Comcast/TWC/Charter — Looking Good But Too Early To Pop The Champagne.

We’ve seen a bunch of news reports recently that the Department of Justice Anti-Trust Division (DOJ) staff and the staff at the Federal Communications Commission (FCC) appear ready to recommend that the proposed Comcast acquisition of Time Warner Cable does not pass statutory muster and their respective agencies should take appropriate action. You can review what that means in these two lengthier blog posts I wrote about how DoJ merger review works and how FCC merger review works.


Critically, however, as this CNN piece notes, we only have rumors and speculation. Obviously, as an opponent of the deal, I would not be surprised of staff at DoJ and the FCC, after reviewing the record, concluded that this deal caused serious anti-competitive harm and offered no offsetting benefits. But, as someone who has played regulatory poker with Comcast for 15 years now, I can say from personal experience that no one counts Comcast out until the game is well and truly over. Even if the rumors are true (and I have no way of knowing), these would only be staff recommendations. Comcast still has plenty of opportunities to plead, cajole and bully DoJ and FCC into submission.


Which is why it’s important to remember my advice from last February with regard to Title II reclassification:†DON’T BE THE SEA HAWKS!We need to continue to keep the pressure on to get this over the goal line. You can start at my employer, Public Knowledge, which has this action page up over here.


At the same time, while not getting ahead of ourselves, it is important to understand how this deal went from “sure thing, no antitrust issues, these aren’t the drioids you’re looking for, move along, move along” to “on the ropes and sinking fast.” While I’m not going to fall into the trap of thinking we have already won, we have a lot of good reasons to believe that this fight is winnable. I elaborate a bit below . . . .


Unlike the AT&T/T-Mobile deal, where the press and industry analysts refused to believe the DoJ and FCC were serious about blocking the deal even after DoJ sued in district court to block it, most folks seem ready to believe that the government would actually move to block the proposed Comcast/TWC/Charter deal. Given the conventional wisdom when this started that a combination of Comcast’s mighty lobbying strength at the state and federal level combined with the general weakness of antitrust law on cable mergers traditionally made this unstoppable, that’s a heck of a turn around. So what happened to bring us where we are?


The Antitrust Case Is Much Stronger Than People Initially Assumed.


Comcast proudly boasts to the world that it is not just a cable company, and the cable industry proudly boasts to the world how they are not just cable companies, so why did anyone think the DoJ and FCC would view this as just a merger of cable companies? In particular, both DoJ and FCC have long signaled their concern that online video seems stalled in place since they approved the Comcast/NBCU Deal in 2011. For those who want to point to recent developments like HBO Now and CBS direct streaming, I will observe (and others have pointed out) to DoJ and FCC) that these developments have only taken place since Comcast filed for permission to merge, and therefore is sitting under the microscope on its best behavior. Absent the current scrutiny, Comcast would remain free to continue crushing the emergence of disruptive online rivals as it has done since it bought NBC Universal.


Evidence of how Comcast uses its already existing market power†despite†conditions imposed in 2011 came to light recently with this story in the Wall St. journal†of how Comcast persuaded Disney and Fox to cancel a planned sale of Hulu to competitors AT&T and DIRECTV. According the story, Comcast’s executives promised Disney and Fox that — if they cancelled the sale — Comcast would make Hulu “the streaming video platform for the cable industry.” Disney and Fox, impressed by this commitment, cancelled the planned sale at the last minute.


One of the major conditions Comcast agreed to when it acquired NBCU, which owns a chunk of Hulu, was that it would not influence the management of Hulu or prevent it from becoming a significant rival in the online video space. Whether Comcast technically violated the condition or not, the story illustrates both the power of Comcast already and the inability of conditions to adequately address that power. Disney and Fox, no naive waifs in the video business, believed Comcast could make good on its promise to make Hulu the “streaming video platform for the cable industry” and thus declined to sell it to competitors to Comcast with a strong interest in developing rival online video.


This is only one example floating around of the many ways Comcast can, and does, leverage its existing market power to foreclose rivals. And Comcast kept providing new examples throughout the merger review. Comcast demonstrated how its ability to control access to its massive subscriber base could crush rival Netflix by degrading Netflix’s interconnection point with Comcast until Netflix agreed to pay for access. Comcast remains stubbornly slow in authenticating†cable subscriptions for those trying to stream “TV Everywhere” video applications like HBO Go on devices that compete with its Xfinity X1 system. (TV Everywhere services require that you have a subscription through a pay-TV provider to actually stream the content. So, for example, to use HBO Go you must show that you have a subscription to HBO through your cable provider, and only your cable provider can authenticate that you have a subscription. By refusing to authenticate HBO Go on rival devices, Comcast prevents you from streaming the content and pushes you to its rival X1 set-top box.)


And, of course, there has been the endless ongoing horror show/comedy of Comcast’s awful customer service.†Comcast simply refuses to let its customers terminate service, a practice regulators would not like to see spread to cover the millions more subscribers that Comcast would acquire. Additionally, as most folks grasp about basic economics, the ability to raise prices while providing worse service generally indicates market power.


All of these help make the case that Comcast already has substantial market power in multiple markets, and that acquisition of Time Warner Cable (and accompanying regional concentration from system swaps with Charter) would make things much worse. Comcast’s strategy depended on passing this deal off as just another cable merger, with no real change in the national market and no impact on local markets because Comcast and TWC did not directly compete. But when the cable industry, and Comcast itself, keeps emphasizing to the world how they are no longer mere cable companies and sell multiple products in multiple markets,†no one should have expected DoJ and FCC to ignore the reality and apply the same standards they applied a decade ago when Comcast and Time Warner divided up the bankrupt Adelphia.


The Three Legs of the Antitrust Stool: Access to Programming, Access To Set-Top Boxes and Access to Broadband.

Over the course of the merger review, the record shows three pathways through Comcast’s existing market power lets them crush incipient online video competition. Limit access to “must have” existing traditional linear content and high-value on demand content like recently released movies, limit access to the television screen by controlling what devices can attach to set-top box and cable video programming guide, and use control of residential broadband Internet access service (BIAS) to make drive up the cost to rivals and make online streaming otherwise less desirable.


Please note that, under antitrust law, the government does not have to prove that any one of these means is absolutely foolproof and that there is no way in the universe that a rival could not scale all these obstacles and somehow bring a product to market — which is how Comcast and its defenders generally try to frame the issue. What the government needs to show is that the merger would allow Comcast to make these barriers sufficiently higher that†there is a substantial likelihood that the transaction will reduce competition. Furthermore, even if any one of these mechanisms for undermining video competition might be addressable by conditions, the combination of all three of them — and the evidence that behavioral conditions proved ineffective in addressing the harms to the video market identified by DoJ and FCC in the 2011 NBCU acquisition — make the case for blocking the deal rather than negotiating for conditions even stronger.


Leg 1: Access to Programming

Both the DoJ and FCC acknowledged in the NBCU deal in 2011, Comcast’s control of NBCU allows it to withhold programming and set up serious obstacles to even relatively modest changes in the cable business model. As my Public Knowledge colleague John Bergmayer points out, Comcast (through NBCU) uses this power to object to even relatively modest changes in the existing cable market, such as slimmer bundles. The conditions designed to address this concern, such as the prohibition on influencing the management of Hulu or the requirement to sell programming to online video distributors (OVDs), have proven utterly useless (especially when the Media Bureau has gone out of its way to undermine these conditions, but I digress).


Additionally, there is evidence that Comcast uses its existing size and power in the video distribution market to force other programmers, like Discovery Channel (which has challenged the merger), to accept contractual conditions limiting its ability to put programming on line or provide programming to OVDs. While such claims have been made before, the strenuous efforts the FCC has made this time to put these contracts in the record indicates that preliminary review of these contracts at the DoJ supports these claims.


The combined Comcast/TWC would have even greater power to force programmers to take contractual terms that either deny access to programming to rivals or significantly raise the cost to rivals of acquiring the content needed to offer competing online services, and to prevent existing rivals such as Verizon or DISH from experimenting with new services or service bundles.


Leg 2: Access to the Television Screen By Controlling Devices


One possible way for rivals to offer new services — whether competition with ancillary services such as DVR capability or rival video programming through over-the-top services — is by streaming online content easily and seamlessly to the TV and offering program guides that make it easier for consumers to find content. Anyone following the endless debate over “cord-cutters” and “cord-nevers” knows that this has been the long-standing fear of the cable industry.


This explains Comcast’s insistence on authentication TV everywhere services and its utter resistance to any sort of standard interface (such as CableCard) that would allow devices it cannot control to attach to the network. Consider, for example, that Sony, which owns the Playstation, keeps threatening to bring out its own streaming service available on the Playstation which could potentially challenge Comcast’s cable service. Coincidentally, if you are one of the 30% of pay tv subscribers that already subscribe to Comcast, you have a strong incentive not to buy a Playstation for video streaming, since existing streaming aps, like HBO Go, don’t work on Comcast. It’s just one of many subtle (and not so subtle) “nudges” Comcast uses very effectively to keep potential competitors off its systems — and out of 30% of the market.


Adding TWC subscribers increases that market lockout fairly dramatically. Given Comcast’s ongoing bad behavior with regard to device attachments†while the merger remains pending, no one believes you can create conditions that would prevent Comcast from using its expanded customer base to further block the introduction of competing devices that could provide an alternative route into the home if the merger goes through.


Leg 3: Access To Residential Broadband Subscribers.


Most of the press coverage and analysis fo the merger has already focused on this, so I won’t spend too much time here. We start with the fact that the 2011 Comcast/NBCU consent decree and FCC Order, already found that Comcast would have lots of ways to discriminate against online video competitiors through its control of broadband Internet access service (BIAS). Comcast has gone on to demonstrate this by exempting its own streaming content from its bandwidth cap†and by forcing Netflix to pay for direct interconnection to reach Comcast broadband subscribers.


Giving Comcast control of TWC would give Comcast control of about 50% of residential broadband subscribers with broadband fast enough and reliable enough to make streaming video a serious rival to Comcast’s cable service (depending on your market definition). For those who want to argue that wireless can substitute, I will note than when Public Knowledge did a survey of consumers with both mobile broadband and wireline broadband last summer, †only 7% agreed with the question “would you consider dropping your landline broadband and relying only on your mobile phone for broadband.” 93% of those surveyed either “disagreed” or “strongly disagreed” that they would even consider dropping their wireline broadband connection and relying solely on their mobile broadband connection.


In antitrust terms, this indicates that Comcast/TWC customers would not switch to a wireless alternative in the face of a “small but significant non-transitory increase in price” (aka SSNIP). That’s the standard antitrust test for whether someone has market power.


Recent Win By The DoJ Supports Key Elements of the Potential Theory Against Comcast/TWC.


Just as the DoJ’s win blocking the the H&R Block acquisition of Tax Act in 2011 helped shape DoJ resistance to AT&T/T-Mobile, DoJ’s recent win against American Express in the Southern District of New York that Amex violated antitrust laws through its web of “retention contracts” with vendors helps DoJ here.

The Amex case involved American Express requiring merchants to accept contract conditions expressly designed to prohibit merchants from offering any kind of promotions or discounts associated with rival credit cards that might prompt Amex card holders to prefer another card, such as Visa or Discover, at the moment of purchase. The important similarities to the Comcast/TWC case include:


a. analysis of a two-sided market structure similar in many ways to the cable/broadband market where cable provides a platform for content providers and subscribers similar to the way Amex provides a platform between merchants and purchasers.

b. Amex is one of four major credit cards, with a marketshare of only 23%.†Nevertheless, the court still agreed with DoJ that Amex could exercise market power because merchants who take only 3 of the four major credit cards lose substantial sales — as even the ability to take all four major credit cards is often a necessary requirement to attract customers even if the customer ultimately uses a non-Amex card.

c. Nor could any of the other credit card companies effectively oppose Amex by offering better deals to merchants or by forcing merchants to choose between themselves or Amex. Because Amex occupied a critical position in the market, it could leverage its relatively modest market share to impose anticompetitive contract clauses in merchants despite the presence of rivals in the market.


As always, antitrust cases tend to be very fact-specific, and this is only the opinion of a single district court. Nevertheless, the case stands for the proposition that there is no “magic number” of potential competitors or some magic threshold of marketshare for antitrust enforcement. Comcast’s own analysis of its share of the relevant markets — 28% of the pay TV market and about 30% of the residential broadband market — are considerably higher than those possessed by Amex. While this does not prove DoJ would win a case against Comcast/TWC, it validates that such a case is†winable.†Given the strength of the antitrust stool against Comcast †described above, this sort of validation potentially gives DoJ (and therefore FCC) a significant amount of betting courage if it decides to go ahead and challenge the merger.


Nobody Else Really Likes This Merger — And Most People Hate It.


Finally, while lobbying and popular opinion don’t relieve the DoJ and FCC of the need to have substance, the intense unpopularity of the deal and the unexpected resistance it keeps encountering at the local and state level certainly don’t help. In a very rough way, the widespread discontent provides more evidence to the agencies that these companies already have market power, and that the merger will only make things worse. Additionally, as I noted in my primer on the merger process back when this started, all of these political factors play into the willingness of the agencies to go forward when they think they have a case.


Here, Comcast simply never found the support it expected to find. In some ways, this is because Comcast had too much of a good thing. No major politician wants to be seen as acting at the behest of the most hated company in America†when the spotlight is on and every news story opens with how Comcast gives millions of dollars to politicians and CEO Brian Roberts plays golf with Obama. But it also reflects the fact that Comcast bungled the ball from the beginning on this — underestimating the opposition, acting entirely too overconfident, and making endless enforced errors that highlighted why customers hate them so much.


Comcast’s argument to Wall St., and the unspoken assumption by everyone who bought into the idea that Comcast was so well connected it just couldn’t lose, was that political pressure could keep the DoJ and the FCC from doing a thorough job and force them to gloss over any antitrust problems that emerged. So far, at least, that hasn’t happened. Staff seems to be doing a very thorough analysis. And whether the rumors of staff recommendations are true or not, staff have at least gathered enough evidence in the record to support blocking the deal.


Conclusion — Still Too Early To Call A Win, But Path To Victory Clear.


As I noted above, all we have are rumors. But for the reasons discussed above, there is lots of good reason to believe that the agencies have a strong antitrust case against the deal, and that — given that kind of evidence — staff should recommend blocking the merger. Comcast, of course, still has plenty of weapons in its arsenal to slow down any official decision to challenge, muster lots of new political support, trot out experts to try to undermine the case against it, and keep pressing with new concessions.


So we need to keep the pressure on, especially the public pressure, and prevent Comcast from using its political clout to short circuit the legal case against it. But this†looks a heck of a lot less like the quixotic campaign and hopeless last stand many people thought it would be a year ago.


Stay tuned . . .

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