AT&T Is Buying Time Warner Because the Future is Google

Telecommunications companies are becoming media companies. That explains AT&T’s agreement to buy Time Warner for $ 85.4 billion. But something else explains it, too.

Media companies are becoming telecoms.

Internet firms like Google and Facebook and Amazon and Netflix are the new media companies. They deliver enormous amounts of video online, posing a direct threat to old-school television and movie companies. But they also are becoming telecoms, threatening the likes of AT&T and Verizon.

They finance undersea cables that link their data centers. They buy fiber optic infrastructure. Facebook builds open source telco gear, Google offers high-speed Internet service, Amazon hopes to become an Internet service provider in Europe.

As this happens, telecoms must fight back. And this means challenging tech giants on the media front.

The proposed AT&T/Time Warner deal combines two powerhouses. AT&T is the nation’s largest pay TV provider, the second-largest wireless provider, and the third-largest home Internet provider.

Time Warner owns a dizzying array of media properties, including HBO, CNN, Warner Brothers, DC Comics, TBS, TNT, the Cartoon Network and broadcast rights to many live sporting events. But it does not own Time Warner Cable, a separate entity that the cable company Charter Communications bought earlier this year.

The deal confirmed today follow’s Comcast’s merger with NBC in 2011 and Verizon’s acquisition of AOL last year and planned acquisition of Yahoo this year.

Pundits quickly noted that diving into the content industry could be AT&T’s attempt to fill the hole that is created as customers ditch cable TV in favor of streaming services like Netflix, Hulu, and YouTube. That’s true, but another shift is happening, too.

For years, the big telecom Internet providers essentially operated as dumb pipes. All they did was deliver content. That used to make a lot of sense. A decade ago, the dotcom crash was still a recent memory, and digital piracy threatened to undercut the entire entertainment industry.

How things have changed. AT&T, Comcast and Verizon have watched Amazon, Facebook, and Google take their place among the world’s most valuable—and powerful—companies, using infrastructure owned by the telcos. The entertainment industry rebounded as well, with upstarts like Netflix having reinvented the very idea of television.

What’s more, those same tech companies have increasingly encroached on the telco’s business. They threaten to upend telecommunications much like they’ve upended other industries, aided by the Federal Communications Commission making more of the wireless spectrum available to them.

Google in particular is eager to access more of the spectrum. And it has a few other projects going that could further undermine traditional telcos. Although Google Fiber and the companies wild schemes to use balloons and drones to deliver Internet access to remote areas garner a lot of attention, two other projects promise to be more radical.

The wireless Google Fi service essentially resells T-Mobile and Sprint’s service. Android phones can discern which carrier offers the strongest signal in any given location, allowing you to move seamlessly between Wi-Fi and the two carriers depending on signal strength. Apple is among the companies that may be developing similar technology.

This could lead to a situation in which your carrier is essentially invisible, and you’re paying Google (or another broker) to connect you to the network with the strongest signal. That could be a national carrier, or a local Wi-Fi provider.

Google Station, an effort to provide a unified system for logging into and paying for Wi-Fi around the world, fits neatly into the vision as well.

Put the pieces together and you begin to see a future in which tech companies have commoditized telcos in much the same way they commoditized computer hardware. Telcos, using cheap, off-the-shelf hardware powered by open source designs, could compete to sell bandwidth to the Googles and Amazons of the world at razor thin margins.

AT&T probably isn’t thinking about this right now. Like the pundits say, it probably cares more about short-term gains like papering over any potential losses from cord cutting. Nor is any of this to say that the merger will be good for AT&T, let alone the public.

Robert McChesney, a communication professor at the University of Illinois at Urbana–Champaign, says these kinds of mega-mergers rarely benefit the public. “This is a merger that will make no sense,” he says. “There’s no reason this merger should be done for consumers or workers.”

These sorts of deals rarely pan out for the companies involved. New York University economics professor Nicholas S. Economides notes that AT&T’s has a checkered history of acquisitions. For example, it bought business technology company NCR in 1991 for $ 7.4 billion, only to spin spin it off six years later for $ 3.4 billion. And who could forget Time Warner’s disastrous $ 165 billion1 acquisition of AOL in 2000, which it unloaded in 2009 for $ 2.5 billion.

If regulators approve the AT&T and Time Warner merger, their blessing almost certainly will include stipulations barring it from, say, refusing to license its movies, television stations and other content to competitors like Comcast. That could make it hard to justify so expensive an acquisition.

But in a world where Internet access is a commodity, not a government-supported monopoly, owning a giant media company begins to make sense.

1Correction 10/23/2016 at 11:30 AM ET: An earlier version of this story said that Time Warner acquired AOL for $ 165 million. It was $ 165 billion.

Correction 10/23/2016 at 1:04 PM ET: An earlier version used an incorrect logo for Time Warner.

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