BUSINESS FEBRUARY 13, 2014
In George Orwell’s 1984, the world is divided into three totalitarian superstates, but in the world of broadband and cable television only a single company may soon reign supreme. Comcast announced today it has agreed to acquire Time-Warner, its largest and only significant competitor in the cable and broadband business.
Some financial analysts are claiming Verizon will still provide stiff competition to the new mega-company. “Verizon is offering video service in the most the markets Comcast is participating in,” a Yahoo Finance reporter declared. But Verizon’s FiOS service is available to only 15 percent of Comcast’s existing customers, and in the fall 2011, Comcast and Verizon reached an agreement that solidified Comcast’s control over the non-wireless industry. In exchange for parts of the wireless spectrum that Comcast owned, Verizon agreed not to expand its FiOS network, which offers far superior service to that of Comcast or Time-Warner.
The combined company would now serve about thirty percent of the cable television market. That doesn’t seem large until you realize that it would have a virtual monopoly in 19 of the 20 largest media markets. (Here’s a useful map.) It would also serve over half of the customers who buy “triple-play” cable-telephone-broadband services. (I haven’t seen figures on the companies’ high-speed internet penetration, but according to the National Broadband Plan, only about 15 percent of consumers have a choice of more than one plan.) The companies claim that the merger wouldn’t threaten consumers because they operate in different markets. But that’s ludicrous. The merger would replace two monopolists (that is, very large companies with monopoly power over a market) by an even more powerful single monopoly, even better equipped to discourage competition.
Large companies, even monopolies, are not necessarily contrary to the public interest if they are strictly and intelligently regulated. But in the wake of the 1996 telecommunications act (which idiotically assumed that deregulation would lead to competition) and a pliant Federal Communications Commission, the big telecom companies have progressively avoided regulation. As a result, they are already committing many of the abuses that come with monopoly power, and if the new merger passes muster, will do so with a vengeance.
Monopolies make it more difficult for new entrants to compete. As a result, they allow the larger companies to raise prices without fearing a loss of market share. Since deregulation in 1996, cable prices have risen at about three times the rate of inflation. According to a study from the Free Press, prices for expanded cable service (what most consumers purchase) went up five percent from 2008 top 2013 –almost four times the rate of inflation. Monopolies also allow companies to neglect service to consumers. The American Customer Satisfaction Index rated Comcast and Time-Warner the two worst cable and broadband companies.
Monopolies can also have a corrosive effect on related industries. The big cable companies have been able to squeeze cable content providers—even to cut off access to customers, as Time-Warner did with CBS last fall. If they also own content providers, as Comcast does, they can harm rival content providers—as Comcast seems to be doing to Netflix.
Monopolies also slow innovation, because companies have less incentive to replace older equipment. That was a major argument for the breakup of the old AT&T telephone monopoly in 1982. According to a report from the New America Foundation’s, Open Technology Institute, the United States has lagged behind other countries in the price and quality of its broadband service. The American city with the highest quality internet is Chattanooga, Tennessee, which gets its service from a municipally owned provider.
Under the new merger, the new company—let’s call it Xsanity—will be in an even stronger position to raise prices, neglect service to its customers, squeeze content providers, harm rival content providers and slow innovation. If local, state or national officials attempt to police them, the single big company will have even greater clout. Of course, Comcast will promise to keep prices down, enforce net neutrality, and spur innovation. There is reason, however, not to take these promises seriously.
When Comcast and Verizon were seeking FCC approval of their agreement in 2011, they promised that they would create a technology/research and development joint venture. Comcast Executive Vice President David Cohen told a Senate Subcommittee that “by enhancing the Cable Companies’ and Verizon Wireless’s own products and services, the Joint Venture will ... spur other companies to respond, perpetuating a cycle of competitive investment and innovation.” Two years later, the two companies abandoned the joint venture.
In short, the only beneficiary of these merger will be Xsanity’s management and stock holders. Consumers will get screwed. The American telecom/broadband industry, already lagging behind South Korea and other upstarts, will fall further behind. Of course, the FCC or the Justice Department could block the merger. But what has happened before does not inspire confidence. Obama’s Justice Department did threaten to block the merge of AT&T and T-Mobile, USA, but Comcast has strong ties to the administration—Comcast’s CEO Brian Roberts is one of Obama’s golfing buddies and Cohen has been a major fundraiser—and in the past, the administration has been soft on the company. The FCC approved the merger of Comcast and NBC and the agreement between Comcast and Verizon.
The merger of these giants on the top of American business—not simply insulated from regulation but with the power and money to block any future attempt at regulation—is an awful prospect to contemplate, but it could well come to pass.