Washington, DC -- (ReleaseWire) -- 11/01/2016 --DAWN BENNETT: Clyde Wayne Crews is the vice-president and director for policy and technology studies at the Competitive Enterprise Institute. He's also an alumni of the Cato Institute, a premier libertarian think-tank, and a one-time libertarian candidate for the South Carolina State Senate. Clyde is widely published and contributes to Forbes.com and authors an annual piece called '10,000 Commandments' which The Wall Street Journal has called the best measure of the overall regulatory burden. Crews authored an article that was published in Forbes on October 24, 2016 titled 'Republicans and Democrats Unite Against the $86 Billion AT&T/Time Warner Merger Deal'. Now, I don't know if you've done the math, but his would make it between $105 and $110 per share for those who own Time Warner stock, making this transaction by far one of the biggest media deals in recent years. Clyde, welcome to Financial Myth Busting.
CLYDE WAYNE CREWS: Well, thank you so much for having me. Good morning.
BENNETT: This week AT&T announced plans to buy Time Warner for an eye-popping $86 billion which would make the combined entity the biggest media company in the world. Before we get into the antitrust issues involved here can you explain exactly what this deal means? A lot of people think Time Warner is Time Warner Cable. Can you just give the listeners the lay of the land and perhaps what AT&T hopes to accomplish?
CREWS: Yeah, just a little bit briefly. Time Warner Cable is a separate company., a cable company that's also in its own merger negotiations with Charter Communications so that's under review now. And typically now large-scale media mergers are getting a lot of attention from antitrust regulators. It's not just one, it's the Justice Department, it's the Federal Trade Commission and also the Federal Communications Commission. Now, this case, AT&T – that's your phone company but being a big wireless company everybody now wants to be on every platform. People aren't watching TV just on the TV. It's on their streaming devices, they're streaming Netflix, they've got kids using tablets, watching from different rooms using Sling TV and all these ways that people are consuming content now. There are a lot of cross-mergers between the content sector and the infrastructure or communication or platform sectors. AT&T right now is the biggest wireless company but it also has DirecTV so that's a major platform for it to offer content across its satellite infrastructure. But by getting Time Warner, what they're seeking is to get Time Warner's big divisions like HBO which—imagine HBO going across your wireless device. That's what they really want to achieve. Then Turner Broadcasting is a big part of it, so like the TNN station and also CNN, the news channel and also Warner Bros. Studios which which competes with Disney studios and so on down the line. So each of these big mergers is bringing together the big stuff, the infrastructure you need to deliver content, but also the content itself. So everything is very, very much in flux, and because of that flux, and because of regulators being much bigger than the economy themselves when they can slam the brakes on this thing, that was why I wrote that criticism saying, 'Better hold off. Let the market respond to this rather than regulators.'
BENNETT: If I ran AT&T and just folded Time Warner's massive programming portfolio into my telecom company I'd immediately start thinking about how to prioritize these shows and movies for AT&T customers. Yet that probably runs afoul of the FCC's new net neutrality rules. Am I right about that? What might that play be for AT&T?
CREWS: If you're a normal business person obviously you want to prioritize your content but so do your competitors. That's a healthy thing, not a bad thing. However, there's a big restraint on you prioritizing in a way that ends up being bad for customers. One, the net neutrality rules – we were heavy critics of that now for over a decade. I think the idea of the federal government deciding what contents should be, regulating microphones that way, I thought it was a bad thing to do. But if you're AT&T and you want to prioritize HBO, remember I'm sitting at home or my kids are sitting at home. We don't want just HBO content. We want Cartoon Network and everything else and so the incentives in the free market economy are not to withhold but to make cross-platform deals. So at the same time you see this AT&T merger and they do get this great content that puts them in an effective bargaining position, it also does something else. It also means that, 'Boy, they better be nice to Comcast/NBC or they better be nice to Walt Disney if they want to get those companies' content onto the AT&T mobile platform or onto DirecTV and so forth like that.' So these are healthy things to have happened rather than unhealthy, in my view. That's how I look at these things. Because just imagine, a year or two from now there are going to be new kinds of mergers and new kinds of cross-platform announcements made. I mean, look at Hulu itself. That's owned by several of these big players. AT&T has a stake in it but so does Disney and others. So you see what I mean. There are lots of cross-platform deals going on.
Bennett: AT&T is basically a telecom company and Time Warner is essentially a content company. So if they do these two totally different things why the antitrust fears?
CREWS: You're right about that. Typically, antitrust in theory gets involved when you've got McDonald's merging with Burger King merging with Wendy's, when you've got companies all doing the same thing merging together. That's horizontal. This is vertical when you've got people up and down the distribution lines. Occasionally this kind of thing gets antitrust scrutiny but we're talking here about ones and zeros, you know, content delivered over the airwaves in a world where now all of us are broadcasters now. Compare this to the way things were in the 50s or 60s when we had three television stations and you had one AT&T that was protected by government monopoly. That long ago phone monopoly that AT&T had where your only choice was a black phone, that's long gone. We're in a completely different world now where competition is way beyond what we had back then back when government thought it was protecting us with an enforced AT&T monopoly. It was against the law to compete with the phone company. We're beyond all that, so I don't credit any of those antitrust arguments. I mean, what we have now is what's creating platform wealth and content wealth and the biggest benefit to consumers is when the next guy says, 'Oh, I'm angry about AT&T doing this deal,' and then they come up with a competing deal of their own to try to get customers too.
BENNETT: Clyde, you're an expert on antitrust issues and I'm going to ask this: over the years, the feds have increasingly inserted themselves into mergers and acquisitions, ostensibly working on America's behalf to protect competition and prevent monopolies yet more often than not it seems their attempts to save consumers from big business end up screwing both the consumer and big business. To take one example, Blockbuster's attempt to take over its competitor Hollywood Video fearing there wouldn't be enough competition to movie rental stores. I think that's silly but, of course, now both companies went bankrupt as the FTC dashed their only chance of survival. Do you see this a lot where antitrust fears largely stem from a failure to appreciate how dynamic market forces are and the constant evolution of industry?
WAYNE CREWS: I do, and it really galls me to think about all of the time and effort that companies like Blockbuster and Hollywood Video had to spend and companies before that, Staples and Office Depot, when they attempted a merger, all the effort they had to spend when the retail landscape was just changing by leaps and bounds, different companies getting into the business. It's incredible to think about it but what once used to be Blockbuster where people would line up on a Friday night and rent videos is now reduced to a Redbox Store sitting in the CVS that nobody uses. It's amazing what's come to be and they pretended that there could be a monopoly in that kind of a content when behind the surface all of these things were beginning to change with the emergence of DVD and emergence of the Internet and all of these new kinds of content, new channels popping up on cable all the time to compete with movies. And that's the thing now. It's just an amazing dynamic of content marketplace. It's astounding when you think about it.
BENNETT: It really is. AT&T itself, I think, is another interesting example of what happens when overzealous federal regulators actually fear company becoming too successful. You remember back in the day, back in 1984, where the feds broke the company up into Ma Bell which is AT&T and Baby Bells like Pacific Northwest Bell and South Central Bell. Looking back the feds' decision to break up AT&T, I'm wondering if you think that was positive or negative for the consumers.
CREWS: Well, the way I look at it is now we have what we have. You know, just like we have giant electric utilities, also it's against the law for you to compete with them too. You go to jail if you run an extension cord across the street. Usually it's been the case that when there was monopoly it wasn't a natural monopoly but it was an artificial one created by government with exclusive franchises and things like that. In a free market economy—and free market doesn't mean unregulated—there are all kinds of disciplines against a company that misbehaves, like if AT&T and Time Warner misbehave here they've got Wall Street, shows like yours, consumers, the media, all these forces are readied against them if they do bad things and people can short their stock, people can make other deals, people can work around it. But AT&T is an interesting case because it had a protected monopoly for so long and in a real free market there may not be a company called AT&T today, probably wouldn't be. Because companies have lifespans typically just like human beings do and like any ordinary business. But it is here now. Its monopoly power that was created by government, not by itself, its monopoly power is gone so it can compete, it's subject to blistering market forces just like Comcast/NBC/Universal and just like Walt Disney and just like all of these entities are subject to now. Nobody knows how this is going to wind up. Amazon just came out with their new Fire Stick to offer broadcasting and being able to distribute content from all of these sources streaming it in your home. There's so many pressures on companies to come up with ways to please consumers and that's what it really comes down to. Consumers are the boss.
BENNETT: Once again, to me it seems no one at the FTC knew the cellphone revolution was just around the corner, nobody knew that we were going to go online for our movies so Blockbuster and Hollywood Video knew it. Why is it that they have all this power but they don't have the education, the foresight? I don't know what the right word is. How can someone with so much power not have the rest of the tools in order to make a very smart decision?
CREWS: Well, you know, it's a whole different set of ideas when you're talking about companies and operating in a market economy. There is such a thing as cronyism, there is such a thing as subsidies. And it's not just that if you're a solar energy company you can get subsidies from the government but if you're powerful enough and you've got an agency with your name in its title you can usually get that agency to manipulate things in your favor and often you find with antitrust interventions not asked for by the consumers. It's the competitors of the company in question that's trying to merge or trying to make some kind of a deal. And you see this in Europe with Google and Facebook. As they expanded to Europe you've seen European antitrust authorities doing very same things. Antitrust works like protectionism. It's a way of incumbent providers who don't want the new competition or want to change the competitive landscape to get the government to step in rather than to compete through the market. So you'll continue to see it as long as we continue to think and accept the idea that antitrust promotes competition rather than hinders it, as I think, you'll continue to see cases like this and you'll see them again with Google and again with Facebook, again with the AT&Ts of the world because, remember, this is an $85 billion merger but it's not going to be the last. You'll be on this show, a year or two or three or five years from now talking about the next biggest merger of $150 billion and that's the way the market goes. For my part I would love to see many more giant mergers like this because when you get the A&P stores of the worlds and the Wal-Mart stores you also get a lot of specialty shops of the world too and you create lots and lots of new niche markets and wealthy economies. So big deals for big companies also mean more medium deals, more small deals and more opportunities for wealth creation and I love to see that kind of vibrant economy. I like us doubling GDP rather than doubling regulation.
BENNETT: Well, we seem to be going in the opposite direction unfortunately. Shouldn't want our companies to prosper? Remember back in the 90s Microsoft led the Internet revolution and they helped to spur an economic boom that lasted almost a decade. The U.S. government enjoyed the resulting boost in tax revenue but they also targeted Microsoft for ostensibly being too popular. So, again, shouldn't the feds want our companies to prosper?
CREWS: They should. That gets back to the idea of—you know, there were competitors at that time to Microsoft who wanted to operate on the desktop. There's a whole thing of when companies get large, when they have a successful platform – in that case it was the desktop of Microsoft – and so others wanted access to that desktop for their content, for their competing browser and things like that, so they created a duty of the existing company saying it had monopoly power to allow access to it. If you've got an antitrust enforcer available, believe me, people will use it.
BENNETT: Clyde, we've had a great conversation so far about the AT&T/Time Warner merger deal. One of the first critics out of the gate was Donald Trump. He said combining two major media companies would concentrate too much power and too few hands. Is this not a legitimate concern? Is there any drawback when companies morph into these mega-monsters?
CREWS: I heard Trump make that comment and I wasn't surprised by it because remember, Trump is a populist in a lot of ways, he talks free market ideas in a very good way when he talks about regulatory reform and cutting 67 percent of regulations or whatever his number was and getting Washington off our backs. Remember, he has had this tendency to say big businesses are cheating the public when they move overseas and they don't bring their taxes back or when they offshore their jobs and things like that. So it didn't surprise me, when I thought about it in that respect, to see him criticize this merger. And remember, his biggest battle has been saying that there's media bias so you would expect him right out of the gate to say, 'Well, if that company has got liberal leadership and if they're buying CNN…' which he already calls it the Clinton News Network, so you would expect him to come out this way against this merger. The Clinton campaign has had some words to say about this too and the Democratic platform has talked about reining in antitrust and in fact President Obama put out an executive order earlier this year on competition, and when they say competition it usually means 'government-managed' to some extent, the government having something to say, and that's what occurred here. But remember, both parties are antitrust boosters. Senator Sherman was a Republican, so you often find Republicans, contrary to what people think, are pushing regulations and regulatory agencies as well. It was Republicans who brought the EPA, Energy Department and so on. So you don't quite know how folks are going to line up but typically just in terms of the rhetoric and discussion you'll hear Republicans criticize the use of antitrust but last week on Sunday it was Senator Mike Lee on the Senate Antitrust Subcommittee who sent out a letter saying they were concerned about this merger and were going to be holding hearings. That worries me because I know he's going to do that. He's been more minimal to antitrust and other Republicans have even though he's been terrific, I mean absolutely terrific on regulatory reform generally. So I was a little disappointed that he decided to do that but it did seem inevitable because of his position on the committee. But the way I look at antitrust is no matter how bad a deal is—and usually when the deal is bad the stock market is what reacts to it—it's never as bad as the federal government stepping in and absolutely denying a voluntary action in a free market because what happens when government does that is it's creating a whole new trajectory. So what ends up coming out of the deal isn't what the free market chose, it's what the government chose. And I always think that when government steps in or blocks a merger it's actually hurting consumers by denying them the competitive response to what those merging companies did. So in other words, if AT&T and Time Warner do not merge all of the competitors who would have been forced to respond to that in a competitive marketplace by offering something new can just sit back on their hands. That's what worries me and that's why I was disappointed with Trump and with Mike Lee.
BENNETT: Yeah. This isn't the first time for AT&T having a failed mega-deal, you know, it did back with T-Mobile because of regulatory hurdles. It was part of that other historic merger but that went through but that was also the top of the market for stock prices, so it may be another warning.
CREWS: We were using those AOL discs for coasters for our beer.
BENNETT: That's right.
CREWS: Imagine what would occur now if the government were to step in and stop this. Time Warner is sitting there as a content company, and believe me it's not wanting to sit still any more than AT&T is. So there it sits and if AT&T doesn't buy Time Warner because the government says it can't, in a year or two or three years some other infrastructure company will move in and do that. But then you've got a deal that was never the choice of the marketplace. That ends up being an artificial later suboptimal merger because the government blocked what happened before. It's far better to make the deal now and if it turns out to be bad the resources are all still there, they just get reshuffled in the free market economy.
BENNETT: If this deal doesn't go through there are a lot of Wall Street banks that are going to be big losers. I don't think people realize they have pledged close to $40 billion in loans to make this deal a reality. JPMorgan Chase alone has pledged about $25 billion to financing. And these banks desperately need business so they need this deal to go through. Clyde, I want to thank you so much for being on this show and we hope to have you back soon.
For over a quarter century, Dawn Bennett has been successfully guiding clients through the complexities of wealth management. Her unique vision and insight into market trends makes Bennett a much sought after expert resource with regular appearances on Fox News Channel, CNBC, Bloomberg TV, and MSNBC as well as being featured in Business Week, Fortune, The NY Times, The NY Sun, Washington Business Journal in addition to her highly regarded weekly talk radio program - Financial Mythbusting. Through prudent and thoughtful advice, Dawn Bennett has strived to consistently provide the highest quality of guidance.
About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com.
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
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