Letter to FCC on Comcast-Time Warner merger
Federal Communications Commission
445 12th Street SW
Washington, DC 20554
VIA ELECTRONIC COMMENT FILING SYSTEM
Re: Comcast – Time Warner Cable, MB Docket 14-57
Aug. 21, 2014
Dear Commission Members:
On behalf of the R Street Institute, a Washington-based free-market think tank with offices in Sacramento, Calif., Austin, Texas, Columbus, Ohio, and Tallahassee, Fla., I write in support of approving the proposed merger between Comcast and Time Warner Cable (TWC). Our analysis of this merger is that it is a natural response to changing market conditions, offers significant potential benefits for consumers in both the residential and business markets and that potential harms are either minimal or mitigated by other existing regulations or market dynamics.
The proposed $45 billion merger takes place in an environment characterized by two trends that have hit cable television providers particularly hard in recent years – a shrinking subscriber base for pay-television services and the rising cost of content acquisition.
Comcast has been losing video customers, on net, for at least five consecutive years, down nearly 10 percent from 24.8 million at year-end 2007 to 22.5 million at the end of the second quarter of 2014. TWC has also lost net video subscribers in each of the past five years, falling more than 17 percent from 13.3 million at year-end 2007 to 11.0 million at mid-year 2014.
Cable companies also have seen rapidly escalating costs to acquire content, driven in part by competition from a profusion of video on-demand services like Netflix, Amazon Prime and Hulu, of which Comcast is a part-owner. Intense negotiations for content – including a 2013 dispute between TWC and CBS – also have led to a number of service blackouts, which unquestionably harm consumers. Reflecting trends across the industry, TWC has seen its per-subscriber content costs rise 24 percent since 2010, while Comcast has seen a 20 percent jump over the past two years.
Currently, nine companies – AMC, CBS, Discovery, Disney, Fox, Scripps, Time Warner Inc., Viacom and Comcast itself – control about 90 percent of the $45 billion market for television content. While the content creation market is not itself a monopoly, growing demand has contributed to higher prices. The market for sports content – provided by the likes of Comcast’s own NBC Sports, as well as CBS Sports, Fox Sports, Time Warner’s TNT and TBS and, especially, Disney’s ESPN – has proven particularly thorny for cable companies. The trend toward “cord cutting,” in which consumers eschew any pay-television service in favor of streaming video on-demand, has raised the stakes for cable companies to retain consumers of live broadcasts, tilting leverage further toward providers of sports content.
According to SNL Kagan, fees paid by distributors to carry cable channels are expected to grow from $31.7 billion in 2013 to $40.8 billion in 2016. The market is led by ESPN, which takes in about $5.54 per month per subscriber, compared to about $1 per month per subscriber paid to broadcast network affiliates for retransmission consent, another rapidly growing cost driver. SNL Kagan projects the broadcast networks – including Comcast’s NBC and Telemundo – will pull in about $3 billion in retransmission consent fees in 2015, with the networks themselves taking roughly a $1.3 billion cut and network-owned affiliates getting the remaining $1.7 billion.
The additional negotiating power wielded by a combined Comcast-TWC could potentially serve as a check on rising content acquisition costs, both in carriage fees and retransmission consent agreements. It should be noted that the extent to which this would reverse the prevailing trend is uncertain and may depend partially on whether the combination spurs further media consolidation in response. To the extent that the combined company can negotiate across any of these markets to reduce fixed costs, it could translate into consumer benefits in the form of lower service bills.
Consumers also should benefit from operating efficiencies that reduce costs without reducing output, and from network upgrades, in particular to TWC’s relatively older and slower service. Comcast has said it expects the combination initially to yield about $400 million in capital expenditure efficiencies and to save about $1.5 billion in operating expenses within three years. The company also has announced it will accelerate TWC’s planned migration of at least 75 percent of its service footprint to all-digital service.
One under-appreciated consumer benefit of a combined Comcast-TWC is the role the larger company could play in the business services sector. While both Comcast and TWC have a modest presence in the market to provide broadband and voice service to small business, the firms are only marginal players in the market to serve large commercial enterprises. Because of the need for a large national service footprint, the business services market traditionally has been dominated by telecoms like Verizon and AT&T. A combined Comcast-TWC, with at least some footprint in all of the 50 largest markets, could for the first time become competitive, with benefits redounding to business services consumers.
Some have raised concerns that a combined company would have undue market power to discriminate in both the video and broadband markets, for instance by privileging its own content over that of competitors. Some of these concerns are relevant to the commission’s own separate industry-wide deliberations on regulation on net neutrality, a subject on which R Street has not taken any formal position. However, it is incumbent on those who raise such concerns to demonstrate why a combined Comcast-TWC presents any new issues or heightens any existing issues that did not already exist with the companies operating separately.
Comcast is already bound by the FCC’s program carriage rules not to privilege its own content. The company also has already pledged that the seven-year net neutrality agreement it consented to when it purchased NBCUniversal in 2011 would also apply to TWC. What’s more, any incentive a combined Comcast-TWC would have to discriminate against particular content providers operating on its platform would, by necessity, be balanced against consumer demand for that same content. This is a lesson already learned the hard way by TWC, which lost 300,000 customers during its blackout dispute with CBS.
Were it the case that a combined company would leave consumers with fewer choices, concerns about discriminatory treatment of content would have more force. But Comcast and TWC already do not compete with one another for customers in any market in the country. Moreover, Comcast also has stipulated as part of the terms of the agreement that it will divest 3.9 million residential video subscribers to Charter Communications. The combined Comcast-TWC would remain the largest provider of pay-television services, but it would control less than 30 percent of the market, with DirecTV and Dish Network – both of which do compete directly with Comcast and TWC — having 20 percent and 14 percent, respectively. Other services, including the telephone providers that also compete directly with cable and satellite, comprise with the remaining 36 percent.
As believers in pragmatic, free-market solutions, we believe antitrust action should be limited in scope and focus on demonstrable harm to consumers. We do not believe the issues raised by the proposed Comcast-Time Warner Cable merger meet that threshold. We ask that you allow it to go forward without undue delay.
The R Street Institute
The R Street Institute