TIME WARNER – COMCAST MERGER: JUST BIG ENOUGH TO FAIL?
The Road Ahead for Comcast and Time Warner
Waiting for the cable guy has been a constant cultural meme since the evolution of cable television, so some Americans may be rejoicing at the impending demise of Time Warner Cable (TWC). In fact, Comcast’s recent $45 billion merger with TWC has generated largely polarizing views. Wall Street bankers hail the merger as a signal of a shift towards bold mergers and consolidations, while activists seem equally certain that such a powerful new voice in the market could dictate its own terms and effectively put an end to consumer choice.
The dangers behind the merger, from a competition standpoint, are readily visible. The merger places Comcast as a singular voice in the market, existing in some form in approximately 66% of American households. With this power, Comcast can dictate terms to content suppliers, manipulate pricing in various ways, or use their new position to engage in various other forms of horizontal restraints of trade. The benefits are perhaps less readily available. The cable market is in no sense a thriving modern industry. Similarly, the telecommunications industry is in flux, as modern means of communication continue to overrun the conventional instruments of the broadcast and transmission of entertainment. As modernity threatens these industries, a merger such as this could help reshape telecommunications and cable into a more unitary, streamlined, content-based system that could compete in a new market.
The question seems to be whether, in the eyes of current antitrust law, the merger is an unreasonable horizontal restraint of trade. A horizontal restraint of trade is any economic restraint between direct competitors. Comcast and TWC are, at least at first glance, direct competitors, so they certainly qualify.
The next requirement is that the restraint, in this case, the merger, must be unreasonable. Classifying a merger as unreasonable is a more tenuous discussion over how the merger will affect market forces. Will it substantially lessen competition or tend towards establishing a monopoly?
The Legal Standard
The answer to that question requires a “Rule of Reason” analysis into the pro- and anti-competitive effects of the conduct in question. This requirement usually entails an exhaustive economic analysis into the characteristics of the particular market, paid experts, and lengthy filings. While litigation often becomes a battle of economic experts, there are basic elements that fuel the discussion: identifying the relevant market, the existence of monopoly power, and the existence of exclusionary conduct.
Identifying the Relevant Market
By far, the most important factor is identifying the relevant market. This analysis requires a two-fold determination: the product market and the geographic market. The answers to these questions might be the saving grace of Comcast. Comcast’s merger is anti-competitive if it helps them control a certain product over a certain geographic region. The narrower the product market and the wider the geographic market, the more likely it is that Comcast is going to have trouble approving the merger. So if that product is as narrow as cable service in local markets across the continental United States, it seems pretty clear that Comcast is going to run into trouble.
Content as Product
The main factor in defining the product market is cross-elasticity of demand. This means the extent to which the product is substitutable in the market. In the seminal case on market definition, U.S. v. E.I. Du Pont, 351 U.S. 377 (1956), the court found that the relative interchangeability between cellophane and other flexible packaging material was enough to defeat a monopolization claim. So the question for Comcast is, what do consumers want: the cable hook-up, or the content that comes with it? With the rise of online streaming services such as Netflix and Hulu, Amazon’s own streaming service, as well as the general willingness of content-providers to release their content online, it’s entirely possible for a new generation of consumers to never even own a television. The “product” is not likely to be cable for very much longer. Content alone has survived as the various means of consuming it have mutated and evolved. In several years, regulating cable might be as effective in ensuring competition as regulating analog television.
Geographic Market and Consumer Access
The issue of geographic reach is similarly problematic. The relevant question is: how far consumers will travel to get the product in question? Again, it seems the answer here is: the Internet. Consumers are not trapped within a geographic area if they can easily go online for the content that cable would provide them. Thus, the main question will be the extent to which the merger will allow Comcast to control competition between other content providers. With many sites like Netflix creating original content, and the ease with which new entrants into the market can create and send out content via the Internet, soon geographically distinct markets, with respect to media content, will be obsolete.
Antitrust litigation has always been dependent on politics as well as current market trends. For example, it peaked during the Clinton administration and waned during the Bush administration. The Obama administration, in turn, has certainly not shied away from litigation. In 2013 alone, they challenged several high-profile mergers in the airline, beer, and healthcare industries. If telecommunications and cable are going to be next, the government will not have an easy time of it. They’re going to have to grapple with new issues. The industry in question is not an easy one to identify, and it’s going through radical changes. Whether or not litigation is on the horizon, maybe the best move would be to wait and see how this merger changes the media landscape.