Richard Epstein Analyzes the Comcast-Time Warner Merger

At, Richard Epstein has analysis of the pending Comcast-Time Warner merger:

It does not take any great legal insight to realize that the proposed $45.2 billion merger between Comcast (the senior partner) and Time-Warner Cable will provoke all sorts of antitrust concerns.  The two companies are big players by any definition, and their combination will make them only bigger. It is therefore a certainty that Federal Communications Chairman Thomas Wheeler will give this merger a close look to see if it passes muster.

In a fashion that will be familiar to many litigators, Epstein notes that his opinion (in favor of allowing the merger) has been informed and sharpened by commentary opposing it, which helped to clarify the critical issues:

The case for allowing the merger became a lot stronger for me when I read Tim Wu’s blog on the New Yorker website arguing against it. The usual test in these cases asks about this tradeoff: how much does the merger in question increase concentration in the industry, and is that amount offset by any efficiencies in production that the merger might be able to produce? That ultimate question is, alas, the one that Wu does not address. Instead, he leads with a classic irrelevancy, complaining about the cost of cable coverage, which, for a “decent package,” is now over $60 per month, with an average cost around $86, and prices rising more rapidly than inflation. Comcast is able to charge about twice that figure, at about $156 per month. Looking at these numbers, Wu thinks that the public interest rests in “lower cable prices,” and that, for engaging in poverty relief, “you could do worse than cutting cable bills."

The sad point about this critique is that it raises none of the relevant issues for this merger. I claim no expertise in the particular transaction, but reading some more balanced accounts of the overall issue from the Washington Post, Bloomberg News, and Quartz gives a much more balanced picture. Here are some of the relevant points that Wu did not mention in his account.

— First, the question of industry concentration does not depend solely on shares of nationwide markets held by the two companies. For better or worse, cable tends to have few competitors in any given market, given the restrictions on entry created by local governments. There is almost no overlap between the customers of Time Warner Cable and those of Comcast. There is therefore no way in which the merger can influence the price charged by either firm.

— Second, there are some efficiencies that could arise from the merger. One advantage is that the superior Comcast technology could be substituted for TWC’s weaker technology. Another is that the combined company may have greater pushback against the large content suppliers like Viacom, which have been able to raise their rates consistently over time. Indeed, much of the increase in direct cable costs comes from the increased cost of content.  It looks, therefore, like the traditional tests that are used to evaluate the merger come out in favor of the deal.

There is a third factor, however. Wu claims that a larger customer base and greater buying power could allow the merged company to reduce competition and raise prices by taking advantage of exclusive control over broadcasting the games of local sports franchises. I believe that the claim of antitrust violation from these tactics is indeed a close one, as I explained in writing about the Supreme Court decision in Comcast v. Behrend. That issue, however, is largely immaterial to the merger. Any effort to use that control over any particular market is available right now to TWC in areas where it has the monopoly. If the practice is risky, it should be stopped whether or not the merger takes place.

Also, there is the important question of market definition. Netflix has about 33 million subscribers, which is the same number as Comcast. Indeed, Netflix subscribers are sharply increasing, and those for Comcast are going down. Price has a lot to do with this, as Netflix is cheap, at about $8 per month. But this is not a huge source of concern. As part of the deal (to which Wu did not refer), Comcast made it clear that it would not degrade the quality of content carriage for Netflix and similar companies that use its pipes for transmission, thereby blunting one of the central objections to the merger.