To paraphrase telecommunications analyst Craig Moffett of MoffettNathanson at last week's American Cable Association Summit, the past 10 years have been all about Washington figuring out that cable companies have developed the dominant network infrastructure in the US: The next 10 years will be all about Washington figuring out how to regulate it.
On the eve of the first public hearing to be held by the Senate Judiciary Committee on the proposed merger of Comcast Corp. (Nasdaq: CMCSA, CMCSK) and Time Warner Cable Inc. (NYSE: TWC), there are concerns emerging that suggest the deal could bring about a new kind of antitrust issue in the telecommunications market.
There has already been some discussion about the power that the merged cable company would be able to wield in negotiations with programmers. With roughly 30% of American TV households in its subscriber base, the new Comcast entity would have significant leverage with content providers seeking a national audience. (See Comcast's TWC Coup: 3 Things to Know.)
However, Moffett took that argument a step further at the ACA Summit by saying that a larger Comcast would, at least to some extent, be able to choose what content Americans can and can't see. Calling it a "real concern," Moffett talked about programmers who won't be able to afford to lose 30% of the viewing market when negotiating for distribution, and, by implication, that there are programmers who won't be able to come to terms with Comcast, and therefore won't have their content distributed to a significant percentage of the population.
Moffett also touched on how Comcast has vertically integrated in recent years, particularly through the acquisition of NBC Universal. The combination of being a content owner and a distributor gives Comcast a different kind of power because it places the company on both sides of the programmer negotiating table. Interestingly, several over-the-top entities are attempting to follow a similar path by combining a packaged service with original content. Amazon and Netflix already produce their own content, and reports suggest that Yahoo and Microsoft are working to do the same.
Meanwhile, Steve Weed, CEO of Wave Broadband, voiced another fear about how a Comcast/Time Warner merger could drive down competition further. Weed pointed out that programmers aren't willing to lose money just because Comcast has the leverage to dictate unfavorable terms. When content companies have to accept less money from Comcast, Weed said, they turn around and charge smaller providers more money to make up the difference. That trend, he continued, will push more of the smaller players out of the market.
Colleen Abdoulah, the ACA chairwoman and CEO of WOW!, agreed with the principle that cable consolidation will continue and that there will be fewer small operators in the future. "I think there's always going to be a niche," said Abdoulah. "Whether it's going to be as large a group as exists today, probably not. And that's sad. But it's a reality."
Regarding the specific acquisition deal between Comcast and Time Warner, Abdoulah was concerned, but pragmatic. "We're going to take the same position [as in the NBCU acquisition]," said Abdoulah, "which is to read the filing, be very thoughtful about it… and probably not go down the path of trying to fight the merger."
However, Abdoulah also cautioned and urged regulators that "if and when [the merger] does happen, please be thoughtful about it… and provide conditions that will give some level of protection and fairness in the marketplace that they're going to wield so much power."
Both the Wave Broadband and WOW! executives also talked about the importance of broadband in the Comcast deal. The two independent operators already have more broadband customers than traditional video customers, and they view that as a positive trend given the limits on profitable growth dictated by programming expenses. The executives expressed concern, however, that content companies will try to transfer the current cable TV model over to the Internet. In that case, small operators could end up in the same disadvantaged position as they find themselves in today. These companies don't want to pay for the right to deliver Internet video on a per-broadband-subscription basis. (See Rep. Rips Retrans 'Racket' .)
Robert Gessner, president of MCTV echoed the fear. "Make sure [the model] doesn't migrate to the Internet," he said.
While broadband is a major factor in the potential merger of Comcast and Time Warner, video is still the main application guiding the economics of the Internet service provider market. The industry is starting to sort out and articulate some of the related issues, but there are many potential consequences of the Comcast deal that are simply impossible to predict. Even as well-formed arguments on both sides of the merger are trotted out in the coming weeks, it will be difficult to determine a fair and reasonable path forward from an antitrust perspective.
This will not be an easy knot for lawmakers to untangle.
— Mari Silbey, special to Light Reading