The AT&T/Time Warner review could depend on what happens next in New Zealand

On Monday, despite earthquakes, floods, and storms, staff of New Zealand’s Commerce Commission posted public submissions related to its recent letter of unresolved issues concerning the proposed merger between the country’s largest pay-television provider, Sky, and largest mobile (and second largest fixed-line) network operator, Vodafone. Whether the commission will grant clearance for the merger to proceed is assuming great significance internationally. The issues it deems relevant will surely become the grounds on which other nationally significant mergers, such as that proposed between AT&T and Time Warner, will be contested. 

The main anti-merger argument

In its October 31 letter, the commission identified significant concerns that a merged Sky/Vodafone could use Sky’s market power in video content markets, notably movies and live sport, to foreclose competition in internet access markets. These concerns, strongly advocated by internet service providers (ISPs) and content providers, echo those voiced by opponents to the AT&T/Time Warner merger. The analytical counterfactual, should the merger be declined, is for Sky to engage in more aggressive wholesaling of its video content so rival ISPs can bundle it with their own internet access offers.  This was held to be both more competitive and offer higher economic welfare than either the current arrangements or the proposed merger.

If it hasn’t happened yet. . .

However, Professor Petrus Potgieter and I fail to find the commission’s merger factual or counterfactual compelling. NERA Economic Consulting, representing Vodafone and Sky, is similarly unconvinced. The problem is that the bundles of Sky content and Vodafone internet access that are presumed to lead to a substantial lessening of competition already exist. These bundles, offered under a contractual agreement at a $20 discount over the unbundled elements, have been available for at least 10 years. Therefore there cannot be any lessening of competition under the merger relative to the status quo ante, as the feared foreclosure must have already occurred.  Yet there is no evidence of such foreclosure.  Instead the very opposite has occurred: ISP Spark has started its own content platform, Lightbox; Netflix has entered without any apparent preferential ISP bundling relationship; and a brand-new ISP backed up with its own proprietary news and magazine content — Fairfax Media’s Stuff Fibre — has been established. While it could be argued that New Zealand’s peculiar regulated access arrangements militate against foreclosure in fixed internet access markets, the same does not hold for mobile markets, where only three network operators compete. This scenario parallels both fixed and mobile markets in the United States.

Heterogeneity in consumer preferences reigns

There is another reason why the warnings of the anti-merger crowds should be taken with a grain of salt: Consumers are inherently heterogeneous in their preferences — an application highly valued by one user is not necessarily valued in the same way by other users. Furthermore, any one consumer uses many different applications. While the most-preferred application may determine the optimal bundle offer to purchase, so long as individuals prefer different applications and their preferences are not stable over time — which is almost certain, given the rapid rate at which new applications are developed — then any market power from a single operator bundling access and applications is likely both weak and transitory. Rather than stifling competition, different operators forming relationships with content providers to offer bundles costing less than each item purchased separately would appear to be both competition- and welfare-enhancing. We argue that Spark’s relationship with Spotify — it is the sole NZ mobile operator to offer Spotify premium in a mobile bundle — is evidence of the development of this new sort of competition, predicated on models of bundled content differentiation rather than price.

The application market is too vibrant to foreclose competition

Indeed, we suggest that as the number of applications from which consumers can choose is large (and potentially getting even larger by the day as new internet of things applications and the services sold off them become available), it will prove extremely costly and physically difficult for one single operator to tie up the agreements for all commercially valuable applications used by all of its consumers to the exclusion of its rivals.  Internationalization of internet application provision further limits the benefits of ISPs rather than individual consumers with heterogeneous preferences negotiating their application and content activity separate from their ISP activity. Neither would it necessarily be in the interests of new or existing applications providers to limit their market exposure to a single ISP’s consumers in the first place, if maximizing consumer reach is their objective. Ironically, requiring content providers to make their content available on (regulated) contract terms to a small number of rival operators — as identified in the commission’s counterfactual — militates against the very sort of competition that has emerged in the market for applications. Parties to the proposed AT&T/Time Warner merger could avoid costly mistakes by learning from the New Zealand process.

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