Is the Comcast and Time Warner Cable Merger Good For Consumers?
September 19, 2015
by Jordan Rosman
In fact, a recent study by the Ross School of Business at the University of Michigan determined that the media giant was the second most hated company among American consumers.On February 13, 2014, Comcast announced that it would merge with none other than the most hated company in America, Time Warner Cable. The announcement sparked a media frenzy as commentators quickly pronounced the death of telecommunication competition.
Because the Sherman Antitrust Act outlaws all business deemed to be anti-competitive, the proposed Comcast-Time Warner Cable transaction, valued at $45 billion, like all mergers and acquisitions, was subject to antitrust legal scrutiny. Unlike certain business activities, like price-fixing and collusion, which are not legal under any circumstance, trusts and monopolies are legal so long as they satisfy “rule of reason” scrutiny; that is, if they are “reasonable” business activities that promote competition and consumer welfare. Specifically, firms must prove that the benefits gained from consolidation necessarily outweigh any of the potential harms produced by decreased competition. Only one month after the Comcast-Time Warner announcement, the antitrust division at the Department of Justice announced that it would conduct a review of the merger.
Together, the combined mega-media corporation would have controlled about 60% of the broadband market and served 30 million customers—three times more than any potential comparable competitor. Likewise, Comcast divested roughly 3 million of its customers to Charter Communications so as to maintain its share of US television subscribers below 30%, a threshold formerly enforced by the FCC as a strict limit on the TV market share for one company.
The arguments in favor of the merger were actually quite strong. First, Comcast asserted that the merged entity would increase their overall scale, which would allow the telecom provider to lower consumer prices. In economics, scale is defined as the advantages gained in which costs per unit diminish because of increasing output from size. That the two companies operate in the media and cable businesses buttresses their case. The delivery of cable and Internet can often be supplied at little marginal cost—that is, the costs of supplying an additional unit. Thus, in comparison to two smaller cable companies biting at each other’s necks, one unified media supplier could offer services at lower prices with a greater capacity to swallow large fixed costs.
Likewise, the two companies rarely compete with each other geographically—for example, Comcast doesn’t offer service in New York City. To quote Richard Epstein, a noted law and economics scholar in favor of the merger: “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.
Moreover, Comcast asserted that in order to compete with Netflix and other forms of media, a growth in heft was necessary. A larger media entity would be able to bargain harder for lower prices with content providers like Viacom. In fact, the rise in cable prices stems directly from the steadily increasing costs of content. Thus, a successful Comcast-TWC merger, they argued, would help curb rising prices.
If you discount the negative perceptions of Comcast and Time Warner, the two corporations seemed to have a very strong economic case in favor of consolidation. However, critics fired back at Comcast’s economic claims. First, they pointed out that Comcast already owned Hulu, one of the largest streaming services. Thus, Comcast was already healthfully competing with Netflix—any merger would have simply given Comcast an unfair competitive advantage. Likewise, Comcast also owns NBC Universal, the world’s largest mass media provider—so any claim that Comcast doesn’t have enough bargaining power with respect to media content falls flat on its face, critics argued.
Of course, given the notorious reputations of the two companies, it would be insufficient to analyze the merger purely in economic terms. Politically, officials across government, pressured by public opinion, condemned the merger as anti-competitive. More than twice as many Americans believed that the deal would hurt consumers as those who believed it would aid consumers. Accordingly, prominent lawmakers experienced in communications law, like Senator Al Franken (D-MI) publicly opposed the deal; when asked if there was any upside in the deal, Franken responded that “he couldn’t see one.” Chairman Tom Wheeler of the Federal Communications Commission expressly criticized it.
Finally, in April 2015, the Justice Department’s antitrust division announced that it would file suit against the impending merger. Facing the threat of legal intervention, Comcast withdrew its bid to acquire Time Warner. The failure of this merger serves to shed light on the power of consumer interests and public will—however powerful Comcast may seem, they lack the authority to defeat the rule of law.
Kaufman, Alexander C., and Jenny Che. “Comcast Calls Off Time Warner Cable Merger.” The Huffington Post. TheHuffingtonPost.com, 23 Apr. 2015. Web. 27 July 2015.
“Rule of Reason Law & Legal Definition.” Rule of Reason Law & Legal Definition. US Legal, n.d. Web. 27 July 2015.
Stout, Hilary. “Comcast-Time Warner Cable Deal’s Collapse Leaves Frustrated Customers Out in the Cold.” The New York Times. The New York Times, 26 Apr. 2015. Web. 27 July 2015.
Teinowitz, Ira. “Justice Department to Conduct Antitrust Review of Comcast-Time Warner Cable Deal.” Yahoo Celebrity. Yahoo, 6 Mar. 2014. Web. 27 July 2015.
Additional Blog Posts
Student Blog Disclaimer
The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Wharton Public Policy Initiative’s strategies, recommendations, or opinions.