Scale and the Comcast-TWC Acquisition

           Former FCC Chairman Reed Hundt hosts The Digital Show on Business Radio 24/7-- Business Talk from Wharton, channel 111 on Sirius/XM satellite radio.  He invites major thinkers on telecom and Internet issues to chat Mondays from 5-7 p.m. in the Eastern time zone.

            On March 10^th, the program featured prominent buy side analyst Craig Moffett, Comcast E.V.P. David Cohen, Free Press Policy Director Matt Wood and yours truly.  I wish Sirius/XM archived the program, because you would hear the points for and against the Comcast-TWC acquisition in an understandable and comprehensible forum.

 

            Each presenter made his arguments effectively. Mr. Cohen offered the view that the acquisition is not such a big deal, particularly in light of the fact that Comcast and TWC “don’t compete,” while Comcast operates in a fiercely competitive marketplace for both video content and Internet access.

            Clearly Comcast does not operate as a charity, but Mr. Cohen recognized the duty to make the case for the deal based on some articulation of how the public benefits, or at least is “not threatened.” He emphasized that Comcast needs to acquire even greater scale to operate effectively and to provide consumers with the best quality of service, a robust research and development budget and a wealth of next generation services, including a new state of the art set top box.  He did not mention the prospect for lower prices even though larger scale may support the company’s ability to extract lower content prices and better Internet peering terms, in the same manner as Walmart. 

            Chairman Hundt used the phrase “balloon squeezing” to provide a visual reference for the enhanced ability of the company to reduce its costs even as smaller ventures incur higher prices for access to the same content and Internet network links.

            Mr. Cohen provided clarity on why the company wants to acquire greater market share in the video and broadband marketplace.  The merged company would serve about 30 million cable television and broadband households. In broadband, the company’s market share will likely grow significantly in light of the fact that Digital Subscriber Line service cannot increase bit transmission speeds to satisfy growing demand for video downloading.  Additionally, AT&T and Verizon have largely refrained from investing more funds to expand their high speed, digital fiber or hybrid copper/fiber networks.  So Comcast can only improve its ability to extract even higher payments from retail subscribers, particularly broadband users likely to face lower downloading allowances and more expensive tiers of service.  The company also can extract additional peering and transiting payments from upstream ISPs and content providers as evidenced by the recent paid peering deal with Netflix.  Also the company has greater “balloon squeezing” leverage with content providers, far greater than even Google.  That megafirm won’t have anything near the scale of Comcast even with an expanded footprint of 37 or so metropolitan areas.

            Case closed?  Matt Wood offered a fine rebuttal and the case for the FCC and Department of Justice to reject the deal.  The scale argument and the lack of competition among Comcast and TWC stand as two major elements why the issue of bigness is threatening to consumers and to a robustly competitive marketplace.  Standing as a toll bridge or bottleneck  operator between consumers and content sources, Comcast would have even greater leverage to extract higher charges without having to enhance the value proposition on either side.

            My concern focused on what happens when Comcast can buy out a significant player in the cable and broadband marketplace.  The fact that operators like Comcast and TWC have implicitly agreed not to compete (a mutual non-aggression pact) does not mean that their combination will lack impact.  Without TWC, cable and broadband companies have even less incentives to innovate and to sharpen their pricing pencils.

            Consider the wireless marketplace with a company like T-Mobile and one where AT&T acquired the company.  In the former, consumers benefit by having the fourth among equals forced—perhaps kicking and screaming— to compete aggressively.  In just a few weeks T-Mobile departed from conscious parallelism—simply duplicating the price points and service terms of AT&T and Verizon—to becoming an innovator.  The company has made a huge impact with lower rates for consumers who bring their own devices, roam internationally and want to change carriers in fewer than every two years.

            With its acquisition of TWC, the odds decline even further for a maverick innovator to offer a better value proposition for consumers, e.g., the opportunity to pick and choose networks on an a la carte basis instead of a large “enhanced basic” tier of channels.  Who would evidence “best practices” when doing so results in sleepless afternoons competing and the potential for being targeted by Comcast for balloon squeezing?

            Matt Wood made a series of convincing arguments that most consumers will suffer from the deal, but I would not bet against conditional approval in this politicized, pay to play environment.

A Free Pass for Comcast to Acquire Time Warner, Because They Don't Compete With Each Other?

            Two rationales supporting the Comcast acquisition of Time Warner don’t make sense to me. 

First Comcast touts the existence of Netflix, Hulu and Google as ample evidence that content competition exists.  Of course the two sources of content mentioned reach end users primarily via last mile broadband providers like Comcast.  Goggle Fiber serves three metropolitan areas and is nothing more than a test and demonstration project that Gigabit fiber is commercially and technically viable. 

Would Comcast meddle with Netflix traffic, say to tilt the competitive playing field in favor of Comcast’s pay per view options?   Why would it, particularly if in a two-sided market total revenues might decline if Comcast were to retard broadband demand?  So Comcast would have no incentive to throttle traffic and otherwise mess with the traffic of content competitors who need its network to reach end users.

Does this rationale pass the smell test?  Was Comcast merely “experimenting” with network management techniques when it previously meddled with peer-to-peer traffic?  Why are retail broadband carriers demanding surcharge payments from Netflix on top of the transit payments they receive from Content Distribution Networks like Level 3, plus the end user subscriptions that have three digit margins? 

Absent a four year network neutrality commitment as part of its acquisition of NBC, profit maximizing Comcast surely would try to squeeze every last dollar, particularly from competitors who need its downstream delivery.  Remember what Ann and Gordon told us: “Greed is good.”

Second, Comcast asserts that because it does not compete with Time Warner, no one should worry about lost competition and consumer welfare.  Would not a more concentrated cable television market have even less likelihood that some operator somewhere would experiment with new pricing models, e.g., offering ala carte channel access in lieu of bloated channel bundles? Isn’t it easier for Comcast to reduce the broadband value proposition by capping download allotments and upselling higher amounts, or agreeing not to debit the now single digit Gigabyte allotment in exchange for a surcharge paid by content sources?  Note that AT&T Wireless announced such a "toll free data” option just a few weeks ago.

Bottom line: Comcast may not compete with Time Warner, but a bigger Comcast makes it more likely that the company can claw back consumer welfare gains and reduce the value proposition of both cable television and broadband subscriptions without significant customer churn.

Comcast-TWC: Why Compete and Innovate When You Can Buy Market Share?

            Expect a charm offensive as Comcast and scores of sponsored researchers explain how acquiring Time Warner Cable will promote competition and enhance consumer welfare.  You might not hear too much about two traditional concerns remedied by actual facilities-based competition: incentives to innovate and reduce prices.

            Comcast will frame its acquisition as necessary to achieve even greater scale to compete with other sources of video content and maybe to compete with the limited other sources of broadband access.  Granted cable television operators have to provide consumers with a compelling value proposition particularly given the pricing model they use that runs up the bill—often to three digits—with a large bundle of channels for which few consumers have any significant preference.

            But Comcast is not acquiring TWC as a defense strategy to shore up the viability of cable television.  Comcast is exploiting the apparent inability of government—even one with a Democratic President and Senate majority—to enforce viable competition policy.  A concentrated market used to trigger concern about whether one or more survivors would continue to compete, or simply agree not to devote sleepless hours innovating.

            Just what happens when markets concentrate?  How can one doubt that the incentive to innovate and compete recedes?  Consider commercial aviation: when a single airline controls an airport, rates to and from that market skyrocket.  Consider wireless service: when AT&T could not acquire TMobile, TMobile got serious about innovating and competing.  Reluctantly Verizon and AT&T have had to respond to TMobile’s initiatives like lower rates for subscribers using their own handsets, lower roaming charges abroad and refunds of early termination penalties.  Would AT&T, Verizon and even Sprint have introduced these enhancements if TMobile did not exist?

            The balance of power has shifted from consumers to providers in the telecommunications marketplace.  Companies like Comcast can invoke scale and efficiency arguments that obscure the fact that consumers will have to pay more for less. So-called competitors can “close ranks” and implicitly agree not to compete.   

            Consider access to Olympics content.  Comcast-NBC wants to make it certain that consumers access this content only via prescribed means, firewalled so that they control access via new technological options like the Internet.  If Comcast did not have the goal of maintaining the status quo, why would it care whether viewers watched commercials on a computer monitor, smartphone screen, or tablet in lieu of the television set?

            Reduced to its simplest terms Comcast’s acquisition of TWC enhances shareholder value at consumers’ expense.   The only silver lining might be FCC-imposed conditions that impose otherwise unlawful requirements,  Of course the Commission would have to enforce them in the face of relentless claims that the requirements are “job killing,” unnecessary and unconstitutional.  What politically savvy civil servant would want to take on a “too big to fail” venture like Comcast?