By Roger Entner
December 14, 2016 at 5:00 am ET
Last week, the U.S. Senate’s Subcommittee on Antitrust, Competition Policy and Consumer Rights held a hearing to review the details of the AT&T and Time Warner merger. Testifying witnesses included the CEOs of the merging companies — AT&T’s Randall Stephenson and Time Warner’s Jeff Bewkes — along with Mark Cuban of AXS TV, Gene Kimmelman of Public Knowledge and Daphna Ziman of Cinemoi.
A number of reports have already dissected the hearing’s developments to discern whether the merger is likely to be approved; however, few have focused on a very significant development that development that occurred during the hearing regarding the technology, media and telecommunications sector.
In his testimony, Cuban noted that the lack of competition among the dominant internet players like Apple, Google, Microsoft, Amazon and Facebook is the real issue when it comes to assessing the state of the market, and that absent a merger of AT&T and Time Warner, the two companies may not have the resources individually to compete against their larger competitors.
Congress seems to have finally come to the realization that technologies that used to operate in silos — creating distinct markets like pay TV, internet access and video streaming services like Netflix and Amazon Prime — are now part of the same consumer video marketplace. This is a significant realization by U.S. lawmakers. The questions that now remain are what Congress and the Federal Communications Commission will do in the face of this realization, and whether President-elect Donald Trump will perpetuate the Obama administration’s efforts to transfer wealth from companies building the core of the internet to the companies operating at the edge. The wealth transfer pushed by the Obama administration is seemingly based on the erroneous belief that companies like Google, Amazon and Facebook are not big enough or successful enough to take on the internet service providers absent government help.
But consider the following: One of the most obvious areas of convergence is in the market for consumer video. The emergence of internet-based video, movie and TV providers has ushered in a turbulent time for traditional pay-TV providers. What helped Netflix, Amazon and Hulu to make massive inroads was twofold: a new, often better way to watch content paid for by a low-cost, monthly subscription using existing broadband connectivity distribute content to keep costs down; and being unencumbered by the traditional pay-TV framework that lets the providers deliver content without the rules and regulations that often hobble traditional pay-TV providers. For example, cable TV providers have to pay a 5 percent franchise fee to local municipalities based on their gross revenues. Franchise fees in the United States are roughly in the $5-to-$8 range. In addition, cable TV providers pay 11.69 percent on average in local and state taxes, which amounts to customers paying roughly $6.12 per month in government fees. Companies like Netflix, Amazon and Hulu are not subject to the same types of fees.
The convergence does not stop with how we are consuming video content. Skype and Google Voice have become full-fledged, over-the-top competitors to traditional telephony voice services. Skype has become the dominant provider of international voice traffic, acting as a competitive force across the world. After a meteoric rise, carrier-based text messaging in the United States is on the decline as edge providers such as Facebook’s WhatsApp are taking over. In many other countries, WhatsApp has reached 100 percent market penetration, often fully replacing carrier-based solutions.
During the last eight years of the Obama administration, the technology, media and telecommunications industries witnessed a calculated effort by U.S. regulators to advantage companies like Google, Facebook and Amazon at the expense of competitors. Even The Wall Street Journal bought into the myth that Google needs government help to compete, which is, frankly, ludicrous for a tech giant that will make around $8 billion in profit this year alone. It’s also the same company that dominates search (76 percent market share), online advertising (50.3 percent market share), mobile analytics (95 percent market share), online video (YouTube 77.6 percent market share) and is the clear global mobile device OS leader (87.6 percent market share). Together with Facebook, Google accounted for 90 percent of U.S. ad growth in the first quarter 2016, leaving their rivals in the dust. With a market position like that, is Google a company teetering on the verge of imminent demise that needs government help to survive?
What American consumers need is a level playing field on which all these companies vying for their eyeballs are competing. Trump has emphasized the need for more capital investment and employment in the United States. Internet companies as a whole are certainly not investing back into our economy at the same rate as U.S.-based ISPs that, as an industry, invested $48 billion in 2015 in capital investment versus $30.7 billion in the same year for internet and technology companies. Nor are edge companies creating or supporting nearly the same number of U.S.-based, high-wage jobs as the ISPs – 781,000 direct jobs for the telecom industry versus 298,000 for the internet industry.
Silicon Valley was a very early supporter of President Barack Obama, eagerly providing support through generous donations and sophisticated data analytics that significantly improved his tactical election intelligence beyond what was available to his competitors. The close relationships that were built on the campaign trail not only survived but deepened during his administration. Most leading technology positions in the White House and other regulatory agencies were staffed by former Google employees and other Silicon Valley executives. Nobody has had more access to the Obama White House than Google. That gave way to unprecedented preferential treatment for Google and other the Silicon Valley edge providers.
When Trump meets with Silicon Valley elites, let’s hope he sees through the spin and recognizes that the edge providers are neither small nor are in need of government intervention in order to compete. What is needed is a level playing field that allows all companies to compete with each other.
Roger Entner is an analyst and founder at Recon Analytics, a telecom research and consulting company.
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