House hearing on the Comcast/TWC merger: A preview

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At 9:00 this morning, House Judiciary Committee’s Subcommittee on Regulatory Reform, Commercial and Antitrust Law will hear the pros and cons of the Comcast/Time Warner Cable merger in a proceeding parallel to the hearing conducted by the Senate recently. Like the Senate, the House has no direct authority over the merger, which will ultimately be approved, denied, or conditioned by the FCC and the Justice Department, but it’s too big to ignore.

The witness list doesn’t betray any committee intent to go easy on Comcast and TWC: anti-merger witnesses outnumber pro-merger ones. They include former Justice Department antitrust lawyer Allen Grunes; a boutique TV programmer, Patrick Gottsch of RFD-TV; the association of boutique cable systems, ACA, represented by Matt Polka; and the founder and CEO of Cogent Communications, the bargain basement IP transit provider who recently lost the Netflix to Comcast carriage business to Comcast. On the pro-merger side, the subcommittee will hear from Columbia Law Professor Scott Hemphill and the spokesmen of Comcast and TWC, David Cohen and Rob Marcus. Network Research’s Craig Labovitz will also testify, but he doesn’t represent a pro- or anti-merger position; he’s going to be the color man, chosen for his experience with Internet peering and transit because he used to play the game.

Nothing in the written testimony filed by the witnesses is terribly surprising, so I expect the hearing to go pretty much the same way the Senate hearing went: the opponents are prepared to charge Comcast with violating the terms of their merger with NBC/Universal and with committing a variety of other offenses, and a very well-prepared David Cohen will endeavor to prove to the Committee that he has neither a tail nor a set of horns. While the stakes of the merger pertain to the future of TV distribution – and of what television even means in the future – the discussion will focus on the past. The sub-text will be about what kinds of economic arrangements for the Internet are most likely to lead to a utopian future, whether we’re heading for dystopia unless major changes are made, and how a large, vertically-integrated content creation and communications company fits into these alternate scenarios.

Let’s do a blow-by-blow of the written comments.

Comcast and TWC will reiterate the testimony they gave in the Senate, and if history is any guide, their actual testimony will be less important than their real-time answers to the Committee’s questions.

Gottsch has a complaint with Comcast over their decision to drop his country life network, RFD-TV, from their cable TV lineup. These concerns are similar to those raised by a “golf lifestyle” programmer in the Senate hearing: Comcast used to carry RFD-TV in some of its markets, but dropped them a while ago. Comcast doesn’t offer a similar rural living channel as far as I can tell, but it does offer some country music and old-time religion channels that probably appeal to the same demographic minus the horses and weather reports. Gottsch claims “Comcast’s decision to drop RFD-TV is supported neither by RFD-TV’s ratings nor by cost concerns,” but that seems rather hard to prove, and even if true wouldn’t address the legality of refusing to carry this particular programmer. RFD-TV strikes me as a perfect candidate for on-demand streaming not only for rural people but as something that urban hipsters might enjoy ironically, like Sponge Bob Square Pants for the horsey crowd.

Grunes insists the merger “almost certainly violates the antitrust laws”, especially the “incipiency” standard from the 1950 amendments to the Clayton Act. This section says that a prospectively merged firm doesn’t need to have actual market power to be sanctioned; it merely needs to show the likelihood of attaining it post-merger. To make that case, Grunes claims: “From 2009 and 2013, Comcast increased prices for basic and premium cable packages far more than competitors AT&T, Cablevision and DISH Network” and also that there’s something unsavory about Comcast’s paid peering deal with Netflix:

When Netflix signs a paid interconnect deal with Comcast and its CEO subsequently calls the deal an “arbitrary tax” and a “toll” that demonstrates Comcast’s “leverage,” we should not simply chalk those comments up to sour grapes or lack of understanding of the market.

Grunes also echoes the DoJ’s dismissal of competition against Comcast, particularly from wireless: “Indeed, there are technical, cost and consumer usage reasons to believe that the two markets will remain separate from an antitrust point of view for the foreseeable future.” This is a key claim because antitrust has so much to do with market definition. It’s interesting that Grunes does not offer any admission that non-cable wired competitors Verizon, AT&T, and CenturyLink are now taking market share from cable with their fiber-based and all-fiber services. It’s going to be interesting to see if the Committee picks up on this, given the pervasive arguments that the battle between cablecos and telcos for the last mile has been over for years. It’s really not, of course.

Cogent’s Dave Schaeffer’s testimony includes a number of factual errors and seems intended to burnish Cogent’s image as the sole “good guy” among the transit services providers. He airs some dirty laundry about his firm’s failed negotiations with Comcast for 500% more interconnection capacity after he signed a deal with Netflix to provide a service he couldn’t provide within the parameters of his existing deal with Comcast. Cogent offered to pay some of Comcast’s equipment costs – some Ethernet switches costing peanuts – but not the fiber capacity that must be deployed behind the switches to make capacity available to the gear. He’s apparently counting on the confusion between network switches and the networks they switch.

Schaeffer also claims that the smaller cable companies who’ve given Netflix free bandwidth, real estate, and power did so because they don’t offer content that competes with Netflix, but that’s laughable. Seriously, we’re supposed to believe that cable companies don’t provide video programming? His role is to paint Comcast as a rogue operator who refuses to follow Internet norms, which isn’t a widely believed notion in the world of Internet operators and standards setters. His testimony doesn’t put Cogent in a good light; they charge money for connections to little guys over assets acquired in fire sales, and expect large operators to give their networks away for free. This is good work when you can get it, but depending on the kindness of strangers is not a sustainable business model.

Polka speaks for small, private and government-owned cable systems. He’s concerned about rising programming prices, but most of that is well outside Comcast’s control except for the Regional Sports Networks that are growing more expensive every year. These price increases are the result of bidding wars between Fox Sports on the one hand and Comcast or TWC on the other. Since people watch sports live instead of time shifting, commercials are more valuable for sports than for most programming, and this has nothing to do with the number of bidders.

Labovitz will explain how the Internet has changed since 2007, when it took thousands of sites to provide 50% of the network’s prime-time traffic load; today, a mere 30 firms (or as few as two by some measures) account for it. I suspect members will ask Labovitz to make sense of some of Schaeffer’s testimony, which might just set off a few sparks. His testimony is brief, so rather than summarize it I suggest you read it. Labovitz is a serious network researcher whose work I’ve been following since 2009.

Hemphill’s testimony explains that bigness itself is not the danger that the antitrust statutes aim to prevent and that paid peering is not a sign of the End Times:

Paid peering is best seen not as an instrument of exclusion, but as a means to put a price on the additional capacity demands resulting from the increased popularity of online video. It is efficient for the distributor and its end-users, considered collectively, to pay for that capacity, rather than spreading the expense among all ISP customers. Doing so better aligns use with cost and incentivizes both investment and economical use. Paid peering is not the only possible solution to that problem, of course. Surcharging heavy users, provided that the surcharge is not itself an instrument of foreclosure, is a viable alternative.

The factual scenario here is that the transition from multicast TV (today’s cable and OTA TV model) to unicast (video on demand, per the Netfix model) increases network capacity requirements by 2000 – 4000%, all the way from video server to consumer. Nobody has that much capacity today, not even Google, so this transition will raise the cost of broadband one way or another. As the major beneficiary is the advertising-based TV streamers who get to sell personalized ads, it seems a bit inevitable that a fast transition will need to be subsidized by the Netflixes, Hulus, and Amazons of the world, whether regulators are dealing with antitrust or not. So the paid peering fears aren’t really pertinent to the merger, as they’re driven by larger dynamics.

Perhaps that’s the overall takeaway from the testimony: Broadband prices will rise if consumers insist on making a fast transition from multicast to unicast TV. This is because bandwidth costs money and routine upgrades to equipment won’t accomplish the task; much, much more fiber and many more switches will need to be deployed, not in the neighborhood but in the regional networks that connect “neighborhood nodes” to the Internet. These networks are all fiber already, so fiber to the home has nothing to do with it. A slow transition will be less expensive since it can piggyback on the natural upgrade cycle, but a number of people are impatient.

So a choice will be made, not as much by one or two companies as by millions of American citizens. That’s not anybody’s fault, it’s just a fact of life.

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