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When companies say a merger will result in lower prices, try laughing in their face

When companies say a merger will result in lower prices, try laughing in their face
AT&T’s chief executive, Randall Stephenson, argued that the company's merger with Time Warner would allow it to cut prices for consumers. The price of DirecTV Now is going up. (Getty Images)

The next time a big company, and especially a telecom company, tells lawmakers and regulators that a multibillion-dollar merger will result in lower prices for consumers, I hope everyone in the room breaks out in laughter.

At this point, it’s patently obvious that such pledges of price reductions are almost always hogwash.

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Prices rarely if ever go down after a big merger. And if they do, as has happened in the airline industry, they go up again before too long.

“It’s good to be skeptical,” said Daniel Rubinfeld, a law professor at New York University and a former deputy assistant attorney general for antitrust in the U.S. Department of Justice.

He told me consumer benefits are often “grossly overstated” when companies make their case for why a merger should go through.

But authorities seldom challenge many of these claims, particularly the ubiquitous assurances of lower prices, despite decades of evidence that such promises hardly ever come to fruition.

We’ve seen it again and again — in the phone industry, the cable industry, the drug industry, the insurance industry, the banking industry, the oil industry.

Companies merge, prices go up, service declines.

The latest company to demonstrate this truism is AT&T, which repeatedly insisted during its nearly two-year effort to purchase media giant Time Warner that the $85-billion deal would practically be a Christmas present for consumers.

In April, AT&T’s chief executive, Randall Stephenson, argued that the merger would allow the company to make more in advertising, which he said would allow it to cut prices for customers.

In a legal filing in May, AT&T reiterated that “the evidence overwhelmingly showed that this merger is likely to enhance competition substantially,” and said “there is no sound evidence from which the court could fairly conclude that retail pay-TV prices are likely to increase.”

Yet within days of the merger being approved last month, the company announced it was raising the price of its DirecTV Now online streaming service by $5 a month.

The cheapest DirecTV Now plan will jump to $40 from $35 — a more than 14% increase.

This announcement followed news that AT&T had quietly boosted its “administrative fee” for wireless customers to $1.99 monthly from 76 cents, which is expected to result in a windfall of about $800 million in extra revenue.

I’m not saying the company has no right to raise prices or to recoup merger costs.

I’m saying it’s time businesses retired the transparent ruse that big mergers and industry consolidation are good for consumers.

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Yeah, there probably will be efficiencies that result from a larger operation, and maybe technological or service innovations that represent improvements. But don’t pretend that lower prices are a part of the picture.

Joseph Farrell, a UC Berkeley economist, said studies have shown that mergers result in “more increases than decreases” when it comes to prices, but “there have been mergers with price decreases, as best the economists who’ve studied them can estimate.”

It can be hard to tell because companies will say you shouldn’t compare pre- and post-merger prices, but rather where prices ended up after a merger relative to where they’d have gone if the deal never took place.

I’m no economist, but that’s some Twilight Zone stuff.

AT&T put me on the phone for a half-hour with a lawyer (no names allowed) who patiently explained how that Twilight Zone thing works.

I kept asking how the DirecTV Now price hike squared with the company’s earlier pledge of lower prices, and the lawyer kept saying I wasn’t asking the right question, and I kept saying I was. It was a fun chat.

AT&T would rather consumers focus on a new streaming-video package called WatchTV, which features about 30 channels for $15 a month. It’s a good deal for cord cutters, and the company says this is an example of the sort of consumer benefits its merger with Time Warner will produce.

To which one might naturally respond, “Yeah, but you just raised the price of DirecTV Now, which is better than WatchTV, by $5 a month.”

AT&T told me in a statement that “DirecTV Now pricing is completely unrelated to our merger.”

It said the price increase will bring DirecTV Now “more in line with similar services in the market.”

Or as a 5-year-old might insist: “If Johnny gets a cookie, so do I.”

This, of course, is a terrible argument, undercutting prior claims that AT&T is committed to delivering high-quality service at a competitive price. What it’s instead acknowledging is that the company is offering pretty much what the other guys are offering, and for as much as the other guys get.

It seems fair to wonder how long it will take before AT&T jacks up the price of broadband Internet access, U-verse pay-TV programming and other services.

Ominously, the New York Times reported Monday that AT&T already has told Time Warner’s HBO premium channel that it’s making “not enough” money, despite being profitable.

“You can see why they do it,” Michael Noel, an economist at Texas Tech University, said of companies’ pre-merger promises of post-merger price cuts. “They can’t just come out and say their merger will result in bad things for consumers.”

So companies paint the rosiest picture possible, he said, with impressive gains for consumers, workers, shareholders — basically everyone.

Improved shareholder value notwithstanding (and that’s debatable, as owners of the once-upon-a-time AOL Time Warner will tell you), big mergers almost always result in workers losing their jobs, and customers facing higher prices and diminished service amid a reduction in competition.

As for that “administrative fee,” AT&T told me it “helps cover costs we incur for items like cell site maintenance and interconnection between carriers.”

Which is to say, it’s a fee for routine business costs, which probably haven’t more than doubled in recent months. So this is just a cash grab after shelling out $85 billion for Time Warner.

Moreover, who do they think they’re kidding with this “administrative fee” stuff? If it’s an ordinary business expense, then include it in your base rate. Don’t try and break it out like it’s some government-imposed surcharge.

AT&T told me “this is a standard administrative fee across the wireless industry,” which is true but, again, is nothing more than the Johnny-got-a-cookie argument.

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What can be done? First, lawmakers and regulators should get any claims of lower prices in writing. If a company won’t make a firm commitment to cutting prices, it shouldn’t be permitted to tout this as a merger benefit.

Second, authorities should make a regular practice of revisiting mergers a few years down the road to see if the professed claims actually were realized. A report should be issued summarizing what the companies said pre-merger and what they delivered after.

Lawyers and business executives try to make this seem really complicated. It isn’t.

You promise something and you deliver on that promise. That’s not complicated at all.

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