ACA-NTCA letter details problems of Comcast-TWC merger


ACA / American Cable AssociationIn advance of the 4/9 Senate Judiciary Committee hearing exploring the competitive ramifications of the proposed $45.2 billion merger of Comcast and Time Warner Cable, the American Cable Association and the NTCA – The Rural Broadband Association shared their views on how the combination will result in harm to competition and consumers. They also noted the harm it would cause to programming suppliers. Here’s a letter from ACA President/CEO Matt Polka and NTCA CEO Shirley Bloomfield sent to Sen. Patrick Leahy (D-VT) and Charles Grassley, Ranking Member, Senate Committee on the Judiciary:

Dear Chairman Leahy and Senator Grassley:

In advance of the Committee’s hearing to explore the competitive ramifications of the proposed combination of the nation’s two largest cable operators, Comcast Corporation (“Comcast”) and Time Warner Cable (“TWC”) in a $45.2 billion transaction, the American Cable Association (“ACA”) and NTCA– The Rural Broadband Association (“NTCA”) wish to share their initial views on how the combination will result in harm to competition and consumers. Combined the ACA and NTCA comprise approximately 850 small and medium-sized multichannel video programming distributors (“MVPDs”) that provide video, broadband Internet, and phone services in all 50 states to nearly 7 million video subscribers. Members range from family owned companies and cooperatives serving small cities and rural areas to multiple system operators serving urban areas.

ACA and NTCA are most concerned about the competitive effects of the transaction in two vertically related industries – the (downstream) MVPD industry, which distributes video programming to consumers, and the (upstream) video programming industry, which provides this programming to these distributors. Comcast is a behemoth in both industries. In the downstream MVPD industry, it is the largest MVPD with 21.7 million cable subscribers. In the upstream video programming industry it owns the NBC network, 10 NBC owned-and-operated stations (“O&Os”), 13 regional sports networks (“RSNs”), and a large number of the most popular national cable networks including USA Network, CNBC, Golf Channel, Syfy, Bravo, E!, and MSNBC. TWC is also a giant in the downstream video distribution industry. It is the second largest cable operator in the nation with 11.4 million cable subscribers. TWC also has a significant presence in the video programming industry through its ownership of 16 RSNs.

From an economic perspective, this means that the transaction has both horizontal and vertical components and that a complete analysis of the potential competitive harms must consider all of these aspects. More specifically, ACA and NTCA are most concerned with the following three components of the transaction.

Component #1: The upstream horizontal component, which is the horizontal combination of Comcast’s programming assets with TWC’s programming assets.

Component #2: The vertical component, which is the vertical combination of Comcast’s programming assets with TWC’s distribution assets.

Component #3: The downstream horizontal component, which is the combination of Comcast’s distribution assets with TWC’s distribution assets.

ACA and NTCA were active participants in this Committee’s and the Department of Justice’s (“DOJ”) review of the competitive effects of Comcast’s acquisition of NBC Universal’s (“NBCU”) programming assets as well as the Comcast-NBCU license transfer proceeding before the Federal Communications Commission (“FCC”). That deal brought together the nation’s largest cable operator, Comcast, with one of the nation’s largest programmers, NBCU. Comcast also had a major presence in the programming industry primarily through its ownership of 13 RSNs in major metropolitan areas. Thus, this previous deal also had vertical and horizontal aspects. In particular, it exhibited the first two of the three components identified above, an upstream horizontal component (the horizontal combination of Comcast’s programming assets with NBCU’s programming assets) and a vertical component (the vertical combination of NBCU’s programming assets with Comcast’s distribution assets.) The FCC concluded that significant competitive harms would result from both aspects of the transaction and imposed conditions that were intended to ameliorate these harms.

Our joint concerns with the first two components of the current transaction before the Committee are substantially similar to the concerns we expressed regarding the competitive effects – and the ultimate effects on consumers – of these components in the review of the Comcast-NBCU transaction. With respect to the upstream horizontal component, we are concerned that the combination of Comcast’s programming assets with TWC’s RSNs will allow the merged entity to exercise greater bargaining power against all MVPDs that carry this programming, by bundling more “must have” programming together. This effect will occur in the areas where TWC offers its popular RSNs, and will be most severe in the designated market areas (“DMAs”) where there is both an NBCU O&O and a TWC RSN, such as the New York, Los Angeles, and Dallas DMAs. All MVPDs in these regions and markets will be affected by this harm regardless of whether they compete against Comcast or TWC.

With respect to the vertical component, our concern is that the merged entity will have an incentive to disadvantage MVPDs that compete with TWC by either withholding Comcast programming from them permanently or temporarily during negotiation impasses, or simply by forcing them to pay higher prices for this programming. ACA and NTCA have at least 20 members representing more than 1.5 million subscribers that have at least a 10% competitive overlap with TWC. However the vertical competitive harm will not necessarily be limited to only these MVPDs. Due to the fact that many of these MVPDs obtain their programming through a buying group, which serves as the buying group for most small and medium sized MVPDs, Comcast-TWC will have an incentive to raise the prices that it charges to this buying group, and these price increases will harm all MVPDs that obtain their programming through the group. Customers of these small and medium-sized MVPDs will ultimately pay the price.

The FCC adopted arbitration conditions that were intended to ameliorate these harms and our understanding is that Comcast and TWC have indicated that they would be willing to abide by these same conditions as a condition for approving the current transaction. However, such conditions will definitely not be enough to solve the problems that will be created by this transaction, because these conditions, although well-intended, have turned out to exhibit a number of defects and problems which limit their effectiveness, particularly for small and medium sized MVPDs. In particular, arbitration is too expensive for individual small and medium sized MVPDs to use, and the manner in which buying groups could potentially avail themselves of the arbitration conditions was poorly and incompletely described. We hope to work closely with both the Committee and the FCC throughout the year to explain the problems with the Comcast-NBCU conditions and explore ways to fix them.

The third component of the current transaction – the horizontal combination of Comcast’s distribution assets with TWC’s distribution assets – did not arise in the Comcast-NBCU transaction and raises significant and troubling new issues. We have read many press reports where the merging parties glibly deny that there is any horizontal problem at the MVPD level by noting that Comcast and TWC do not compete at this level. As Paul Krugman of the New York Times and others have noted, however, this facile response ignores the main problem created by this massive horizontal combination, which is the dramatic increase in the merged entity’s bargaining power with respect to and control over the video programming industry. With more than 30% of all MVPD subscribers, the merged entity will become a “must have” distribution outlet for programmers. In the short run, the merged entity will gain additional competitive advantages over its MVPD competitors, through demanding larger volume discounts than its rivals are able to obtain, thereby weakening the competitive position of these rivals or perhaps driving them out of business entirely. Programmers subject to the enhanced bargaining power of Comcast-TWC will seek to make up for lost revenues either by charging higher prices to other MVPDs or by reducing their investments in programming. In the longer run, Comcast-TWC may be able to leverage its increased dominance in the MVPD industry to increase its market share in the video programming industry, therefore ultimately reducing the competitiveness of this industry as well. In any event, the final result will likely be higher prices and fewer choices for consumers.

We are currently actively engaged in additional research and fact-finding and will report our findings and conclusions to the Committee, the DOJ, and the FCC as our analysis progresses. Please do not hesitate to let us know if you or your staff requires additional information or clarification of our views.”