Comcast, Time Warner Cable Deal Deserves Accurate Analysis

Big news yesterday - Comcast is planning to buy Time Warner Cable in a stock deal worth $45.2 billion. This is no doubt a big transaction: Comcast and Time Warner are the two largest U.S. cable operators, and the deal will give the combined company roughly a third of the pay TV market. Such a largemerger deserves a careful look from the FCC and the DoJ, but knee-jerk reactions against any consolidation, all too common in the media, cloud the discussion. We should consider the benefits to consumers and the overall economy, as well as the potential drawbacks instead of assuming big cable companies are necessarily bad. With a little analysis, the deal appears a win for consumers and the economy overall.

The most important point, frequently overlooked or downplayed by opponents, is that Comcast and Time Warner have no overlapping service areas. The two simply do not compete. There will be no change at all to consumer facing competition in the pay TV or broadband market after the deal goes through. Furthermore, what we should really be concerned with is intermodal competition, not how a merged entity would stack up against other cable companies. This deal will put the company on equal footing with satellite TV, and has potential pro-competitive benefits in broadband as well. Comcast has been investing heavily in building out its Hotspot 2.0 technology, lighting up WiFi nodes along its cable plant. If anything, this deal will enhance competition, helping to push cable and wireless closer to substitutable products that compete.

Since these two companies do not compete, the anti-trust analysis is very different from your typical horizontal merger. This is somewhat unusual and likely to be mis-reported in the media. For example, CBS is reporting that the deal will put “more people on a given loop” and that once the operations are combined “you might end up with . . . increased pressure on the actual connection speeds.” Not only is this a completely inaccurate understanding of cable technology, it also perpetuates a serious misunderstanding of the structure of this market. Comcast and TWC do not overlap facilities, and there is absolutely no reason to believe that speeds will drop as a result of this merger. Even reputable outlets like the Wall Street Journalare getting it slightly wrong, comparing the deal to major mergers recently denied by the Department of Justice. These other mergers were in the beer and airline industry, where the companies competed head-to-head. Cable TV has a completely different market structure where individual companies do not compete. Therefore the deal is much more likely to pass muster under the DoJ’s anti-trust analysis.

More interesting is the advantage the merged firm will have against upstream programming and content providers. The two combined will give Comcast-NBCU about 30% of the cable market, making for considerably stronger buying power. The merged company will have every reason to drive a hard bargain with programmers, and these bargains will flow through to consumers. This is particularly important given that many experts have argued that the cost of programming is too high - research from SNL Kagan puts ESPN’s monthly price at about five and half dollars per subscriber. The combined firm will hopefully be able to drive these costs down.

The transaction will also potentially give Comcast a stronger bargaining position when it comes to Internet traffic peering arrangements. Interconnection and paid peering are still largely informal processes, whereby if incoming traffic exceeds a certain threshold, typically 2 times the upstream traffic, the receiving network is paid to carry the traffic. So far the number of problems caused by peering disputes have been few and far between, especially compared to the amount of traffic that is carried successfully. The merger conditions should avoid hampering the flexibility operators have had in interconnection to date and intervention should only occur if we start to see harms to consumers.

Many self-appointed “consumer interest” groups claim that somehow this deal will raise prices for consumers with no real explanation of how. There is an implicit assumption in many of their arguments that consolidation in any form is a bad thing. It is strange that those claiming to be looking out for consumers would reflexively oppose consolidation - scale usually allows large companies to more effectively serve consumers with much lower prices. Furthermore, a larger company will have better access to the capital required to drive research and innovation that will benefit consumers in the long run and can amortize that spending over a larger number of customers.

You simply cannot ignore the economic benefits of combined efficiencies and scale that would flow from this merger. There is significant overhead in the cable business: plant engineering, design of digital platforms, management, etc. Building and operating these networks is fundamentally a scale business, and the economic benefits that come with consolidation should be taken seriously. When production and operating costs fall, consumers and the overall economy benefit. Comcast expects to save about $1.5 billion in operating efficiencies through the deal. These cost savings should benefit consumers.

No doubt, this is a big transaction. Anytime two companies this large consider merging, a careful look from the government is warranted. Unfortunately, we are already seeing inaccurate knee-jerk reactions in opposition to the deal. In some circles cable companies can do no right, others ignore the very real scale and synergy benefits from such a deal. More importantly, many ignore the fact that these two companies were not in competition to begin with, removing many of the typical horizontal merger concerns. Once you subject the deal to even a little analysis, the consumer benefits are clear.