For years, AT&T had been flirting with the idea of acquiring satellite pay TV company DirecTV.

But such a deal would have resulted in increased market concentration that may have precluded getting regulatory approval, and this concern caused AT&T to hold back. Regulators are charged with protecting the public interest by stimulating healthy competition and innovation. Two large firms attempting to merge in the same industry is generally a “red flag” for regulators concerned about the potential for limiting competition and for higher prices charged to consumers.

When Comcast announced that it had an agreement to merge with TWC in February 2014, AT&T saw an opening to get regulatory approval for a deal involving DirecTV. The Comcast/TWC merger would have made Comcast the dominant cable company and broadband provider in the industry.

AT&T reasoned it could argue that Comcast needed a strong competitor. AT&T in combination with DirecTV would be much stronger financially than DirecTV on its own and constituted a formidable counterweight to a Comcast/TWC tie-up.

AT&T’s interest in DirecTV’s satellite service is not simply about finding more pay TV customers in a market that is fast maturing; it’s about bundling and getting more money from the same customers. By adding DirecTV’s 20 million pay TV subscribers into its diversified product portfolio consisting of wireless, phone, fiber-optic broadband, and cable TV, AT&T hoped to create more attractive bundled packages for which they could charge premium prices to boost revenue and profit.

The firm’s previous growth engine had been wireless mobile services, but now that market is maturing and AT&T needs to find new ways to boost revenue that has been growing slightly more than 1% annually in recent years. While the firm has lost landline subscribers, that decline in revenue was offset by new tablet subscribers. Currently, AT&T customers who have U-Verse “triple-play” service, which includes landline phone, broadband internet, and cable TV, spend about \($170\) each month, not including wireless service. With its satellite TV revenue alone, DirecTV generates about \($102\) per user.

AT&T is the nation’s largest telecommunications company by revenue and second largest wireless company by subscribers. The DirecTV deal gives AT&T, with 2014 revenue of \($133\) billion, a greater national presence to expand video delivery and another \($33\) billion in yearly revenue. But it also pairs the carrier with a business that is past its prime as Americans increasingly disconnect from pay TV and watch TV on a variety of mobile devices. DirecTV has suffered from years of sluggish subscriber growth in its core satellite business and lacks any broadband infrastructure needed for streaming television. As the biggest provider of pay TV the deal would also give AT&T more bargaining power with content firms.

AT&T envisions future bundled services including mobile, TV programming, and other services like home security. But the firm is limited to only 22 states where it offers its U-Verse fiber-optic service. AT&T wants to build a better bundle of services, combining mobile, TV programming, and other services and eventually wireless TV. It has 11 million U-verse customers, but only 5.7 million of them get TV. With DirecTV—the second-largest pay TV provider in the United States, behind only Comcast—AT&T instantly becomes a national player in providing pay TV.

But the competitive landscape changed dramatically in 2015. In less than 6 months, regulators disallowed the proposed merger of Comcast and TWC while approving the mergers of Charter Communications (Charter) and TWC as well as AT&T and DirecTV. All three proposed mergers were valued between \($45\) and \($55\) billion. What made one proposed merger unacceptable and the others okay?

Comcast has been the “800-lb gorilla” in the cable industry in recent years. When the firm sought to take control of foundering TWC, alarm bells sounded among content providers and the public and in turn regulatory agencies. Regulators were also concerned about the absence of a strong third competitor behind Comcast and AT&T. Prior to acquiring TWC, Charter was a weak player in the industry. This gave them an edge in getting support from the regulators who say the combination of Charter and the financially ailing TWC provides potentially the strong third competitor they thought was necessary to protect consumer interests......

Discussion Questions:

1. The net neutrality principle states that all legal content providers should have equal access to the internet and that no provider can gain faster access to the internet by paying a premium price. ISPs that are now regulated by the FCC as public utilities argue that net neutrality reduces the incentive for firms to innovate because they cannot charge for premium services that might require faster network speeds than other services. In your opinion is innovation helped or hurt by net neutrality rules? How are all content providers forced potentially to pay more to ISPs for online access as a result of net neutrality rules? Explain your answers.
2. Should regulators in your opinion have extracted more concessions from AT&T before granting approval to merge with DirecTV? Explain your answer.
3. A s a regulator, would you have approved the takeover of DirecTV by AT&T? Explain your answer.
4. Free markets discriminate among consumers based on price: those that can afford a product or service can get it and those that can’t don’t. Net neutrality offers everyone equal access to the internet. Of these two options, which do you believe is most fair? Explain your answer.
5. Whose interests do you believe antitrust regulators represent? What trade-offs do antitrust regulators face in making decisions that impact the groups whose interests they represent? Be specific.