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Is Antitrust about the Present or Cloudy Expectations of the Future? A Consideration of the Comcast – Time Warner Cable Merger

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Introduction

The question posed above lies at the heart of many antitrust decisions. Since these actions, particularly when opposed, often take long periods of time before resolution, any remedies imposed will become operative only in the future. On this account, it is tempting to consider future market conditions before making enforcement decisions.

The problem of course is that “the future is not ours to see.” While we can make guesses about future market conditions, they are often wrong. There are countless examples of industry participants unable to predict future circumstances in their own markets. In that case, it might be better just to stick to the present as an implicit projection of the future.

This question is particularly relevant in high tech industries where innovation and new products are constant themes. Even if antitrust violations in the current marketplace can be demonstrated and reversed, it might not matter if the existing product and services are soon obsolete. As discussed below, this question lies at the heart of the policy debate surrounding the proposed Comcast – Time Warner Cable (TWC) merger.

The Relevant Markets

In its early days, cable television was designed to bring broadcast television signals into places where over-the-air reception was limited. However, it has long surpassed that early purpose. Not only does it now distribute video programming that is only available via cable transmission but also it has become a major conduit of broadband internet services to homes and businesses. With these additional functions, it has become an essential utility in the modern economy.

Although cable companies, such as the merging parties, do not generally compete as service providers in the same local market areas, they are separate buyers of the same video programming channels which are distributed to their customers. For this reason, even if they do not compete as sellers of cable services, they do compete as buyers of video programming.

This point has been challenged by the economists retained by the merging companies. In their report, they argue:

Because Comcast and TWC do not compete for … customers, the combination of the two will not change their demand for programming … [nor] change the supply of programming because there is essentially zero incremental cost for a content provider to sell its programming to both Comcast and TWC relative to selling it to one of the two.[1]

In effect, their argument is that because it costs largely the same for a content provider to sell to either buyer as to both of them, these buyers are not competitors. While that position could be correct in the short run, where the video programming already exists, that is not the case in the longer run where programming costs need to be covered.

In that case, both the amount of the programming that is purchased by individual buyers and the prices that are paid will influence the quantities produced. In this longer run, supply curves are upward sloping and marginal costs are positive; and note this longer run may merely reflect the next season. In this setting, the parties compete as buyers even if not as sellers.[2]

To be sure, the buying side of the market for video programming contains more rivals than the cable companies. Video programming is also distributed by satellite transmitters as well as by some telephone companies over a portion of their systems.[3] Within this larger market, Comcast and TWC together controlled 34% of US video subscribers in 2012. However, this share jumps to 52% in a submarket which excludes the two satellite transmitters. The basis for defining a relevant submarket is that satellite transmission cannot offer programming via the internet because, as acknowledged by the leading satellite transmitter, the technology’s “one-way video delivery service lacks broadband capabilities.” [4] As a result, satellite providers cannot distribute both conventional and internet-based programming which some consumers prefer; a deficit which makes them more distant competitors. [5]

The Presence of Monopsony Power

Suppose hypothetically that a dominant video distributor decides to reduce its quantities by purchasing fewer specialty channels. Because such channels appeal to smaller audiences, producers of specialty channels may not be able to cover the supply price of their programming from the remaining potential viewers. In that case, the specialty channel will exit and the overall quantity of video programming will decline. What all this means for the proposed merger is that a large distributor of video programming, such as a combined Comcast and TWC, could potentially exercise monopsony power in the relevant market.

To be sure, the presence of monopsony power depends on more than merely large market shares. As the economists defending the merger correctly point out, it also requires an upward sloping supply curve along which both prices and quantities are reduced. [6] Turning first to prices, there is surprisingly a direct admission of this result by a Comcast official. In his statement to the FCC, the company’s Chief Financial Officer acknowledged that the merger with TWC will result in sharply lower programming costs.[7] This effect had been noted in prior government reports [8] but this statement may be its first explicit acknowledgment by an industry participant. These savings can be substantial because programming costs account for 37% of Comcast’s total operating costs and 46% of TWC’s total operating costs.[9] While this evidence is not detailed and complete, it suggests that Comcast already pays lower prices for its programming inputs, which can be extended to TWC if the merger proceeds.

However, there is also the quantity dimension of monopsony power. On this point, see the FCC-provided evidence below on the number of channels of programming carried on Comcast’s medium-tier packages along with those carried by other wireline distributors [10]:

2012

2013

Comcast

160 channels

160 channels

Time Warner Cable

NA

200 channels

Cox

236 channels

280 channels

Verizon VOS

285 channels

290 channels

Charter

NA

NA

AT&T U-verse

270 channels

270 channels

Cablevision

NA

NA

BendBroadband

196 channels

NA

While these data are incomplete and requires confirmation, they suggest that Comcast cable systems offer fewer programming channels than its rivals do to most of their subscribers, which is consistent with its exercise of monopsony power.

Before concluding this section, it is important to recall a well-known economic result that is often missed. When a monopsonist pays lower prices for its inputs, these prices do not lead to lower output prices but rather the reverse. Because reduced input quantities are involved, they lead to reduced output quantities as well, and thereby higher output prices.[11] To the extent that the proposed merger promotes enhanced monopsony power, we would expect to find higher and not lower prices charged to consumers of cable services.

An Antitrust Judgment

From this evidence, so long as it can be confirmed with more detailed data, there are strong grounds to block the merger. However, before taking that step, one must also confront the question posed in the title of this piece. Does this evidence from the present offer a likely description of the future for this market? And here, commentators raise some relevant issues.

See the following statement in the press:

As buyers of content, they (the cable companies) face an expanding universe of rivals – Amazon, Netflix, Google and Apple, not to mention emerging wireless content players like Sprint, AT&T and Verizon. In today’s technological world, content producers don’t even need a distribution partner to reach consumers – they can offer their shows directly to viewers over the Internet. [12]

The suggestion here is that the future may be so different from the present that it may not be worthwhile to bring an antitrust action intended to block the merger.

This is a serious critique and one that should be faced before a decision is taken. Should a reporter’s projection of the future be sufficient to alter what otherwise might be a strong antitrust action? Should forecasts of the future be added to the many burdens already faced by antitrust plaintiffs? While these projections could be correct, they could also be quite wrong. Even recognizing that future competitive factors can sometimes correct for monopolistic abuses in the present, legal actions require convincing evidence, which means they must rest on facts and data which are available only for the present. The future is unknown and should therefore play a more limited role in policy decisions.

___________________________

I am grateful for the helpful comments and suggestions of H.E. Frech and Ellen Stutzman in the preparation of this article.

[1] Gregory l. Rosston and Michael D. Topper, An Economic Analysis of the Proposed Comcast Transactions with TWC and Charter In Response to Comments and Petitions, September 20, 2014, p. 21.

[2] Roger D. Blair and Jeffrey L. Harrison, Monopsony Antitrust Law and Economics, Princeton University Press, 1993, p. 82.

[3] According to AT&T’s CEO, “Due to technology and economic limitations, we can offer video in only a small portion of the country – less than a quarter of American households.” Randall Stephenson, Statement before the Subcommittee on Regulatory Reform, Commercial and Antitrust Law, US House of Representatives, June 24, 2014, p. 2.

[4] AT&T-Direct TV Application to the FCC, Description of Transaction, Pubic Interest Showing, and Related Demonstrations, redacted version, June 11, 2014. [5] This position is also taken in Michael Katz, An Economic Assessment of AT&T’s Proposed Acquisition of Direct TV, June 11, 2014, pp. 7-8.

[6] Gregory l. Rosston and Michael D. Topper, An Economic Analysis of the Proposed Comcast Transactions with TWC and Charter In Response to Comments and Petitions, September 20, 2014, p. 21.

[7] Declaration of Michael J. Angelakis, Before the Federal Communications Commission, MB docket No. 14-57, April 7, 2014, p. 4.

[8] US Government Accounting Office, Video Marketplace Competition is Evolving and Government Reporting Should Be Reevaluated, GAO-13-576, June 2013, p. 22 and Federal Communications Commission, Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, July 22, 2013, p. 34.

[9] Comcast Corporation, form 10K; and Time Warner Cable, form 10K.

[10] Federal Communications Commission, Annual Assessment of the Status of Competition in the Market for the Delivery of Video Programming, July 20, 2012, p 58; and July 22, 2013, p 59.

[11] Blair and Harrison conclude: “When the monopsonist has marekt power in its output market, the reduced input prices translate into higher output prices.” p. 42.

[12] Holman W. Jenkins, “On Comcast and Jimmy Carter,” Wall Street Journal, October 4, 2014, p. A13.

AUTHOR
William Comanor
William S. Comanor is Professor of Health Policy and Management and also Professor of Economics at the University of California, Santa Barbara. At UCLA, he is Director of the Research Program on Pharmaceutical Economics and Policy and also organizes a Seminar by the same name. Dr. Comanor received his Ph.D. in Economics from Harvard University in 1964. Since completing his dissertation on "The Economics of Research and Development in the Pharmaceutical Industry," that subject has been one of his primary interests. He has written and lectured on various topics in this area, and founded the Research Program he now directs. From 1991 through 1993, he served on the Advisory Panel of a Federal Government Study on Pharmaceutical Research and Development, and from 1978 through 1980 was Chief Economist and Director of the Bureau of Economics at the U.S. Federal Trade Commission in Washington.
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