It does not take any great legal insight to realize that the proposed $45.2 billion merger between Comcast (the senior partner) and Time-Warner Cable will provoke all sorts of antitrust concerns. The two companies are big players by any definition, and their combination will make them only bigger. It is therefore a certainty that Federal Communications Chairman Thomas Wheeler will give this merger a close look to see if it passes muster.
Opinion on the merger is sharply divided along predictable political lines, with experts on the left opposing the merger and those on the right being more sympathetic to it. Initially, my own views about the merger were cautious. In general, any merger between two leading players in the same industry can raise concentration concerns. Yet by the same token, defining what counts as “the same industry” is no easy task given the rapid evolution of information services; it is now plausible to say that any company that transmits information using zeros and ones is in the same market as any other company that does the same. Expand the denominator, and the concentration ratios are sure to go down, as new entrants on the one had, and a long list of actual competitors on the other, will put downward price pressure on the market.
The case for allowing the merger became a lot stronger for me when I read Tim Wu’s blog on the New Yorker website arguing against it. The usual test in these cases asks about this tradeoff: how much does the merger in question increase concentration in the industry, and is that amount offset by any efficiencies in production that the merger might be able to produce? That ultimate question is, alas, the one that Wu does not address. Instead, he leads with a classic irrelevancy, complaining about the cost of cable coverage, which, for a “decent package,” is now over $60 per month, with an average cost around $86, and prices rising more rapidly than inflation. Comcast is able to charge about twice that figure, at about $156 per month. Looking at these numbers, Wu thinks that the public interest rests in “lower cable prices,” and that, for engaging in poverty relief, “you could do worse than cutting cable bills.”
The sad point about this critique is that it raises none of the relevant issues for this merger. I claim no expertise in the particular transaction, but reading some more balanced accounts of the overall issue from the Washington Post, Bloomberg News, and Quartz gives a much more balanced picture. Here are some of the relevant points that Wu did not mention in his account.
— First, the question of industry concentration does not depend solely on shares of nationwide markets held by the two companies. For better or worse, cable tends to have few competitors in any given market, given the restrictions on entry created by local governments. There is almost no overlap between the customers of Time Warner Cable and those of Comcast. There is therefore no way in which the merger can influence the price charged by either firm.
— Second, there are some efficiencies that could arise from the merger. One advantage is that the superior Comcast technology could be substituted for TWC’s weaker technology. Another is that the combined company may have greater pushback against the large content suppliers like Viacom, which have been able to raise their rates consistently over time. Indeed, much of the increase in direct cable costs comes from the increased cost of content. It looks, therefore, like the traditional tests that are used to evaluate the merger come out in favor of the deal.
There is a third factor, however. Wu claims that a larger customer base and greater buying power could allow the merged company to reduce competition and raise prices by taking advantage of exclusive control over broadcasting the games of local sports franchises. I believe that the claim of antitrust violation from these tactics is indeed a close one, as I explained in writing about the Supreme Court decision in Comcast v. Behrend. That issue, however, is largely immaterial to the merger. Any effort to use that control over any particular market is available right now to TWC in areas where it has the monopoly. If the practice is risky, it should be stopped whether or not the merger takes place.
Also, there is the important question of market definition. Netflix has about 33 million subscribers, which is the same number as Comcast. Indeed, Netflix subscribers are sharply increasing, and those for Comcast are going down. Price has a lot to do with this, as Netflix is cheap, at about $8 per month. But this is not a huge source of concern. As part of the deal (to which Wu did not refer), Comcast made it clear that it would not degrade the quality of content carriage for Netflix and similar companies that use its pipes for transmission, thereby blunting one of the central objections to the merger.
It is very difficult to predict the influence of this merger, should it be allowed, on prices in the industry. That is not the dominant concern, however. Wu notes that people grouse about having to pay these higher rates — but the behavior tells more than the criticism: Everyone wants a lower price for existing services. The customers who complain but keep their service, however, value the service more than its cost. They’ll be faced with the same calculation if and when the merger goes through.
This quick tour suggests — even if the FCC may be inclined to block or slow down the merger —that it better come up with better reasons than those advanced against it by one of the more prominent (if less precise) gurus of the information age. I shall await a clearer picture of the evidence, but, for the moment, the case against the merger seems to justify a “not proven” verdict.