Is the Trump Administration on the Side of Cord-Cutters?

MarketsMotley Fool

Although cord-cutting is a growing trend, with millions of American households forgoing cable service every year, to date there haven't been many options for those seeking freedom from a cable company.

What many cord-cutters want is unbundled service and true a la carte pricing, paying for only what they view. When you're still tied to the cord, it's cable providers and content producers who decide what channel options to provide to you. Considering both parties benefit from large, bloated pay packages, the consumer has only the illusion of choice.

Continue Reading Below

Is the federal government going to help? The Trump administration's latest maneuvers to block AT&T's (NYSE: T) acquisition of Time Warner (NYSE: TWX) make some people say the Trump administration is indeed taking on the biggest obstacle to cord-cutting.

Vertical merger

The federal government's case against AT&T and Time Warner merging initially appeared weak, looking at the arguments and considering historical precedent.

The initial claim of trying to prevent market concentration in the cable and/or broadband Internet industry doesn't pass muster, considering AT&T's purchase of Time Warner would be a vertical merger -- rather than a horizontal one -- and thus would not increase market concentration.

Additionally, the federal government has adopted a light-touch regulatory policy to cable companies for years. Although the Obama administration was considered a more aggressive regulatory regime than its predecessors, AT&T was granted approval to acquire DirecTV in 2015.

The federal government uses the Herfindahl-Hirschman Index (HHI) to gauge industry concentration for antitrust regulation. Typically, transactions that increase an HHI figure 200 points or more and result in a total HHI score of more than 2,500 are more heavily scrutinized, as they signify significant consolidation in a highly concentrated industry. It was alleged that the AT&T/DirecTV merger would increase the broadband internet HHI by 450 to as much as 3,300 in some areas. But the latest proposed merger doesn't affect the cable and broadband industries.

The Trump administration's approach is interesting

More recently, it seems the federal government is taking a new tack to block the merger. In court arguments, the U.S. Justice Department alleged that allowing AT&T to buy Time Warner would hurt consumers by making it harder to unbundle and buy cheaper, online options. Yes, it appears the federal government is standing up for cord-cutters and attacking the cable television's "cash cow."

This is a novel way to argue against the merger. Rather than focus on market power and concentration in the broadband or cable TV industries, the Trump administration is taking a holistic approach to argue for consumers. Industry experts have long noted programming costs are at the root of exploding cable bills.

What's it all mean?

It's hard to tell if this represents a wholesale shift to greater consumer-focused regulation. It was reported that the president initially announced his opposition to the Time Warner/AT&T deal not out of concern for consumers, but rather because he was angry about coverage from CNN -- a Time Warner property -- a network he calls "fake news."

Despite his reputation as a business-friendly president, Trump has been more aggressive than his predecessors in using the bully pulpit to browbeat companies he disagrees with (such as Amazon and Rexnord) and block mergers (Broadcom/Qualcomm). The upshot here is this could be more of a one-off issue, and more of a disincentive for mergers in general than earnest support for cord-cutters.

That said, cord-cutters and investors should follow this case closely, because it could precipitate a shift to unbundled cable, which would likely be a thesis-altering event for both cable networks and providers, and a boon to the greater cord-cutting trend.

10 stocks we like better than AT&TWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and AT&T wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of April 2, 2018

Jamal Carnette, CFA owns shares of AT&T. The Motley Fool recommends Time Warner. The Motley Fool has a disclosure policy.