Breaking news has a way of upsetting our best laid plans, so my article on Tivo Roamio shall have to wait a little while longer….
With news breaking last night of a merger agreement between Comcast (the nation’s largest cable operator) and Time Warner Cable (the nation’s second largest cable operator), it was predictable that today we would be hearing many declarations of impending doom should the merger be allowed to go through. These predictions invariably come with so much misinformation that I think it worthwhile to take a few minutes to discuss the actual facts of the situation, and look at the public policy implications.
There are indeed important public policy concerns brought to the fore by the proposed Comcast-TWC merger, but for the most part, they aren’t directly related to the merger, itself. Let’s start by looking at some facts, or some non-facts, as the case may be.
New York magazine published a story, “This Math Formula Shows Why the Comcast—Time Warner Cable Deal Should Be Blocked” attempting to apply a measure normally used to gauge market concentration among competitors to companies that don’t compete. It went on to argue:
Now, Comcast will argue that because it doesn’t compete head-to-head with TWC in many cities, its HHI should be calculated differently – using city-by-city statistics instead of nationwide ones. That’s the same kind of argument AT&T made when it wanted to acquire T-Mobile. And in both cases, it makes some amount of sense. (In New York City, for example, combining Comcast and TWC wouldn’t change much – you’d just write your monthly check to a different near-monopoly.) But the AT&T—T-Mobile deal got shot down on antitrust grounds anyway, and so should the Comcast-TWC deal.
Why? Because cable companies compete with each other nationally as well as locally.
This is fundamentally mistaken. Comcast and Time Warner Cable don’t compete on a city-by-city basis. They don’t compete on a national basis. Their service footprints don’t overlap anywhere. They simply do not compete for customers, period.
This is very different from AT&T and T-Mobile, who were direct competitors. That their city-by-city overlap was limited says merely that their competition had typically caused one or the other to be much more successful in different regions. But they were fundamentally still direct competitors. You could substitute AT&T’s services for T-mobile’s, and vice versa.
Anybody who lives in either a Comcast service area or a Time Warner Cable service area knows that they cannot substitute the other as a competitor. They might be able to substitute DirecTV, Dish Network, FiOS or U-verse, or perhaps even an overbuilder like WOW or RCN. But if you’re a Comcast customer, TWC is not an option, and if you’re a TWC customer, Comcast is not an option.
The New York magazine story goes on to argue:
Being a huge national conglomerate gives you advantages when you’re negotiating with cable networks. And the bigger Comcast gets, the more leverage it will be able to exert on the networks who depend on it for distribution, and the less competitive the entire cable industry will be as a result. That’s ultimately bad for customers, even if their monthly bills don’t change all that much in the short-term.
Swanni at TVPredictions.com made a similar argument, suggesting:
If a programmer couldn’t renew its contract with Comcast — and was forced to remove its signal from the cable operator — it would mean the loss of more than 30 million viewers overnight. While programmers say they always want a fair value for their signals, they would likely have to be more flexible when talking with Comcast.
Consequently, the programmers would likely put greater pressure on other TV providers, such as Dish and DIRECTV, to pay high fees to carry their channels.
This is actually extremely speculative. Comcast already has an enormous number of subscribers: some 22 million. They have considerable negotiating leverage compared to most other providers. It’s fairly speculative to suggest that they get a lot of incremental leverage by bulking up to roughly 30 million subscribers, as the merger apparently contemplates. (Comcast is reported to have agreed to sell 3 million of TWC’s subscribers to Charter Communications.)
It’s further speculative to suggest that the programming market will act like a balloon, and that, to the degree Comcast is able to hold down its programming costs, the programming costs for other providers will increase, correspondingly.
But in fact, the primary problem with this line of argument is not how speculative it is, but that it misses the actual public interest issue, entirely!
The current programming market—and by that I mean the wholesale market in which programmers (cable networks and broadcasters) sell their channels to operators (cable, satellite and telco providers)—is a monopoly market that disserves the public interest, and has for nearly two decades now.
Each of the major programmers has some “must have” content that no service provider can survive without, in the long-term. It might be a broadcast network, ESPN, MTV, Fox News, or one of several other channels. There is only one place to get each of these channels—the programmer has an effective monopoly.
When cable companies were actually monopoly providers, up through the early 90s, this was manageable, because there were monopoly providers on both sides of the table, creating a reasonable balance in negotiations.
But today, on the other side of the table is an operator who, despite sometimes still being perceived as a monopoly, almost always has multiple competitors for television service. Most markets have at least one incumbent cable operator, and two satellite providers. Some also have a telco provider, or a cable overbuilder.
By now, the script for carriage disputes with major programmers is well-known. If a deal can’t be reached, eventually the channels involved get blacked out. The operator can no longer supply one or more must-have channels. Customers and politicians are up in arms. Some customers get fed up and switch to a competitor.
Both sides experience pain, but while the programmer loses a fraction of their subscribers, for only a limited period of time, the operator typically loses the must-have channels across their entire footprint, and when they lose customers, they don’t recover them merely by settling the dispute and turning the channel back on. The programmer has a huge advantage, and eventually, the operator is forced to capitulate.
This dynamic pervades the carriage negotiation process, so that even when there isn’t a blackout that becomes visible to the general public, major programmers have enormous leverage in carriage negotiations.
The huge expansion of non-premium channels included in extended basic tiers, along with consistently super-inflationary increases in cable television rates over the last two decades, are directly tied to this leverage imbalance. It is one of the great ironies that the introduction of competition in the multichannel video industry has actually driven drastic price increases, due to the leverage imbalance in negotiations at the wholesale level. (Competition at the retail level has kept costs lower than they would otherwise be, in the sense that retail competition limits operator pricing power—the margins for the TV business have been tremendously squeezed. But that hasn’t proved enough to keep rates from continuing to grow much faster than the overall inflation rate.)
So what does this have to do with a Comcast-TWC merger?
Well, for one thing, there’s a strong argument that, to the degree the merger actually does strengthen an operator’s hand in negotiations, that’s actually a good thing for consumers, because right now, consumers suffer badly due to the enormous leverage programmers wield in negotiations. That is, anything that tends to reduce the leverage imbalance is good for consumers.
Of course, that reduced imbalance would apply only to the newly merged Comcast-TWC. That’s where the above arguments come in that the new Comcast would enjoy an unfair advantage over other providers.
The problem with this basic argument is that this disparity already exists. Why are these critics so concerned about Comcast going from 22 million subscribers to 30 million subscribers, and having an unfair advantage over DirecTV with its 20 million subscribers, while at the same time ignoring the fact that both Comcast and DirecTV have an even larger scale advantage over the likes of Dish Network and TWC? Or that they have a 4:1 or greater scale advantage over Verizon FiOS, AT&T U-verse, Cox and Charter? Or that Cablevision, Suddenlink, Medicaom, WOW and RCN have even greater disadvantages in negotiations? Or worst of all, that the remaining independent, mom and pop cable systems have no negotiating leverage whatsoever?
Blocking a Comcast-TWC merger would have absolutely no impact on this significant problem.
Fundamentally, what we need is for policy-makers to examine the issue, and ask whether competing on the basis of this kind of scale is beneficial to the public interest. Does it serve the public interest for two competitors to have vastly different costs for programming, because of the scale differences that already exist? Is it beneficial that a rural subscriber in a very small independent system should have to pay much higher rates than a subscriber in a major operator’s system, merely because the small operator lacks clout to negotiate with programmers?
If we think that such differences based on scale are acceptable, then we can hardly blame operators for looking to get bigger. In fact, we should expect it as the natural, rational outcome. The policy (of inaction) effectively encourages, perhaps even compells, consolidation.
If, on the other hand, we think these kind of differences are harmful to the public interest, and shouldn’t be acceptable, we certainly can’t solve the problem simply by blocking mergers. Rather, we would need some kind of reform to how the carriage negotiation process works at the wholesale level. Perhaps, for example, requiring programmers to offer their best rates to all operators, regardless of size. So if a behemoth like Comcast is able to negotiate low rates, even the smallest of operators (whether competitors to Comcast or not) get the benefit of the same low rates.
Suggesting the blocking of a proposed merger as a solution is a knee-jerk expression of frustration. But when it comes to the actual concerns that are raised, such is no substitute for a serious examination of the issues at play, and what policies would best serve the public interest.
(The same goes for various other concerns that have and will get raised with respect to this merger. At the end of the day, where there actually are legitimate concerns being raised, what is needed is good policy-making, not simplistic calls to jump straight to blocking the merger, as a purported solution.)
Thought this piece was interesting? You might also be interested by our recent stories Why the Comcast-TWC Merger is NOT About Broadband and Are ISPs Gouging US Broadband Users?, or by our examination of Aereo.