II. A natural experiment

The U.S. communications/media marketplace provides a rather convenient natural experiment to test the effects of vertical integration of carriers into video content. There are two major national telecommunications carriers – AT&T and Verizon – and two major publicly traded cable television operators – Spectrum and Comcast. Two of these carriers – AT&T and Comcast – have invested heavily in media content that is distributed over their broadband networks. The other two carriers have generally avoided such investments. Has the integration of content and broadband distribution provided the two integrated carriers opportunities to exploit their position in delivering broadband relative to the two unintegrated carriers?

AT&T and Verizon compete in offering wireline and wireless voice, data (Internet) and video services,Footnote ⁹ but these two companies have pursued very different strategies regarding media (largely, video) content and video distribution. Verizon has concentrated heavily on developing its traditional consumer and business wireline/wireless services. It has divested itself of a large share of its wireline facilities in smaller markets and has built out a substantial fiber-to-the-premises service, called Fios, in its major markets to deliver video and high-speed Internet services. It is also one of the three major national competitors in the wireless marketplace. For the most part, however, Verizon has declined to integrate backwards into video media production. Its media acquisitions have been limited to the acquisition of the online portals, AOL (2015) and Yahoo! (2017). By its own admission, the results of even these limited acquisitions have been disappointing.Footnote ¹⁰ In 2022, it sold both entities.

AT&T’s business strategy is very different from that of Verizon’s. Until recently, it has largely eschewed the extension of fiber to the premises, opting instead to deliver video by satellite and more limited fiber deployment to the curb (U-verse).Footnote ¹¹ In 2015, it purchased DirecTV, the country’s largest satellite broadcaster, for $67 billion. It followed this acquisition with the $85 billion purchase of one of the country’s largest media companies, Time Warner, in 2018. The latter acquisition required 18 months to comply with a government antitrust investigation and successfully defend itself against the resulting antitrust suit that alleged that the combination of Time Warner’s video media production and AT&T’s national video distribution would result in a reduction of competition in one or both sectors.Footnote ¹² When finally consummated, the Time Warner acquisition provided AT&T with a large number of cable programming networks and a major motion picture producer-distributor, Warner Brothers.

The U.S. cable television sector presents a similar contrast between its two major companies, Charter and Comcast.Footnote ¹³ Charter (now branded as “Spectrum”) has steadily built its cable distribution business through a series of acquisitions, the latest of which was Time Warner Cable in 2016, but it has avoided investing in upstream video content.Footnote ¹⁴ Comcast, on the other hand, acquired one of the largest media companies, NBC-Universal, for a total of approximately $30.5 billion in two stages, the first in 2011 and the second in 2013.Footnote ¹⁵ This acquisition provided it with a host of cable channels, a major motion picture producer-distributor (Universal), theme parks, the NBC television network and NBC’s network-owned television stations. Subsequently, it also bought DreamWorks, a feature-film producer, for $3.8 billion in 2016Footnote ¹⁶ and a major British media company, Sky TV, for $39.4 billion in 2018.Footnote ¹⁷

These two sectors of the U.S. communications industry thus provide an excellent opportunity to determine whether there is any evidence that backward integration into content by a major communications carrier increases its market value, whether by affording the carrier the opportunity to engage in anticompetitive conduct or by simply enhancing efficiency. If the two exercises of acquiring major content providers had provided a competitive benefit to AT&T and Comcast, one would expect their common equities to outperform those of Verizon and Spectrum, respectively.

A. U.S. telecommunications: AT&T and Verizon

If AT&T’s integration into media content provided anticompetitive opportunities, AT&T’s common stock price should have outperformed Verizon’s equity price. As Figure 1 shows, however, precisely the opposite is true. Verizon has generally outperformed AT&T in the last 14 years, and this outperformance increased substantially once AT&T acquired Time Warner.

Figure 1.

AT&T and Verizon Monthly Stock Prices, 2010–2024.

Source: www.finance.yahoo.com

Less than 5 years after announcing its intention to acquire Time Warner, AT&T conceded that the acquisition was a mistake by announcing that it would spin off its Warner Media subsidiary into a joint venture with Discovery for $43 billion. In addition, AT&T stockholders would own 71 per cent of the joint venture that became Warner Brothers Discovery.Footnote ¹⁸ This divestiture followed a similar spin-off of DirecTV in 2021, in which AT&T received $7.3 billion for a 30 per cent stake in the new company, far less than the $20 billion which it paid for this stake 6 years earlier.Footnote ¹⁹

Note that AT&T’s underperformance relative to Verizon was most pronounced between 2018 and 2022 when AT&T owned Time Warner. Another major reason for AT&T’s poor performance was the sharp decline in its satellite TV subscribers before it spun off DirecTV. AT&T’s total “premium TV” subscribers to its satellite service (DirecTV) and its U-verse wireline service declined by more than one-third between 2015 and 2020.Footnote ²⁰ Surely, this precipitous decline in AT&T’s pay-TV business does not lend credence to the theory that its acquisitions of Time Warner and DirecTV provided it with opportunities to engage in anticompetitive practices in video content or distribution markets. Since 2022, both AT&T’s and Verizon’s common equities have underperformed the overall market, largely because of T-Mobile’s dynamic growth in the wireless sector after its acquisition of Sprint.Footnote ²¹

B. U.S. cable television: charter (Spectrum) versus Comcast

The performance of Charter and Comcast common equities provides equally strong evidence that backward integration into content does not confer advantages on a video distributor. As Figure 2 shows, Charter, which has no meaningful upstream video media production operations, has vastly outperformed Comcast from 2010 to 2024. Comcast’s acquisition of NBC-Universal apparently conveyed no competitive advantage for Comcast over Charter. Note that Charter’s stock price began to rise more rapidly than Comcast’s as Comcast completed its acquisition of NBC-Universal and then accelerated substantially as Comcast completed its acquisition of Sky TV in October 2018. Both companies’ common equities began to decline steeply in late 2021 as subscribers began to drop their cable subscriptions in favor of video streaming, but Charter’s stock has still outperformed Comcast’s common equity since 2013 when Comcast completed its purchase of NBC-Universal.

Figure 2.

Charter and Comcast Monthly Stock Prices, 2010–2024.

Source: www.finance.yahoo.com.

It is possible that some of the difference between the stock-market performance of AT&T and Comcast and their unintegrated competitors is due to investors’ concern over the potentially adverse effects of net neutrality regulation.Footnote ²² If this were a major concern, however, it would be difficult to explain why AT&T offered to buy Time Warner 19 months after the FCC decided to regulate net neutrality in 2015. Furthermore, Comcast completed its acquisition of NBC/Universal in 2013 when the debate over the need for net neutrality regulation was well underway.

C. A further analysis

It is also useful to examine the enterprise market value, i.e. the total value, including outstanding equity and debt, of AT&T and Comcast to determine how past purchases of media companies were valued at the end of 2021.Footnote ²³ These data are shown in Table 1 for each of the major telecommunications carriers, as well as for the largest remaining media company with no telecommunications or cable distribution interests, Walt Disney. Admittedly, Disney’s market value does not provide a perfect comparison for AT&T’s Warner Media (or for NBC/Universal, below) because Disney has major theme-park and cruise-ship operations that Warner Media lacked. Nevertheless, it is the best choice among the current large media companies.Footnote ²⁴

Table 1.

Enterprise value for AT&T, Verizon and Walt Disney 31 December 2021 (billion $)

* EBITDA = earnings before interest, taxes, depreciation and amortization.

^** The revenues and EBITDA for Disney are for the entire company.

Sources: Yahoo! Finance; Company Annual Reports.

From an initial perusal of Table 1, one notices that at the end of 2021, Verizon’s enterprise value was greater than AT&T’s even though Verizon had virtually no media operations and its communications operations were only slightly larger than AT&T’s.Footnote ²⁵ Is it possible that the financial markets assigned very little value to AT&T’s Warner Media?

If investors valued AT&T’s communications operations at the same multiple of revenues or cash flows as for Verizon, the value of these communications operations would have been greater than the entire value of AT&T.Footnote ²⁶ This would suggest that the financial markets found Warner Media to be worthless at the end of 2021. But AT&T’s spin-off of Warner Media, completed in April 2022, netted AT&T’s shareholders $43 billion-plus 71 per cent of Warner Brothers Discovery, worth $41.5 billion at the time of closing.Footnote ²⁷ If Warner Media was worth $84.5 billion, AT&T’s communications operations must have been worth substantially less than the multiple of its cash flows and revenues that investors assigned to Verizon.

Moreover, as Table 1 shows, the $84.5 billion total sales price for Warner Media was far less than the value that these operations would have commanded if they had sold at Walt Disney’s market-determined multiple of revenues or cash flows, $171 billion and $291 billion, respectively. Admittedly, the latter comparison fails to account for the possibility that Disney’s theme-park and cruise-ship operations, even as they rebounded from the effects of Covid, would be worth larger multiples of revenues and cash flows than their media operations. But Time Warner was spun off by AT&T at a price that was such a low multiple of its 2021 revenues or EBITDA, that one is forced to conclude that AT&T’s combination of telecom and media operations was far from value enhancing for its shareholders. Moreover, AT&T severely underperformed Verizon in its overall communications business while it was vertically integrated into video media.

Thus, it is obvious that AT&T failed to convince the capital markets that vertical integration allowed it, whether by competitive or anticompetitive strategies, to extract additional rents from its integration with Time Warner. Some of this failure may be attributed to the steady decline in DirecTV’s subscribers under AT&T’s watch, a decline that was not arrested in the 4 years of AT&T’s ownership of Time Warner. It is not surprising that, given this bleak performance, AT&T decided to spin off Warner Media into an independent joint venture with Discovery.

A similar analysis can be undertaken for Comcast. The results are shown in Table 2. As of 31 December 2021, Comcast’s enterprise value was $313.57 billion. Were Comcast’s cable revenues or cable EBITDA valued at the same multiples as Charter’s, Comcast’s cable operations would have been worth $249.94 billion or $273.49 billion, respectively. This would result in a residual value of $63.63 billion or $40.08 billion, respectively, for all of Comcast’s media operations at the end of 2021.Footnote ²⁸ But if its media operations were valued at Disney’s enterprise value per dollar of EBITDA or revenues, these operations (including the recently acquired Sky-TV) would have been worth $241.78 billion or $244.55 billion, respectively. The total company would have been worth between $492 billion and $518 billion, far above its enterprise value of $314 billion. In short, at the end of 2021 Comcast’s “sum of the parts” appears to have been greater than the value placed by the financial markets on its combined operations – if it is appropriate to measure the value of the parts based on Charter’s and Disney’s market values.Footnote ²⁹

Table 2.

Enterprise value (31 December 2021) for major U.S. cable companies (billion $)

Sources: www.finance.yahoo.com (Enterprise Values); Company Annual Reports.

Once again, it appears that vertical integration has not proved to be a lever by which Comcast could improve its performance, whether due to competitive efficiencies or anticompetitive actions.

With only two carriers in each sector, it is difficult to expand the explanatory variables to analyze the differences in market performance between integrated and unintegrated carriers in the United States. But there is another option: look at a different jurisdiction for confirmatory evidence. Canada offers just such an opportunity.

III. Canadian Communications

The communications sector in Canada bears a striking similarity to the U.S. sector. It has two major telecommunications carriers – Bell Canada and TELUS – that offer wireless and wireline services and a third carrier, Rogers, that offers wireless and cable services. In addition, there are two regional cable television companies, Videotron and Cogeco, with a variety of portfolios of services and different geographical footprints.Footnote ³⁰ Rogers competes with these cable companies through its cable platform, and Bell Canada offers a video satellite service.

The Canadian telecom sector offers a similar opportunity to test the effects of vertical integration on market performance.Footnote ³¹ Bell Canada has an extensive portfolio of video content that it offers through a variety of outlets, including its own satellite service and broadcasting operations, and it owns a share of two major sports franchises. Similarly, Rogers has substantial interests in video content and sports franchises. TELUS, like Verizon in the United States, has largely avoided investing in video content.

In Canada, network neutrality has been much less of an issue than in the United States. As video services have become more important to carriers, there have been some minor issues involving access to video content, but there is little discussion of explicit net neutrality rules. Rather, the regulator – the Canadian Radio-Television and Telecommunications Regulatory Commission – has been bound by a provision of the Canadian Telecommunications Act:

For the purposes of this paper, the most relevant comparison is between Bell Canada and TELUS. Both offer voice, Internet and video services, but TELUS has not invested in content or in other video delivery services. Figure 3 clearly shows that TELUS’s stock has greatly outperformed Bell Canada’s (BCE’sFootnote ³³) common equity. It has also outperformed Rogers, which has substantial investments in content and (cable) video delivery. As in the case of U.S. telecom companies, there is no evidence that a company’s integration into content provides superior stock performance, whether from potential discrimination in favor of its own content or other sources.

Figure 3.

Bell Canada, Rogerrs, and TELUS Monthly Stock Prices, 2010–2024.

Source: www.finance.yahoo.com

TELUS and Bell Canada have similar national wireless operations: TELUS had 10.1 million subscribers at the end of 2023 while Bell Canada had 10.3 million. Bell Canada’s cash flow (Adjusted EBITDA) in 2023 was 44 per cent greater than TELUS’s cash flow, in large part because it has a much more extensive wireline network than TELUS.Footnote ³⁴ Although BCE has a large media presence in Canada, its media operations are not very profitable, accounting for less than 7 per cent of its cash flows in 2023. As a result, Bell has announced substantial reductions in its media staff.Footnote ³⁵

The equity market values Bell Canada’s and TELUS’s cash flows somewhat differently. TELUS had an enterprise value that was 9.9 times its cash flow at the end of 2023 while BCE’s enterprise value was only 8.8 times its cash flow.Footnote ³⁶ Thus, it appears that Bell derives no advantage over TELUS from its ownership of media content, a conclusion that it concedes as it continues to scale back its media operations, much as AT&T has done in the United States.Footnote ³⁷

To summarize, for the last 14 years, TELUS’s common equity has outperformed BCE’s equity shares. TELUS has essentially no investments in video content while BCE has substantial, but declining investments in media content and broadcasting, though it is now apparently contracting these media operations. Given this performance, it is clear that vertical integration into media content has not provided BCE with an advantage over its unintegrated rival, TELUS.

IV. Preliminary results from the new video streaming marketplace

The recent shift from linear cable television offerings to streaming services delivered over the Internet provides another opportunity to test for any unfair dominance by broadband Internet carriers. If ownership of the broadband network conveys anticompetitive advantages to carriers in offering video streaming, we should begin to see these carriers surging ahead in the battle for video streaming subscriptions. However the results thus far do not suggest that these carriers are dominating the new video-streaming marketplace.

Netflix, an independent start-up, has been the leader in video streaming for several years, but several other companies are now challenging Netflix, including Disney, Amazon, Apple and the two media companies that have been owned by communications carriers – NBC-Universal and Warner Brothers Discovery. A recent (2d Quarter, 2024) estimate of the market shares of the leading streaming services finds that Netflix and Amazon Prime each have 22 per cent of the U.S. video streaming market, followed by HBO Max with14 per cent, Disney+ with 11 per cent, Hulu (now controlled by Disney) with 10 per cent and Apple TV+ and Paramount+ each with 9 per cent.Footnote ³⁸

HBO Max is the streaming service of Warner Brothers Discovery, the company that emerged from the spin-off by AT&T of Warner Media. It was integrated with AT&T’s Internet services before the spin-off in the second quarter of 2022, but it is now unaffiliated with any Internet provider. It had been expanding before the spin-off, but its market share is now declining slightly as Netflix and Amazon Prime continue to gradually expand their shares of the market.

NBC-Universal’s Peacock streaming service is the only streaming service now owned by a vertically integrated U.S. Internet carrier, Comcast. It is not among the leading services in the above list. Comcast reported in July 2024 that Peacock had only 33 million subscribers and was still not profitable.Footnote ³⁹ In contrast, Netflix has 277 million subscribers.Footnote ⁴⁰ It is still far from clear how the streaming market will develop, but it does not appear that Comcast’s integration of content and distribution provides it with any advantage thus far over its rivals in this market.

The various streaming services are still experimenting with various business models involving direct subscriber fees and advertising support. As viewers continue their migration from linear cable offerings, streaming services should continue to grow, but enormous uncertainties remain. It is possible that the large digital platforms –Amazon, Google and Apple – will be the most successful competitors. Google’s YouTube operations provide an obvious opportunity for growth. Thus, far, however, there is no evidence of any anticompetitive effects of communications company backward integration into video streaming. Indeed, there is even a possibility that video streaming will be dominated by large digital platforms – entities that are totally unrelated to traditional communications companies.