Will Comcast’s Merger with Time Warner Give It Too Much Power?

Last week, when Comcast announced its plan to buy Time Warner Cable, it came within reach of the dream of its founder Ralph Roberts to become America’s most powerful media company. If the $45.2 billion merger goes through in the coming year, the new entity would operate in 43 of the 50 largest metropolitan markets in the U.S. with a total of 30 million subscribers, after divesting three million subscribers to meet anticipated antitrust concerns. In effect, it would control 30% of the country’s pay television subscribers and a third of Internet broadband subscribers.

Is it a good idea to have such a powerful cable TV and broadband services provider? Comcast CEO Brian Roberts said the merger would bring “innovative products and superior customer experience,” but he did not offer details. Comcast expects the merger to bring operating efficiencies of $1.5 billion. Also, it would provide the firm with the national presence it previously lacked to compete with the likes of AT&T and Verizon.

According to Wharton experts, it is not immediately apparent how consumers would gain from the merger. They also note that the combined entity would have significant power over content suppliers like CBS and Disney and companies like Netflix and Amazon.com that depend on broadband Internet for their services.

“We have to remember that both Comcast and Time Warner are very big players in the Internet broadband market, and [this deal would make] them a much bigger player,” says Gerald R. Faulhaber, Wharton emeritus professor of business economics and public policy. “That could be a problem that the Justice Department and the FCC [Federal Communications Commission] would want to look at.”

To be sure, Comcast’s business model has been focused on creating the largest footprint possible. Founded 51 years ago by Ralph Roberts (father of the current CEO) with 1,200 subscribers in northern Mississippi, it has grown largely through acquisitions worth more than $100 billion. Its biggest deal thus far is its 2001 purchase of AT&T’s cable division for $47 billion. A decade later, it bought NBCUniversal from General Electric, gaining access to entertainment content, TV channels, the Universal Pictures studios and several theme parks. It also launched an unsolicited $54 billion bid in 2004 to buy The Walt Disney Company, but that attempt failed when Disney rejected the offer. Last year, before Comcast struck its latest deal, smaller rival Charter Communications had sought to buy Time Warner Cable.

Who Gains the Most? 

Faulhaber weighs the potential impact of the merger on competition, subscribers and suppliers. He notes that the cable TV business in the U.S. operates within a monopoly model, and that most markets have just one provider. In that scenario, he does not see the merger posing a threat to local franchises since “they are monopolies to start with.”

to Kartik Hosanagar, Wharton professor of operations and information management. He notes that the main competitors for Comcast are companies like Verizon and content providers like Hulu and Netflix. “In fact, the cable companies can easily argue that recent trends have brought so much competition into their markets that competition and pricing concerns shouldn’t exist.”

However, the merger “will give the combined firm a great deal more power as it negotiates with networks like ESPN and other providers of content,” says Faulhaber. That could mean the merged entity will be able to get content for a lower cost, he notes. It will also create a “monopsony” (where one entity buys from several sellers) over content providers, because they will have fewer buyers for their product.

“We will see content providers complaining bitterly to the FCC and the Justice Department, saying we should not have this merger because of how it will impact them,” says Faulhaber. In that scenario, consumers might get less content if providers of the content refuse to succumb to the pricing power of the merged entity, he adds. However, he feels that is unlikely.

Kenneth L. Shropshire, Wharton professor of legal studies and business ethics, however, warns that the merger might lead to an overly powerful cable provider. “If you are [a consumer] in a Comcast community or a Time Warner community, you understand how powerful they are, and how you have no options in some instances,” he says. “So when you see something like this, you feel it is a multiple of that same power.”

According to Shropshire, the Comcast-Time Warner Cable deal is reminiscent of the power the oil companies and the railroads had over American consumers in the early days of antitrust legislation. “If Comcast-Time Warner buys everybody else, then [consumers will feel they] have no option,” he says. On the other hand, he notes that the business school logic points to potential synergies and efficiencies such a merger could bring. He expects regulators to consider if and how such gains could be transferred to consumers and to ensure that suppliers are protected.

A bigger gain for the merged entity, says Faulhaber, would be control over distribution of video content over the Internet. “Broadband is the way of the future, and that is where cable providers have to make their money. The merged entity has to make a transition from being a monopoly cable provider to [being] one among several broadband providers.”

Control over Broadband

Those changing trends are most likely the biggest reasons driving the merger, Faulhaber notes. “It could be that a big piece of the merger is not about getting more power in negotiating with companies like CBS. [Instead,] it could be about gaining more negotiating power with Netflix and Hulu.” Consumers are increasingly hooking up their computers to their big-screen TVs to watch programming coming over content providers like Netflix or Hulu, and not over cable TV channels, he points out. Competition in video delivery is also increasing from offerings like AT&T’s U-verse and Verizon’s FiOS services, he adds.

“The big concern would be tied to the increased ability of Comcast to dictate terms to suppliers,” according to Hosanagar. “There is also the concern that they can use their market power to impact services like Netflix and Amazon” by controlling how much bandwidth they can use. Comcast already has data caps for consumers that affect their usage of such streaming services.

Comcast says the  company adheres to the policy of “net neutrality,” where all content is treated equally. However, the cable services industry has in the past sought fees from content companies to carry movies online over and above what they collect from their subscribers.

The growing competition in broadband and wireless delivery of video content “is a new world” for Comcast and Time Warner Cable, and a merger would certainly help, says Faulhaber. A merger “doesn’t do away with the competition that will arrive, but it is going to put them in a better position, from their perspective, to deal with that competition.” As the FCC releases more spectrum that can be used to deliver wireless broadband, “that future will arrive sooner rather than later,” he adds.

In that unfolding scenario, Faulhaber does not see “any particular upside for consumers,” at least as things stand now. “The first thing that Brian Roberts has to do is to make a very clear case as to why consumers are going to benefit from this,” he says.

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