Should We Be Anxious About the Comcast-Time Warner Deal?

 

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.

There are 14 comments.

  1. EJHill Podcaster

    Richard speaks of Comcast’s ability to push back against content providers like Viacom, but Comcast is a giant content provider as NBCU, with a broadcast network, cable channels and a movie studio.

    • #1
    • February 17, 2014, at 8:48 AM PDT
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  2. David Foster Member

    Yes, Comcast is now the total owner of NBC Universal (previously, partly owned by GE.) One component of NBCU is MSNBC, the voice of rabid “progressivism.”

    Given that Comcast has apparently done little or nothing to rein in the vileness at MSNBC, is there any reason to believe that an expanded Comcast would not use its greater market power to propagandize one-sidedly for left-wing causes?

    • #2
    • February 17, 2014, at 9:01 AM PDT
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  3. Nick Stuart Inactive

    Whether the merger is or isn’t approved will depend largely on how well connected the companies are.

    • #3
    • February 17, 2014, at 9:32 AM PDT
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  4. Instugator Thatcher

    Here is the proof that Poverty in America has been conquered. From the Wu article, first paragraph

    Outpacing inflation, cable is now so expensive that it creates poverty issues: in poorer households it competes with basics like food, rent, or health insurance. If you wanted to help the poor, you could do worse than cutting cable bills.

    When people pay for television, they are not worried about food, clothing, or shelter – they aren’t in poverty and one could argue they aren’t even poor.

    • #4
    • February 17, 2014, at 9:40 AM PDT
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  5. Plato's Retweet Inactive

    Legal issues aside, politics to the forefront, I’d like to see Comcast divest itself of all NBC except its cable entertainment and sports networks before this deal goes through. And Comcast should agree to stay out of the news channel business.

    Cross-ownership of broadcast and broadband-cable empires wasn’t intended to result in lower standards of journalism.

    According to The Hill, “(Comcast CEO Brian Roberts’) fundraising efforts for Obama were dwarfed by head Comcast lobbyist David Cohen, a Democratic bundler who raised $1.44 million for the president’s re-election campaign in 2011 and 2012, and $2.22 million since 2007, according to internal documents obtained by the New York Times.”

    Why have Cohen and Roberts permitted MSNBC’s despoiling of NBC News’ reputation? Why should they control so many eyeballs?

    While CNBC has been immune to MSNBC’s toxic influence, and local broadcast news is no worse than others, MSNBC’s many breaches of journalistic standards can’t be ignored.

    Corporations traditionally seek influence in Washington from both sides. Businesses should advocate for free markets, not against them.

    MSNBC is an outlier, possibly subsidized for partisan advantage. Make them sell it, and NBC broadcasting.

    • #5
    • February 17, 2014, at 9:46 AM PDT
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  6. MeanDurphy Member

    On another tack: I don’t think it matters a lot. As cable gets more expensive, it drives folks to disconnect. I know a few people who have divested themselves of cable and satellite connections entirely and get all of the programs they like over the internet. Services like Roku, Netflix, Amazon Direct and the network’s internet presence make it easier.

    The expensive “buy all of your TV from one provider” model seems to be headed the same way as newspapers. 

    • #6
    • February 17, 2014, at 10:21 AM PDT
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  7. Mike H Coolidge

    Government regulation is the only thing that can keep a monopoly sustainable in the long term. There are very few businesses where the optimal number is one, or even a few. The only reason this merger is nerve-wracking is because the government will be there keeping small competition from challenging them.

    • #7
    • February 17, 2014, at 10:23 AM PDT
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  8. KC Mulville Inactive

    Philosophically, the chief purpose of anti-monopoly legislation was to prevent any giant from making competition impossible. But I’m not sure how that goal applies here. After all, there really isn’t much competition in the first place, and the company is so diversified that one wonders what the competition would be about. 

    The first thing that strikes me about this deal is that we need to re-think the concept of anti-monopoly in the current environment. And while I’m certainly not qualified to come up with those ideas, I am certainly interested if other people do, and would love to read a discussion on that.

    • #8
    • February 17, 2014, at 10:37 AM PDT
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  9. Mendel Member
    Mike H: Government regulation is the only thing that can keep a monopoly sustainable in the long term. There are very few businesses where the optimal number is one, or even a few. 

    There might be some organic explanation why some telecommunications seem to tend toward monopolies.

    Any industry which requires a great deal of private infrastructure to be located in many public areas is going to be subject to government regulation – and as long as public property exists, this is proper.

    Given the difficulty in obtaining public approval to lay wires, and the coziness which always ensues in such processes, it is probably inevitable that any landline-based system will favor a monopoly or duopoly (similar to railroad tracks).

    I don’t think this is a reason to oppose a merger – just to consider that not every enterprise can exist in an unregulated state.

    • #9
    • February 18, 2014, at 3:11 AM PDT
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  10. ParisParamus Member

    My biggest, and really only concern is lobbying that thwarts true internet TV (including cable carriers preventing it from happening over the internet access they provide, or making internet access too expensive).

    At this point, “basic cable” should cost $10-20/month. Give me that over the Internet, with the option to pay more for some a la carte/ad hoc viewing. 

    Or give me just metered ad hoc viewing over the web…

    • #10
    • February 18, 2014, at 12:17 PM PDT
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  11. ParisParamus Member
    Mike H: Government regulation is the only thing that can keep a monopoly sustainable in the long term. There are very few businesses where the optimal number is one, or even a few. The only reason this merger is nerve-wracking is because the government will be there keeping small competition from challenging them. · 1 hour ago

    Kind of reminds me of rent control for housing, except that at this point, real estate is much more a finite resource than bandwidth…

    • #11
    • February 18, 2014, at 12:18 PM PDT
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  12. James Gawron Thatcher

    Dr. Epstein,

    I don’t wish to hi jack this post. However, it demonstrates something I think may become a very real issue and soon. Here we have an example of the super sophisticated discussion over the monopolization of economic power by private corporations. For over 100 years this debate has consumed some of the brightest minds and brought to heel some of our most powerful private institutions.

    What we are facing today is the Monopolization of Powers by a President. The massive increase in the centralized power of the government that results is the real threat. Chief Justice Roberts called it a tax. What does it matter what the Supreme Court ruled when the President can usurp their role and the role of Congress.

    Yes, I think that a rational anti-trust policy can aid the consumer. However, what if you gain $5 per month on lower cable bills with more channels to choose and then pay $1,000 a month more for your health care and lose your doctor.

    Regards,

    Jim

    • #12
    • February 18, 2014, at 12:40 PM PDT
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  13. Duane Oyen Member

    People are all focused on the wrong thing. Cable constitutes the pipes- so do satellite, broadband, etc. There is plenty of competition there- where it is lacking is in the one thing that binds all pipes- programming packages. You can’t buy any of the channels to watch on any feed unless you buy all 200 or all 120, or whatever.

    Every cable company is a monopoly in league with a local government entity, to which it pays royalties in exchange for an (usually) exclusive franchise. Every provider sell onlys in service tiers- and the service tiers all look alike, at about the same price, enforced by the programmers. The programmers and cables/sats won’t sell programming a la carte, but only as a package on tiers I, II, or III- of which I and II are mostly shopping and religious channels and big bucks for ESPN.

    Forget about mergers, concentration, etc.- too hard to unwind. Simply require that, as a condition of any merger or regulatory request, customers be allowed to purchase services a la carte. That will reintroduce actual competition- programmers competing with carriers, carriers with carriers, and local governments have less clout.

    • #13
    • February 19, 2014, at 4:01 AM PDT
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  14. Dave L Member

    I will give a second to Dean Murphy’s point. I am one of those who pulled the plug on cable, about a decade ago, and satellite over a year ago. I got tired of having 200+ channels and nothing worth while to watch. Now I use an updated version of rabbit ears for the local channels, works fine, and use Amazon prime through a dsl internet link. A friend disconnected from cable and tethers his computers through is cell phone. The bottom line is cable is no longer the only game in town and as they raise their rates and technology changes more people will pull the plug.

    • #14
    • February 23, 2014, at 4:56 AM PDT
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