What’s Happening to the Telecom Trust?

David Rosen

Well, the telecom media rollercoaster is once again rolling.  On May 17^th, AT&T announced that it was spinning off its WarnerMedia subsidiary that includes HBO and Warner Bros. for $5 billion and merging it with Discovery.  This followed the May 3^rd announcement that Verizon was selling off its media holdings, AOL and Yahoo, for $43 billion.  Nevertheless, Comcast still owns NBC-Universal.  What’s going on?

A quarter-century ago, Pres. Bill Clinton signed the 1996 Telecommunications Act arguing that it would “promotes competition as the key to opening new markets and new opportunities.”  He insisted, “it will protect consumers by regulating the remaining monopolies for a time and by providing a roadmap for deregulation in the future.”

Unfortunately, Clinton’s “for a time” was short lived.  Immediately after the Act’s passage, the telecom industries began a period of mega mergers and acquisitions (M&As) that continues today.

This is noteworthy because it is led to greater market consolidation and the integration of telecommunications and the entertainment industries.  Two major acquisitions took place in 2005 – (i) SBC acquired AT&T for $16 billion; and (ii) Verizon acquire MCI for $6.6 billion.  After the acquisition, SBC kept the AT&T name, and then, in 2006, purchased BellSouth for $86 billion.

These mergers were followed by a series of additional M&As that included but not limited to the following:

+ Comcast acquired a controlling stake (51%) in NBC-Universal, a subsidiary of General Electric and French media conglomerate Vivendi Universal Entertainment for $6.2 billion in 2011.

+ Charter Communications acquired Spectrum (aka Time Warner Cable) for $55 billion and Bright House Networks for $10.4 billion in 2016.

+ AT&T acquired DirecTV for $67.1 billion in 2015; it bought Time Warner for $85 billion in 2018; and acquired AppNexus, a digital ad exchange that competes with Google and Facebook, for between $1.6 and $2 billion in 2018.

+ Verizon acquired AOL in 2015 for $4.4 billion and Yahoo! in 2017 for $4.8 billion.

+ Mobile and Sprint, valued at $26.5 billion, merged in 2020.

The outcome of telecom industry consolidation turned the traditional duopoly of phone and cable companies into today’s integrated voice, internet, video wireline and wireless communications system.  AT&T and Verizon dominate the nation’s wireless and wireline networks; Comcast and Charter/Spectrum control the full-screen, full-length wireline video signal market.

Since Clinton signed the Communications Act, federal regulatory policy has promoted M&As, a policy driven by the nation’s most influential conglomerates, ostensibly repositioning the U.S. for global competitiveness.  As a result, meaningful competition at the national level has all but disappeared, thus sacrificing a “free market” of communications services for an ever-more powerful handful of giant conglomerates.  And ordinary consumers, including telecom subscribers, have suffered.

Today, the “Telecom Trust” companies control the pipes — the wire and the wireless networks – that link the nation’s homes, businesses, schools, governments and people.  While the dominant financial, health-insurance and energy trusts have come under public scrutiny during the last couple of years due to their individual crises, little attention has been paid to the mounting power of the Telecom Trust.

During the fin de siècle and the early-20^th century, the U.S. economy was dominated by a giant corporations dubbed “trusts” – and AT&T was one of them.  According to one source, between 1897 and 1904 over 4,000 companies were consolidated down into 257 corporate firms. U.S. Steel was formed by the merger of nine of the largest steel companies.

By 1904, some 318 companies controlled nearly 40 percent of the nation’s manufacturing output. One estimate claims that a single firm produced over half the output in 78 industries. These corporations became known as “trusts” – and they ruled with vengeance, using predatory pricing, exclusivity deals and other anti-competitive practices to undercut smaller local businesses and gain market dominance.

The development of the trust-dominated economy fueled the rise of the Progressive era and what Teddy Roosevelt dubbed “muck-rakers,” journalist who investigated and publicized social and economic injustices.  They included Jacob Riis, Upton Sinclair, Lincoln Steffens, Ida Tarbell and Ida B. Wells.

Progressives sought to elimination of government corruption, supported women’s suffrage, championed social welfare, prison reform, civil liberties and prohibition. Some supported civil rights, even backing the formation of the National Association for the Advancement for Colored People (NAACP).  Many Progressives feared that concentrated, uncontrolled, corporate power threatened democratic government.  They argued that large corporations could impose monopolistic prices to cheat consumers and squash small independent companies.  And these trusts could strongly influence both federal and state governments.

A century later, following merger after merger, the Telecom Trust — dominated by a postmodern “cartel” consisting of AT&T, Comcast and Verizon — came to control wireless services and broadband, internet and telephone (local and long-distance) services.

However, with the exception of Comcast’s acquisition of NBC-Universal, the recently announced sales of the AT&T’s and Verizon’s media holdings suggest that bigger is not always better.  It’s unclear how the spin-offs will playout for the new media companies that are being formed.

Verizon’s holdings of AOL and Yahoo recall the glory days of the early internet, with AOL founded in 1985 and Yahoo in 1994.  It is unclear if they can capture a significant audience – and advertising dollars – in today’s broadband streaming world.

However, the new Discovery with WarnerMedia suggests a different outcome.  As assessed by DocumentaryBusiness, the deal involves such established media brands as HBO, HBO Max, CNN, Cartoon Network and Warner Bros. Studio. Looking specifically at documentaries, it notes that the combined company includes HBO Documentary Films, CNN Films, Discovery Channel / Discovery+, and HBO Max.

DocumentaryBusiness points out that “the new Discovery/WarnerMedia venture is still primarily an ‘old model’ channels company.”  It adds that “75% of combined 2021 earnings (EBITDA) comes from the very linear cable networks that are in decline as they lose audiences to streamers.”  And warns: “The new Discovery may be even more tied to cable’s melting ice cube of cord-cutters and shrinking revenues.”

The sales of the media holdings by Verizon and AT&T suggests that a phase of Telecom Trust development may be over.  These conglomerates could not successfully – in a financial sense – make their respective acquisitions work.

Nevertheless, the Telecom Trust control wireline and wireless services.  It’s time to recall the 1948 Supreme Court decision, U.S. v. Paramount Pictures, that broke up the Hollywood studies control over movie theatres.  Why not separating wire from wireless distribution?