Thursday, September 25, 2014

Comcast-Time Warner Cable: Would it really be anti-competitive?

As you probably know, Comcast and Time Warner Cable have agreed to merge. Many consumer groups and some of the companies' content providers and competitors are opposing the merger, while it's hard to find proponents that aren't either getting funding from one of the two companies or are "Astroturf" organizations created to support the merger. However, is the Comcast-TWC merger really anticompetitive? A big part of the answer depends on whether you're looking at the multichannel video services market today, or a few years from now.

If you look at the situation today, whether or not the merger is anticompetitive depends on who you are. If you're another cable company, it's not anticompetitive at all. The reason is that cable operators all have local franchises to be the exclusive cable supplier in the areas they serve. So, Comcast doesn't compete with TWC, which doesn't compete with Cox, which doesn't compete with Charter, etc. The reason for exclusivity is that it was so expensive for a cable operator to lay the wires, put in the plant and equipment, and service customers, that it was uneconomical to do so unless they could serve all the customers in an area without competition.

If you look at Comcast's and TWC's non-cable competitors, the merger is likely to have a modest impact at most. Existing Comcast and TWC customers will still be customers of the merged company, and can switch to a competitor if they want to. It's likely that Comcast will improve TWC's plant and equipment, and improve its cable and Internet services, which would make the combined company a stronger competitor in TWC markets. If you're an existing Comcast or TWC customer, your competitive situation isn't likely to change much, either. The new company will still supply your cable service, most likely your wireline Internet service, and possibly your phone service as well. The same competitors you could switch to will still be there.

However, if you're a program supplier to Comcast and TWC, your situation is likely to change substantially. The reason is that the merged company will have around 30 million subscribers and will be by far the biggest cable and Internet provider in the U.S. (If the AT&T acquisition of DirecTV is approved, that company will have at least as many video subscribers as Comcast-TWC, but DirecTV, which has the lion's share of subscribers, doesn't provide its own Internet service--it resells services from local Internet Service Providers.) The merged company will be the only way for program suppliers (television and cable networks, and movie distributors offering titles for Video on Demand (VOD)) to reach about 1/3rd of all U.S. households. That will give the new company enormous power to negotiate preferential licensing and retransmission fees, and will also give it additional power to negotiate non-fee terms and conditions, such as limitations on content providers' ability to license their content to other service providers. In addition, given that Comcast owns NBC Universal, it can give preferential treatment to NBCs broadcast and cable networks and Universal's movies and television shows similar treatment in its VOD systems, which would put other content providers at a competitive disadvantage.

If you're an Internet content provider, such as Netflix, the merged company will be by far the biggest single provider of ISP services to your customers in the U.S. There's strong evidence that Comcast was throttling the bandwidth available to Netflix subscribers until Netflix agreed to pay for a peering agreement with Comcast. The combined company would have even more power to extract payments from Internet companies.

That's today's situation, but what about tomorrow? Netflix is a nationwide (now also international) service; it can reach everyone in the U.S. who has either wired or wireless high-speed Internet access. Roku, Apple, Sony and others sell set-top boxes and devices that offer similar access to video over the Internet. Verizon, which has long operated its FiOS IPTV service which offers a cable-like video service and high-speed Internet, recently acquired Intel's OnCue Over-The-Top (OTT) Internet video platform. Verizon is expected to use OnCue as the basis of a nationwide video service that will operate over its wireless network, and possibly over the Internet as well. That would give Verizon a nationwide footprint, and would enable it to offer video services in almost every U.S. market. Sony and Dish are also rumored to be in the planning stages for a similar Internet service. Intel's attempt to launch OnCue was stymied by pressure from the cable industry to prevent its program suppliers from licensing their content to Intel, and the same pressure is suspected as the reason why Apple has not yet launched its long-rumored HDTV and video service.

What happens if OTT service and program suppliers find a way to launch viable services that can compete with cable? The video services market could change radically. Instead of today's three or four competitors (the incumbent cable operator, DirecTV, Dish, and depending on where you live, either Verizon or AT&T,) there could be many more:
  • T-Mobile and Sprint could use their networks to deliver video to households.
  • I've written that there's evidence that Netflix is planning to offer live programming in addition to its VOD offerings; they could expand into a full cable competitor.
  • Sony and Apple could offer their own services.
  • The existing cable operators could directly compete with each other for subscribers using OTT.
With the exception of Verizon, Sprint, T-Mobile and (if it doesn't acquire DirecTV,) AT&T, all of the other new competitors will have to go through telco ISPs or cable operators in order to get to consumers' homes. If cable operators set prices and/or terms & conditions that make servicing their customers with OTT video unprofitable or too complex, these new competitors could be killed in the womb. That's why I suggest that regulators set and enforce two conditions on both the Comcast-TWC and AT&T-DirecTV deals:
  1. Both combined companies must offer all OTT services access to their Internet networks and subscribers under fair, reasonable and non-discriminatory (FRAND) terms.
  2. Both combined companies must remove all clauses in their contracts with program suppliers that prohibit them from licensing their content to competitors, or that place significant restrictions on such licenses. In addition, they're prohibited from signing contracts with any such clauses in the future, and from using their influence and market power to informally persuade program suppliers not to deal with competitors.
Both conditions would last for five years from the day that each combined company finalizes its merger and begins operating as a single company. That would give competitors enough time to build their market presence and establish viable businesses, and also give the telecom industry five years to develop new ways for the OTT services to reach consumers without having to go through the incumbent cable operators.
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