Comcast, Time Warner Deal Signals Changing Times in Cable Industry

NEWS ANALYSIS: A Senate Committee meeting April 9 was an opportunity to consider perspectives on the merger of Comcast and Time Warner Cable.

AT&T hopes to expand its fiber broadband network business, called U-verse with GigaPower, beyond Austin and Dallas, Texas, and into bustling areas of North Carolina, it announced April 10.

This expansion—which would have AT&T following Google into yet another region to lay fiber—is exactly the type of new growth that Comcast and Time Warner Cable (TWC) spoke to in their April 9 testimony, during a meeting of the U.S. Senate Committee on the Judiciary to examine Comcast's proposed $45.2 billion acquisition of TWC.

In their joint written statement, Comcast Executive Vice President David L. Cohen and TWC Executive Vice President and CFO Arthur T. Minson Jr. argued that the greater scale the companies could achieve together is "essential" to compete in today's marketplace.

"The media and communications industry has changed dramatically over the past two decades and today has evolved into a vastly larger, more complex and multi-faceted communications, media and technology ecosystem, in which a host of sophisticated companies with national and even global footprints, like AT&T, Verizon, DirecTV, Dish, Amazon, Apple, Sony, Google, Netflix and Facebook, are increasingly competing against one another for customer attention and loyalty," they said.

Further into their testimony, Cohen and Minson suggested that the dynamics of the industry are making rivals of erstwhile partners and customers, sometimes to their own detriment, but to the benefit of consumers.

"New digital platform providers, with their roots in software and hardware, are using the robust Internet connectivity provided by Comcast, TWC and our competitors to grow into global powerhouses. These companies are increasingly pursuing new businesses that compete with ours," they continued.

"As one industry expert has observed, 'Broadband connectivity is the glue that permits multiple firms, once walled off from one another in distinct product-market categories, to compete, cooperate, buy and supply products and services from one another in order to satisfy customers that are able to buy from any one of them.'"

That expert was Jonathan Sallet, an attorney and acting general counsel at the Federal Communications Commission (FCC), who in a 2011 paper described how in addition to business value chains there are now value circles in which companies, in "not necessarily the same product markets, are able to offer competing packages of value to consumers."

The value circle is a tool, wrote Sallet, for strategists and policymakers to "understand the velocity and seeming chaos of important markets."

Among the four other witnesses contributing to the examination was Gene Kimmelman, the president and CEO of consumer advocacy group Public Knowledge, who also celebrated the potential offered by value circles.

"After years of suffering from enormous rate increases and poor service from Comcast and other providers, a vibrant broadband economy is just beginning to bring exciting new alternatives to subscription television," he told the committee. "Everything from new devices ... to new video services—like Amazon Prime, YouTube, Netflix and Aereo—are demonstrating that online video can compete with some elements of traditional cable TV."

The merger, said Kimmelman, would give Comcast control of nearly 50 percent of high-speed Internet access in the country, 30 percent of Multi-Channel Video Programming Distributor (MVPD) subscribers (this includes services like satellite TV, Verizon FiOS and AT&T U-verse) and almost 60 percent of cable subscribers.

This "unprecedented accumulation of market power" would create "incentive and enormous leverage" for Comcast to essentially pinch the hose.

It could "stifle slowly emerging competition from rivals such as Netflix and Amazon," said Kimmelman, "position itself as the dominant gatekeeper for all new services," slow the pace of equipment, device and service innovation "to lock in maximum revenue" for its own infrastructure and business model, and, among other offenses, drive up the cost of programming to other distributors and so increase prices to consumers.

Kimmelman concluded, "Because the merged company will have both the incentive and ability to thwart development of innovative Internet services that threaten Comcast's excessively priced offerings across a much broader swath of the market than is true today, this merger must be rejected."

Christopher S. Yoo, a professor of law at the University of Pennsylvania, argued in his testimony that the technological and economic changes transforming the markets today "make the prospect of anti-competitive harms ... remote."