Content, Consumers and Cross-Owners
(Bloomberg View) -- Television.
I am no antitrust expert but I confess that the Department of Justice's lawsuit to block AT&T Inc.'s acquisition of Time Warner Inc. had me from paragraph 1:
American consumers have few options for traditional subscription television. For the nearly one hundred million American households that pay a monthly bill to traditional video distributors (cable, satellite, and telephone companies), this means paying higher prices year after year and waiting on hold to hear why a service technician is running late or why their monthly bill has skyrocketed. For traditional video distributors, this lack of competition means huge profit margins. Indeed, AT&T/DirecTV describes the traditional pay-TV model as a “cash cow” and “the golden goose.”
It's a little too easy to take cheap shots at the cable company -- "and what's the deal with the DMV, am I right, Your Honor?" -- but there is a reason that it has become such a cultural touchstone. And the DOJ tells a plausible-sounding story about how the combination of AT&T's distribution (DirecTV, U-Verse) and Time Warner's content (Turner, HBO, etc.) could lead to higher prices and worse choices for consumers:
There is currently a limit to what video distributors will agree to pay Time Warner for its Turner networks. If, in negotiations, Time Warner seeks too high a price for the Turner TV networks, the video distributor across the table may walk away. Without a deal, Time Warner loses monthly payments from the video distributor and advertising revenue—and gains nothing in return. This merger, if allowed, would change that. After the merger, if the merged company raised prices of the Turner networks to the video distributor and no deal were reached, resulting in a blackout of such networks, the merged company would still lose monthly payments and advertising revenue from the video distributor with whom it could not reach a deal, but, importantly, it would now get an offsetting benefit. Because the video distributor walking away from a deal with the merged company would lose access to Turner’s popular programming, some of the video distributor’s valuable customers would be dissatisfied and switch to a competing video distributor. Some of those departing customers would sign up with AT&T/DirecTV, bringing with them significant new profits for the merged company. This improvement in Time Warner’s best alternative to a deal resulting from the proposed merger—and therefore in its negotiating leverage—would give the merged firm the ability to credibly demand higher prices than it otherwise would.
AT&T's response to all this is sort of curious. It does argue that the merger will be pro-consumer, but in a rather blathery way:
This merger will benefit consumers by:
- Creating more competition in the evolving, multi-faceted entertainment industry.
- Giving consumers more choice and value—not less—in how they get their favorite content.
- Making entertainment more innovative, interactive and mobile.
- In short, Time Warner content will be distributed in more ways and to more places and people, not less.
I read the DOJ's story about how a combined AT&T/Time Warner will negotiate over content packages and I think "yes sure I could see that happening." I read AT&T's bullet point about "making entertainment more innovative, interactive and mobile" and I think "yes sure those are all buzzwords but what do they mean?" (A somewhat better explanation from Randall Stephenson to the Wall Street Journal: "Tech companies are spending billions creating content and distributing it directly to consumers," and the deal "gives Time Warner the opportunity to do the same, across multiple platforms and with ad-supported models that cost consumers less.") The pro-competitive mechanism seems vaguer and less direct than the DOJ's anti-competitive one.
The main thrust of AT&T's response, instead, is to lean hard on the precedents. "The lawsuit 'stretches the very idea of antitrust law beyond the breaking point,' Stephenson, AT&T’s chief executive officer, said at a briefing Monday." "The last time the DOJ tried a vertical merger case, Jimmy Carter was President – and the DOJ lost," says AT&T, and "the last time the DOJ blocked a vertical merger in court, Richard Nixon was President." That is not even a legal argument, really. Certainly in a new administration whose main theme is to overturn all traditions of U.S. government, it is hard to see how "this never happened when Bush or Obama were president" could be a compelling argument. "The flaw in Wall Street’s thinking was that precedent would hold in an administration that doesn’t highly value precedent," notes the Wall Street Journal.
On the other hand, there really isn't that much precedent for courts blocking vertical mergers. "The Justice Department will have a tough time winning the case in court, where precedent still holds, or at least that is what Wall Street believes," continues the Journal. And AT&T's argument that this deal is existential for it as a way to compete with the internet giants -- "if this deal is killed, AT&T's entire video-entertainment strategy goes kaput," writes my Bloomberg Gadfly colleague Tara Lachapelle -- does suggest that it is not going to exercise all that much monopoly power.
Meanwhile at the FCC:
The Federal Communications Commission is preparing a full repeal of net neutrality rules that require broadband providers to give consumers equal access to all content on the internet, putting more power in the hands of those companies to dictate people’s online experiences. ...
A rollback of net neutrality regulations would represent a significant victory for broadband and telecom companies like AT&T and Comcast and would amount to a strike against consumers.
As the DOJ is trying to block the Time Warner deal so that AT&T can't discriminate among content providers and dictate people's online experiences, the FCC is doing the opposite. I suppose there are substantive arguments for why you might hold these two positions simultaneously, but I prefer the simpler explanation, which is that the person who runs the DOJ's antitrust division is a different person from the person who runs the FCC, and if you have a government without any particular unifying philosophy of governance or regulation or consumer protection, you get a bunch of haphazard and conflicting decisions.
Should index funds be illegal?
Here is "Common Ownership Does Not Have Anti-Competitive Effects in the Airline Industry," by Patrick Dennis, Kristopher Gerardi and Carola Schenone. We talk a lot around here about the theory that common ownership of companies in the same industry by large mutual-fund complexes leads those companies to compete against each other less vigorously. That theory is largely based on an empirical study about cross-ownership in the airline industry, but Dennis et al. question that study:
This paper revisits the empirical evidence on the relationship between prices and common ownership in the airline industry documented in Azar et al. (2017). In contrast to their finding that greater common ownership leads to significantly higher average airline prices, our results suggest that there is no relationship between common ownership and prices in the airline industry.
Meanwhile the Committee on Capital Markets Regulation looked at some papers about common ownership and "finds that this common ownership research reaches conclusions based on questionable research methodologies and that, given the concerns with the research design, the findings in the three papers are not robust to the critiques of other academics and are, therefore, largely inconclusive."
These empirical debates will continue, and eventually someone might even study industries other than airlines and banks. I have to say that my interest in this debate is more aesthetic and governance-theoretical than empirical. If you don't believe the common-ownership-is-bad argument, it's because you think that corporate executives naturally want to compete with each other and don't think a lot about their shareholders' other holdings. If you do believe the argument, though, it's because you think executives are, or should be, at least subtly affected by their shareholders' actual economic interests, rather than just the stylized version of their interests that considers only a single company's shares. One interesting question is which model is empirically right, but it is not the only interesting question. Which model ought to be right, and which model is implied by modern notions of governance and shareholder value, also seem like interesting questions.
Blockchain blockchain blockchain.
Am I too mean to the idea of closed trusted blockchains run by consortia of banks? Really this is a perfectly heartwarming story:
The prospect of blockchain technology remaking financial services just moved a step closer to reality after banks including Goldman Sachs Group Inc. and JPMorgan Chase & Co. completed a successful six-month test in the $2.8 trillion equity swaps market.
The program, managed by blockchain startup Axoni, kept track of the swaps contracts after they were executed, recording things like amendments or termination of the deals, stock splits and dividends, and achieved a “100 percent success rate,” Axoni said in a statement Monday.
This is where I would normally object that there is nothing magically blockchain-y about keeping a centralized database of swaps contracts. Like, you could just hire Axoni -- or Depository Trust Company for that matter -- to keep a list of who has what swaps, and when you agree on an amendment or whatever you could send it to Axoni to update. And Axoni could keep that list on its computers, and it could also have a web page where the bank participants could log in and see the list. The actual innovative benefits of blockchain -- a ledger without a trusted central party, permissionless access for anyone -- aren't priorities here, and so there's no need for the traditional annoyances of blockchain -- slow and energy-hungry multiparty verification of transactions, the inefficient redundancy of everyone keeping the list.
But, you know, "100 percent success rate"! And:
A blockchain system for equity swaps works to speed transaction times because the banks and asset managers all become members of a network that shares a so-called distributed ledger. Each member has an up-to-date copy of the ledger, so when payments need to go from one participant to another they can be processed almost in real time.
“Fewer valuation disputes, less reconciliation and real-time access to data would benefit all of the industry,” Adam Herrmann, global head of prime finance at Citigroup, said in the statement.
You can't argue with that last part. Sure, Axoni could just have a good fast database and a good fast web page and a good fast communications protocol with its members, and when they sent in amendments it could just make them accurately, and they could trust Axoni's centralized database so thoroughly that they could just use it as their own with no errors and no need for time-consuming manual reconciliation. But empirically, sociologically, technologically, that often seems not to happen. Some service provider provides a transaction database, and all of its customers keep their own local ledgers and are constantly finding discrepancies and haggling over them. But distributing the ledger -- even distributing it narrowly among participant members, and keeping a centralized manager -- does seem to have improved matters. If the actually existing blockchains are better than the actually existing centralized databases, then it's a little silly of me to complain that you could do the same thing with a really good trusted database.
Still I object to "remaking financial services." Five years ago, if I had come to you and said "I have discovered a new way to administer the swaps settlement process to reduce reconciliation errors from 2 percent to 0.01 percent" (or whatever the numbers are), you would have fallen asleep before the end of that sentence. The most impressive trick that blockchain-in-banking advocates have performed is not making marginal improvements to the efficiency of back-office reconciliation processes. It is getting the world to pay attention to those back-office technology upgrades, and to think that they might be revolutionary.
Meanwhile in decentralized trustless blockchains, remember that the fate of all bitcoin exchanges is to lose their customers' money:
The company behind tether, a cryptocurrency used by bitcoin exchanges to facilitate trades with fiat currencies, announced the theft on Tuesday. It said in a statement that a “malicious” attacker removed tokens from the Tether Treasury wallet on Nov. 19 and sent them to an unauthorized bitcoin address.
And here is "100 cryptocurrencies described in four words or less." It is missing some of my favorites -- TetzelCoin ("buy forgiveness from sin"), Dentacoin ("somehow blockchain for flossing?"), Cream Cash ("gobbledygook centralized Wu-Tang coin") -- though it does have Dogecoin ("Serious meme bitcoin clone"). Of course there are far more than 100 cryptocurrencies, and the long tail is full of minor coins that could share the same description. "Mostly joke, part scam," or "mostly scam, part joke," would suffice for many of them.
People are worried that people aren't worried enough.
"A Trader Called the ‘VIX Elephant’ Is About to Rock Volatility Options," so if you are worried that people aren't worried enough, don't worry, an elephant is on the way to worry. (Actually the elephant has "been betting on a modest rise of the Cboe’s VIX index," so I suppose he/she/it is only modestly worried.)
People are worried about unicorns.
There is a popular narrative that innovation in America is suffering because public companies take all their profits and return them to shareholders in the form of dividends and buybacks, rather than investing them in research, and that the shareholders then waste them on yachts or whatever. But there is an interesting and opposite story in Silicon Valley, where it seems like the norm is:
- Someone starts a company with venture funding
- The company gets huge and makes many employees millionaires
- The employees all quit to become venture capitalists
The money flows out of the startup into the pockets of employees, who put it right back to work in other startups. There is perhaps something a bit off-putting about a bunch of 30-year-olds whose job is now just to invest their and their friends' massive wealth, but from an innovation perspective it seems like a virtuous cycle. Good for them. Anyway here's a story about how it's a really really really really easy time to raise a venture capital fund:
The rush has brought an unusual mix of prospectors. In addition to veterans like Mr. Sands, there are wealthy Google and Facebook Inc. engineers who want to try investing, celebrities such as the band Linkin Park and basketball stars Carmelo Anthony and Kobe Bryant, and big corporations like 7-Eleven and Campbell Soup Co. all spraying money on tech. Just since this summer, two separate venture firms were started by former Airbnb Inc. employees.
Airbnb isn't even public yet! It used to be that you'd need an initial public offering before your employees start calling in rich and becoming venture capitalists, but now the pre-IPO unicorns are spawning new unicorns themselves.
Elsewhere, here's a story about some people -- America Online co-founder Steve Case, "Hillbilly Elegy" author J.D. Vance, some other venture capitalists -- who are funding startups in the Midwest. The Enchanted Cornfield has not been quite as fecund with the unicorns as Silicon Valley's Enchanted Forest, but there have been some:
CoverMyMeds, an Ohio start-up, whose software streamlines drug prescribing, was sold to McKesson this year for $1.1 billion, and Salesforce bought ExactTarget, a maker of marketing software in Indiana, for $2.5 billion in 2013.
"Every major Midwestern city now has clusters of start-up accelerators and incubators, typically housed in renovated red-brick industrial buildings," and it is pleasing that the aesthetic is so consistent. Imagine running a start-up accelerator from a suburban office park.
People are worried about bond market liquidity.
But Tobias Adrian, Michael Fleming and Erik Vogt of the Federal Reserve Bank of New York are not worried about Treasury market liquidity, because they have constructed "a daily index of Treasury market liquidity" from 1991 to 2017, and find:
The liquidity index points to poor liquidity during the 2007-09 financial crisis and around the near failure of Long-Term Capital Management, but suggests that current liquidity is good by historical standards. Market liquidity tends to be strongly correlated with funding liquidity at times of market stress, but otherwise exhibits little correlation.
Paris wins battle to host European banking regulator. Yellen Says She'll Leave Fed Once Powell Sworn in as Chair. Lew’s New Job Means Six of the Last Seven Treasury Secretaries Got Finance Gigs. Zions to Challenge Its ‘Big Bank’ Label. Activist Investor Plays Superhero at Marvell Technology. China Is Stepping Up the Fight Against Its Mountain of Debt. "Kingdom Holding’s plan to borrow money to fund new investments has stalled because owner Prince Alwaleed bin Talal has been detained in Saudi Arabia’s anti-corruption crackdown." Apple’s iPhone X assembled by illegal student labour. PayPal to Introduce Customers to Robo Investing. "The truth is that Zimbabweans are not paying $5000 more per bitcoin than everyone else." Cleveland Fed Removes Report on Marketplace Lending for Clarification. House Tax Bill Is Littered With Loopholes for Wall Street’s Wealthiest. Glencore Upends Board of Congo Unit Amid Probe. Dillweed (As An Insult).
If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Thanks!
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
For more columns from Bloomberg View, visit http://www.bloomberg.com/view.
©2017 Bloomberg L.P.