Why the case against Comcast-Time Warner Cable is evaporating
[commentary] Recent developments in Comcast's efforts to merge with Time Warner Cable suggest the deal will go through...eventually.
As details emerge over Comcast's proposed $45 billion takeover of Time Warner Cable, the legal and economic case against the merger is quickly unraveling.
On April 9, the Senate Judiciary Committee held its first hearing on the deal, a few days after the parties filed a nearly 700-page "public interest" statement with the Federal Communications Commission.
(Disclosure: I was interviewed by both Republican and Democratic Committee staff as a potential witness at the hearing. I was not called to testify.)
The Senate's hearing was mostly for show. Review and approval of the deal is exclusively the job of the Department of Justice and the FCC. And while Congress established the rules of antitrust and communications law that apply, there's simply no legal argument under those laws to reject the deal.
That's the conclusion of an exhaustive review of the applicable legal standards written by Geoffrey Manne, executive director of the International Center for Law and Economics. As Manne summarizes his paper, there is no "plausible theory" of anticompetitive harm under current antitrust standards. "Instead," Manne writes, "arguments against the merger amount to little more than the usual 'big-is-bad' naysaying."
Such arguments, however, have no basis in the law.
Though combining the nation's No. 1 and No. 2 largest cable providers sounds like the kind of transaction that would raise the eyebrows of regulators, the cable market is still so fragmented that even after the merger, Comcast will control less than 30 percent of total subscriptions. That number is significant. On two earlier occasions, most recently in 2009, federal courts rejected efforts by the FCC to cap cable ownership at 30 percent. Even if the rule had been upheld, the combined Comcast-Time Warner Cable wouldn't violate it.
The courts were right to reject such a low cap, for reasons that have become even more obvious in the last five years. With the convergence of voice, video, and data content onto the single protocols of the Internet, the "cable industry" is no longer a relevant market for anything.
While cable technology is used for an increasing range of information communications, cable companies compete more and more with other technologies that provide the same growing menu of services. In the past decade, disruptive competition has emerged from former telephone companies Verizon and AT&T, as well as satellite providers, fiber-based services (including Google), and fast-improving mobile broadband networks, which may soon approach cable speeds.
Comcast and Time Warner Cable don't actually compete against each other in any market. After the merger, TWC customers will become Comcast customers, with access to better technology, faster Internet speeds, and more programming. But the number of other video, voice and Internet options TWC customers have won't be reduced at all.
The absence of overlap -- and of even more competitive choices for consumers -- is not the result of excessive market power by cable providers. As Jack Shafer and other commentators remind us, constraints in the current market for video services are entirely the result of a long history of misguided decisions made by federal, state, and local regulators.
It was regulators, in particular, who stifled competition by limiting cable franchises to a single provider (often accompanied by delays and corruption) until the courts and Congress opened the market starting in the late 1980s. In the more relevant market of what the FCC calls "multi-channel video programming distributors" (MVPD), cable customers have actually been defecting to other technologies. While FiOS, U-Verse and satellite services have picked up 8 million subscribers since 2009, cable has lost almost that many.
Disruptive technology is creating competition -- in spite of regulators
But the real story isn't just about the dynamic and highly-competitive MVPD market. For as many subscribers as cable companies have lost to other technologies, even more have cut the cord entirely, relying on "over-the-top" content providers, including Hulu, Apple, Amazon, Netflix, YouTube, and literally hundreds of new channels and independent programmers blossoming on the Internet.
Comcast, of course, is often the provider of Internet access to its former cable TV customers, leading to speculation from opponents to the deal that a larger Comcast could block access to over-the-top content or otherwise put the squeeze on independent programmers. That concern is amplified by Comcast's 2011 acquisition of NBC Universal, giving it a significant stake in the program business.
But nothing about the addition of TWC's customers increases the incentive (if there is any) for Comcast to limit the programming choices of customers, nearly 99 percent of whom have at least one or more other choices for broadband Internet and MVPD service.
Moreover, under the terms of the NBC Universal deal, the company agreed to nearly 100 pages of conditions at least partly designed to minimize these risks -- including a requirement to abide by a version of the FCC's net neutrality rules Comcast's competitors were recently spared by a court decision that invalidated them.
The NBC Universal conditions will now extend to the new subscribers the company acquires from TWC. Even absent the conditions, most of the speculative market failures raised at the April 9 hearing already fall squarely within the rules for unfair competition -- rules that both the Department of Justice and the Federal Trade Commission aggressively pursue in the Internet ecosystem.
Why have cable prices risen so fast?
Opponents of the deal also point to rising prices for cable-TV programming, arguing vaguely that a larger Comcast would have the incentive and the ability to charge customers even more. In theory, that might be true in markets where the merger eliminated a major competitor, or where the number of other MVPDs and alternative programming providers was shrinking rather than increasing. But that doesn't apply to any market where Comcast will take over for TWC.
That argument also fails to examine the source of rising cable TV costs. Though average monthly bills have risen significantly in the last decade, the price per channel, according to data collected by the FCC, has declined.
Beyond expanding the average number of available channels from 44 to 150, where have the higher fees gone?
In part, subscriber fees have underwritten massive infrastructure investments needed to compete with the new disruptors. Between 2000 and 2009, for example, cable providers spent $127 billion on upgrades to equipment and technology. For their troubles, according to data cited by ICLE's Manne, Comcast and Time Warner Cable have earned a five year-average return on invested capital (ROIC) of 4.5 percent and minus 1.3 percent, respectively. By comparison, Apple's five year average ROIC is 16 percent. Google's is over 30 percent.
The other significant source of higher prices comes from fees the MVPDs must pay to carry the programming of increasingly powerful content providers. Overall programming costs, according to company filings, have increased more than 50 percent in the last five years. Much of that goes to Disney, which owns not only its own programming but that of subsidiaries including ESPN, ABC, Marvel, and Pixar. Analysts estimate that the average cable bill includes roughly $5 per month just for ESPN.
The billing bloat that results is part of the reason consumers are cutting the cord and moving toward a la carte or more customized over the top programming bundles in the first place. But the source of that pressure is coming from content providers, not from the MVPDs.
Indeed, one possible result of a larger Comcast is increased leverage in negotiations with programming sources, which might translate to lower fees or at least to a slowdown in the accelerating prices passed on to customers.
In that sense, the merger would lower rather than raise prices for consumers. Yet improved bargaining power for the merged company, strangely, is one of the red flags being waived most aggressively by self-styled consumer advocates who oppose the deal. These groups appear more interested in protecting the gigantic content providers and Comcast's rivals (who, according to a recent New York Times report, partly fund them) than, well, consumers.
Opposition to the merger is beginning to fold
As arguments against the merger unravel from prolonged exposure to facts, the Washington Post last week came out in favor of the deal. In particular, the Post's editorial board concluded that uncertainty surrounding the quickly-evolving information ecosystem tips the scales in favor of regulatory caution.
"The government's smartest move is not to block the merger," the paper's editors wrote, "but to make clear that regulators will respond if big industry players begin to violate basic principles of market fairness."
Fair enough. Still, regulators already have ample power to step in when and if consumers become the victims of disruptive market change. Meanwhile, approval of the merger will take months at best, and will likely include a smorgasbord of unrelated conditions -- more well-meaning but dangerous attempts to respond to problems that haven't yet occurred. All while technology continues to reinvent the "cable" business at a far faster pace.
Which is unfortunate, and not just for the parties. The government's repeated efforts to genetically engineer industries in transition almost always backfire, making things much worse -- and more expensive.
The market is by no means perfect. But here at least, it has done a far better job of providing consumers with competitive options than the government. Indeed, it has done so in spite of the government. And much faster.