Getting the Story Straight on Comcast, Time Warner

09/27/2015 04:58 pm ET Updated Sep 27, 2016

It's often worthwhile for policy makers to look back on a matter to determine whether they made the right call on it. So, in this sense, I appreciate FCC General Counsel Jonathan Sallet's recent comments at TPRC describing the agency's objections to the Comcast-Time Warner Cable (TWC) transaction.

And while it is helpful that the FCC staff has provided this insight into their analysis, Sallet's comments fail to deal with some of the stronger arguments in favor of the transaction, how it would have benefitted consumers, and why many of the FCC's concerns were clearly inconsistent with market realities and competition laws.

We all can agree that the law instructs that the FCC must weigh the risk of a substantial lessening of competition against the benefits consumers are likely to receive. The promotion of consumer welfare -- as objectively analyzed in a transparent and reviewable manner -- has been the guiding light of the FCC's public interest standard, as well as US antitrust laws, for decades. Here, however, the agency seems to have focused on hypothetical theories of future risks that were inconsistent with current marketplace evidence, while ignoring immediate benefits to consumers.

The benefits of a Comcast/TWC combination were concrete and compelling, including:
  • Comcast's commitment to invest hundreds of millions of dollars every year to improve TWC's network and increase consumer broadband speeds and reliability well beyond what TWC was planning. There was little dispute that TWC customers would have benefitted with these investments in upgraded, faster, networks.
  • Comcast's expanded geographic reach would have enabled Comcast to bring substantial new competition to incumbent LECs vying for business customers, creating nearly $8 billion in cost savings over a 10-year period for large enterprise customers, according to a detailed quantification analysis submitted by Comcast. It is hard to understand why these competitive benefits alone did not outweigh the speculative harms addressed n the speech.
  • Comcast also promised to extend its industry-leading Internet Essentials broadband adoption program to help close the digital divide and bring low-income Americans online. Internet Essentials is the most successful private sector program to bridge the digital divide, having connected over 500,000 low-income families - more than 2 million people - in under four years. While Mr. Sallet identifies increased broadband access for all parts of society as an important public interest benefit, he does not even mention the substantial progress that would have been made through the extension of Internet Essentials to thousands of low-income families throughout the acquired TWC territories.
  • At the end of the day, these are the types of considerations of consumer benefit that are central to the FCC's mission of protecting the public interest. And Mr. Sallet's remarks do little to discredit them.

As for the impact on competition of the proposed Comcast/TWC combination, let's start with some bedrock principles. First, the purpose of the competition laws is to protect rivalry and consumers -- protecting competitors is only part of the analysis if it is clear that the impact on them will also have a measurable impact on consumer welfare.

Second, the competition laws seek to protect against anticompetitive conduct -- not to try to adjust the playing field so some set of rivals can prosper, perhaps at the expense of others.

Finally, when antitrust and competition regulators seek to act in order to prevent some putative form of anticompetitive conduct, they should do so only when the firm being regulated has both the incentive and ability to engage in that conduct. Absent that, regulatory intervention is unwarranted.

According to Mr. Sallet's remarks, the staff's core concern was that a larger Comcast would have an increased incentive and ability to disadvantage OVDs in order to protect its video business by (1) contractually restricting OVD access to programming, and (2) denying or degrading OVD access to Comcast's broadband network through interconnection. But these concerns are speculative and contrary to marketplace facts.

It makes little business or practical sense that Comcast would seek to harm OVDs, which are complementary to its most profitable business -- broadband -- to protect its video business. As Mr. Sallet notes, Comcast and other cable operators now have more broadband subscribers than video subscribers -- a trend that no doubt will continue.

The marketplace realities simply do not support the argument about impeding "nascent" OVD competition, given the explosive growth OVDs have experienced over the past few years:
  • Netflix grew from 22 million U.S. streaming customers in 2011 to over 65 million worldwide today (accounting for more than a third of peak Internet traffic).
  • Amazon Prime reportedly has 40 million U.S. subscribers, and Hulu has 9 million.
  • Linear OVDs like Sony PlayStation Vue and Dish Sling TV launched within the past year, after the Comcast-TWC merger was announced.
The staff's concern that Comcast might use MFNs and other contracting practices to deny programming to OVDs is likewise puzzling. OVDs have had no difficulty obtaining content. In fact, OVDs are increasingly obtaining original content on an exclusive basis that is denied to traditional MVPDs.

The notion that Comcast would therefore reverse course post-merger and attempt to use contracting practices to deny programming to OVDs seems inconsistent with Comcast's common-sense business incentives. And if the concerns were not merely speculative, simple prohibition on MFNs, similar to that used by other antitrust authorities, would have quite adequately addressed these speculative concerns.

The staff's asserted concerns about interconnection also seem inconsistent with basic and well-understood facts about the interconnection marketplace. Competition in the Internet backbone market is intense, creating multiple paths into Comcast's network that effectively eliminate any ability to foreclose or degrade OVDs' access to Comcast's last-mile network. And Comcast itself has dozens of settlement-free, major interconnection routes with significant capacity, and has negotiated robust and efficient interconnection agreements with numerous CDNs and ISPs. Many edge providers use these multiple paths to send their traffic onto Comcast's network every day, without directly interconnecting or negotiating with Comcast. For example, Sling TV, the new Dish linear OVD that Mr. Sallet mentions, uses high-quality third-party paths into Comcast's network to offer its online programming directly to Comcast's broadband customers - without any direct agreement with Comcast.

Further, Comcast simply lacks the incentive or ability to engage in harmful conduct with respect to interconnection. Any attempt by Comcast to degrade a particular OVD's traffic would ultimately require disrupting a major swath of Comcast's interconnectivity to the Internet. This would significantly impair Comcast's ability to serve and satisfy its broadband customers. Moreover, Comcast needs settlement-free peers, CDNs, and transit providers to connect its customers to the global Internet, just as much as edge providers need these links to send their traffic to Comcast's customers. Given these marketplace dynamics, even with 8.5 million more broadband subscribers from the transaction, Comcast would not have been able to effectively deny or degrade OVDs.

Mr. Sallet's hypothetical positing two cable operators with 50% market share and suggesting that OVDs need access to 50% of U.S. households to survive is also inconsistent with marketplace facts. One only needs to look to the current success of many OVDs with far fewer subscribers to see that this is a fallacy. This argument also ignores the fact that OVDs are, or can be, global. Netflix, for example, has over 65 million subscribers in over 50 countries. The global marketplace for OVDs substantially expands the open field for them and further undercuts the claim that OVDs are (or would have been) dependent on access to Comcast's customers to survive.

Mr. Sallet also suggests that Comcast would have a "toolkit" of "competitive levers" that it "might have an incentive" to use to disadvantage OVDs. But these concerns too are entirely speculative and inconsistent with any current marketplace behavior or facts.

Also unexplained is why the FCC could not have addressed its perceived transaction-specific harms through the imposition of reasonable conditions, as it has done in numerous other mergers, including the AT&T/DIRECTV transaction -which, again, Mr. Sallet acknowledges raised many of the same concerns. For instance, he notes that the record there supported the FCC's conclusion that post-transaction, AT&T would have an increased incentive to use its broadband assets to discriminate against competing OVDs. Yet, he concludes that the FCC was able to address that concern by adopting some targeted conditions, such as limits on data caps and the required submission of all interconnection agreements to the FCC. There was no explanation whatsoever why similar conditions would not have also addressed the concerns in the Comcast/TWC transaction.

Calling balls and strikes correctly is the FCC's job, but in this instance, it appears that the FCC may have substituted a dubious process to arrive at a pre-determined result. As the Wall Street Journal and many others reported, the FCC threatened to designate this transaction for a hearing before an Administrative Law Judge (ALJ) (a process that often takes years to complete). Such a hearing designation order (HDO) is unprecedented in these circumstances. A core rationale for an HDO is that applicants have not submitted evidence sufficient to allow the FCC to resolve disputed issues. But a hearing was not needed in this case, especially in light of the searching review undertaken by staff and the incredible level of information gathered from the applicants and many third parties. More requests for information were issued and more sensitive documents collected by the FCC over the 15-month review than in any other merger I can remember.

Finally, Mr. Sallet indicates that the parties abandoned the proposed transaction after hearing the FCC's concerns, intimating that they may have done so because they accepted the FCC's analysis. Again, this notion just misses the point that an HDO perverts that very idea because it effectively deprived Comcast from getting a fair, timely, and balanced judgment until after years of protracted litigation.

Given the strong record that Comcast and TWC made for approval of the transaction, compared to the speculative theories espoused by the agency, it seems far more likely that the prospect of putting this deal out for an indeterminate hearing before an ALJ left the companies no practical choice but to abandon the transaction - no business can stay in limbo forever. The threat of an HDO essentially gives the FCC a "pocket veto" that is immune from judicial review because it's not a "final" order. This denies parties the ability to see the process through to the end and, if warranted, challenge a final decision in court - a challenge which I think they would have likely won in this case.

Mr. Sallet deserves credit for giving us a peek inside the black box of the staff's analysis. But this peek hardly gives us comfort that the FCC handled this process in a way that was fair to the parties involved or reflected a sober analysis of today's market realities.