Twitter exploded last night with the breaking news that Comcast hopes to buy Time Warner Cable in a $45.2 billion deal. This story, along with details of the deal, have been confirmed this morning. The deal, which values TWC at $159/share, would combine the #1 and #2 cable companies by number of video customers. The combined firm would have about 33 million customers, assuming that regulators do not require divestiture of subscribers (the parties have indicated a willingness to divest customers). This dwarfs the next largest traditional cable company, Cox Communications, with its 4.5 million customers, and is still larger than their non-cable competitors: DIRECTV and DISH (20 million and 14 million customers) and Verizon and AT&T (about 4.5 million customers each).
This merger is going to be in the news for quite a while. We’ll have plenty of time to think about this transaction over the next several months; for now, I’d like to take some time to think broadly about some of the issues this transaction will raise. As a reminder, before the parties can consummate the merger, they will need to file documents with the antitrust agencies, which will then have 30 days to request further information, and another 30 days after the parties respond to any such request to decide whether to bring a suit to block the merger. They will also need to file with the FCC. Overall, this process will almost certainly take at least 6 months, and probably quite a bit longer than that.
First, and most important, Comcast and TWC do not compete with one another in the downstream market for cable television and Internet services. Comcast and TWC are two of the largest providers of both of these services – but they do not operate in each other’s territories. Comcast, for instance, offers service in DC; TWC, for instance, offers service in New York; neither offers service in both cities. This means that they are not competing for customers in either city. If they are not competitors, a merger between these cable television and cable Internet services cannot harm competition, and therefore should not raise antitrust concerns.
This point will not be well understood, and surely will be misreported by the press and most commentators, so it bears repeating. The fact that Comcast is #1 and TWC is #2 in terms of cable television customers, and that together they are seven times the size of Cox (#3) tells us little, if anything, about this transaction. This is because Comcast, TWC, and Cox operate in different territories – they do not compete with each other for customers. Rather, they compete against other video and internet providers, like DIRECTV, DISH, Verizon, AT&T, and Centurylink, and maybe even over-the-top providers like Netflix. Because they do not compete against each other, this merger does not reduce competition. The purpose of antitrust law is to protect competition (and through competition, to protect consumers) – the purpose is not to prevent firms from being large.
This does not mean, however, that this transaction does not raise concerns or face intellectually challenging questions. For instance, Comcast and TWC are competitors in the equipment market: they are the two largest buyers of the cable television and cable Internet equipment that makes up their networks. This merger may increase their market power as buyers in these equipment markets. That is a traditional question that comes up in merger analysis, and which the antitrust authorities will need to consider in this case. Similarly, both are members of CableLabs, which plays a critical role in developing the technologies and standards used in cable television and Internet service – the merger may increase the parties’ influence over this important part of the cable marketplace. While both of these raise traditional concerns about mergers between horizontal competitors, they are also small relative to the size of the overall transaction – while there may be concerns in these markets, they should not be anywhere near large enough to derail this transaction.
Perhaps the most intellectually challenging question that this transaction may raise – and the one that will likely be a key focus of regulators, even though it is not as clear-cut a traditional antitrust question – is how the transaction will affect the parties’ relative bargaining powers in the market for Internet- and media-related services, such as peering and content. Before diving into these issues, we should note that the Comcast-NBCU consent decree, which is still in effect from Comcast’s acquisition of NBCU a few years ago, may go a long way to address many of these concerns. The details of that agreement, how it applies to this transaction, and the extent to which it addresses competitive concerns is easily overlooked, but will be a central to understanding whether this transaction is approved. For instance, that agreement likely addresses any vertical foreclosure concerns over Comcast’s role as a content owner and creator.
Both firms are important participants in the market for peering and interconnection. Importantly, they are both consumers and providers of interconnection. In some sense, they are competitors in this market. In another (and, by and large, the more important) sense they are complementary inputs into the market for peering and interconnection. The greatest concern relating to peering that this transaction raises is that the merged firm would have increased bargaining power in negotiating interconnection to other networks (a vertical concern). A firm with 30 million Internet customers may have more power in peering negotiations than one with merely 20 million.
Similarly, this transaction would increase the merged firm’s bargaining power vis-a-vis content providers – both content owners in the television context and over-the-top providers in the Internet context. Thus, the merged firm may be in a stronger bargaining position in retransmission consent negotiations than either Comcast or TWC would be individually. The merged firm (with its 30 million Internet customers) may also be in a better bargaining position relative to firms like Netflix (with its 33 million customers) in negotiations over a wide range of issues (from peering to CDN hosting to network prioritization). Of course, Comcast is subject to conditions from its acquisition of NBCU that are designed to protect content owners in the television context as well as online video distributors such as Netflix, and those conditions would carry over to any cable systems it acquires. Notably, as part of the Comcast-NBCU conditions, Comcast and any cable systems it acquires will be bound by the FCC’s Open Internet rules even though two of them were overturned in court.
We’re likely to hear a great deal of discussion about these issues, especially from consumer advocates and others concerned about the panoply of challenging and contentious issues that define modern telecommunications debates: peering, interconnection, retransmission consent, and network neutrality.
These are the issues of the day – and they are all important. The hard question is how these issues relate to this proposed merger. Remedies in merger cases, including a decision to block a transaction, need to respond to merger-specific concerns. One could say that the merger would exacerbate each of these issues, because relative bargaining power plays a role in them. And if you are concerned generally about peering disputes, viewing them as harming consumers, this merger is likely to exacerbate those concerns. On this front, it is important to remember that the market for peering and interconnection is robust. It seems a stretch to argue that this transaction will dramatically affect the market for peering and transit – and it is important not to conflate the important discussions going on in the context of the IP Transition with concerns raised by this merger.
On the other hand, if you view peering disputes as bilateral negotiations between upstream firms over how to best apportion the costs of delivering Internet content or just how to “split the profit pie,” you are likely to find this merger relatively innocuous: it may affect how profits are split between Comcast/TWC and Netflix, for example, but it won’t affect the quality or cost of service provided to the ultimate consumer. From this perspective, blocking this merger wouldn’t address the concerns at the core of modern telecommunications debates – rather than symbolically blocking a merger, we should focus on addressing these underlying concerns.
As said at the outset, this merger will be in the news for some time to come. The thoughts above are an effort to quickly dispel the inevitable characterizations of this as a simple horizontal merger, and to dive into some of the legitimately hard questions that it will raise. The issues that this merger raises are tied up in a number of other important and challenging debates, and it is not at all clear at this point what responses to these myriad issues are on the table. One thing that is clear is that we’re in for an exciting 2014.