of video you think of everywhere.
But you really do have to squint to see Sky that way. Most people think of Sky as a satellite distributor like Dish, except with a better interface. The vast majority of its revenue comes from subscriptions to satellite TV. And that subscriber base is steadily, if slowly, eroding in Europe just as it is in America. In fact, it’s worse in Europe: Digital television is quite respectable there, with a lower percentage of viewers than in the US convinced that you should have to pay to watch TV. On the content side, some analysts are pointing out that Sky’s exclusive rights are very short-term—in just five years or so, Sky (or a new Sky owner) will have to convince ever-more-powerful media brands that they somehow need distribution through Sky and won’t make it going alone.
Comcast’s Sky strategy is the media mogul direction, in other words. More content has to be good, in the company’s view, as it embarks on its global-domination tour—a risky but fun adventure for Brian Roberts, but not great for consumers, wherever they are.
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