Consumer groups, some members of the media, and members of Congress on both sides of the aisle have weighed in with differing visions of the future
of the Internet and paid television service if their arguments do not win the
day. But amidst all the hype and rhetoric, it is important to remember that any
analysis of the proposed merger should be grounded in traditional antitrust
principles, that the market affected by a transaction or regulation be clearly
defined, and that consumer welfare be a top consideration of any proposal.
While the
proposed merger between AT&T and DIRECTV may impact the competitive
assessment relevant to the Comcast/TWC proposal, and vice versa, in this piece I want to focus primarily on the
testimony presented at the May 8 House Judiciary Committee hearing. At that hearing, Professor C. Scott Hemphill explained why, in his view, the merger of Comcast/TWC would not pose anticompetitive concerns. In
his written testimony, Professor Hemphill considered the application of
antitrust law to Internet service providers (ISPs) and video distributors:
Antitrust
law has a critical role to play in preserving competition. Competition
benefits the economy through low prices, efficient production, and innovative
new products and services. Antitrust law accomplishes this, in relevant part,
by prohibiting mergers that may “substantially . . . lessen competition” or
“tend to create monopoly.” Some of the concerns raised about this
merger are best framed as antitrust objections.
Professor
Hemphill found that most objections to the proposed merger were based on
analogies in which foreclosure threats were high—threats that he contends are
not applicable to the proposed merger due to differences in the nature and
structure of video and broadband markets. Mr. Hemphill elaborated in his live
testimony that “there is not so much a threat of foreclosure, but an ongoing
fight among powerful firms that make possible the dramatic growth of online
video” and other innovations.
Allen Grunes,
partner at the law firm Gorey and Gorey LLP, also grounded his testimony in
antitrust law. He advanced arguments that the merger would enable input
foreclosure, customer foreclosure, and harm competition based on bargaining
theory. Professor Hemphill addressed each of those arguments by analyzing the
effect of a merged Comcast/TWC on individual markets.
First, Professor
Hemphill addressed concerns about the merged company dominating content distribution.
He explained that most mergers that receive antitrust scrutiny are combinations
of rivals. But Comcast and TWC are not rivals because they do not overlap in
any geographic territory. As such, output markets – or the markets for products
and services sold by the parties – will not be negatively affected. Consumers
will still have the same choice of multichannel video programming distribution
service post-merger.
Second, he
explained that antitrust concerns are not present regarding the market for
video programming. Post-merger, Comcast/TWC will not acquire increased
“monopsony” power, which would theoretically incentivize Comcast/TWC to
artificially decrease its demand for programming to drive down the costs the
company would have to pay for programming. Unlike in certain markets, like the labor
market for example, where competitors can drive down wages by reducing hiring, Comcast/TWC
would not be able to manipulate demand for programming by purchasing less. This
is because sales of video programming do not decrease the amount of programming
available for sale; Comcast and TWC do not compete for rights to a scarce
resource. Programmers would still have the power to bargain for and demand the
same prices for their content post-merger.
Further, in
negotiations for video programming, a merged Comcast/TWC likely would not have sufficiently
greater bargaining power with programmers or the ability to cause
anticompetitive harm due to its enlarged subscriber base. In order to cause
such harm, the merged company would have to be so large that a programmer would
be unable to effectively function without Comcast/TWC’s business. The
post-merger company will lack the requisite scale to pose such harm.
In their joint written testimony, Comcast CEO David Cohen and Time Warner
Cable Chairman and CEO Robert Marcus confirmed that the merged company will
only account for 30% percent of cable customers after it divests subscribers to
Charter. As Christopher Yoo, a member of the Free State Foundation’s Board of
Academic Advisors, explained, critics must overcome one “potentially
insuperable obstacle” in order to argue that a company of this scale would
create anticompetitive harms to video programmers:
On two occasions, the FCC attempted to
institute rules prohibiting cable operators from controlling more than 30% of
the nation’s multichannel video subscribers in order to protect the interests
of video programmers. On both occasions, the courts invalidated the rules
because the FCC’s rationale for imposing the 30% limit was arbitrary and
capricious. In both cases, the court indicated that the available evidence
suggested that cable operators could control much larger shares of the national
market without harming video programmers, driven largely by the advent of
competition from direct broadcast satellite (DBS) providers, such as DIRECTV and
the Dish Network. Given that the merging parties have committed to reduce their
holdings so that the resulting company will control no more than 30% of the national
market, these court decisions essentially foreclose arguments that anticompetitive
harms to video programmers would justify blocking the merger.
Third, Professor
Hemphill found that the transaction is unlikely to lessen competition by
enabling foreclosure in the market for programming or in the market for distribution.
A company that is able to foreclose competition would aim to inhibit the “competitive
prospects of rivals,” which would result in harm to competition, innovation,
and ultimately to consumers. A merged Comcast/TWC would not have the incentive
or the ability to undermine its rivals’ ability to compete.
Professor
Hemphill explained that the merged company would not likely withhold
programming from other distributors in order to drive up prices for other
MVPDs. Programmers like ESPN will still possess strong bargaining power post-merger.
And, new models have emerged in the video marketplace, which enable companies to
compete with content producers in new ways. For example, distributors like
Netflix that produce their own online-only programming are becoming major
content providers and are thriving. Netflix has garnered a larger U.S. base of
video customers than Comcast and TWC combined.
Parties that
oppose the merger have raised concerns that Comcast/TWC would have the
incentive to foreclose the growing online video distribution [OVD] market by
taking aim at companies like Netflix. Merger critics fear that the merged
company would choke off the broadband Internet access on which Netflix and
other OVDs rely. For instance, in a May 7 letter to Chairman Goodlatte and Ranking Congressman Conyers,
Consumers Union expressed concerns about the effect approval of the
Comcast/Time Warner Cable merger would have on the merged company’s market
power, ability to raise prices, and its incentives to act as a “gatekeeper” for
video and broadband consumers.
These concerns
are unfounded. First, online video services contribute much value to broadband
Internet and harming the OVD business would drive away broadband subscribers
who love their Netflix and similar services. As David Cohen and Robert Marcus
stated in their joint written testimony: “We have no interest in degrading our
broadband services to disadvantage OVDs or providers of other content and
services. That would only harm the attractiveness of our fastest-growing
business – high-speed data – and simply makes no business sense.”
Next, Comcast’s
regulatory commitments made as a condition of its NBC-Universal acquisition
prevent it from blocking or discriminating against any content provider. Some
witnesses at the May 8 House Judiciary hearing, particularly Dave Schaeffer CEO of
Internet backbone provider Cogent Communications, decried the recent Comcast-Netflix
interconnection agreement as evidence of Comcast’s intent to disadvantage OVDs
and providers of other content and services. However, as Professor Hemphill
explains, paid peering is “a new variant of an old business practice” – paying
for interconnection – and peering agreements should instead be seen as “a sign
that the market is working well. The proposed merger does not change that.”
Indeed, paid peering is “a means to put a price on the additional capacity
demands resulting from the increased popularity of online video. It
is efficient for the distributor and its end-users, considered collectively, to
pay for that capacity, rather than spreading the expense among all ISP
customers. Doing so better aligns use with cost and incentivizes both investment
and economical use.”
The proposed
Comcast/TWC merger may create some uncertainty regarding the future form of the
broadband marketplace, including the PayTV market segment. But this is not a
reason in and of itself for regulators to be concerned; rather the proposed
merger is mainly a function of the constantly evolving marketplace.
What is clear is
that the broadband marketplace, and the video segment of that market, are both
fiercely competitive today. And these markets have grown and developed without
unnecessary and burdensome regulatory interference. Businesses are efficiently
negotiating to reach agreements that enable companies to roll out innovative
distribution platforms and business models to compete for and meet the needs of
consumers.
The proposed merger
of Comcast/TWC is a transaction that should allow the merged company to react
to new consumer behaviors and demands. Based on well-established antitrust
principles, the proposed merger of Comcast/TWC likely will
not harm these vibrant marketplaces.
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