Archives For television

I have a new article on the Comcast/Time Warner Cable merger in the latest edition of the CPI Antitrust Chronicle, which includes several other articles on the merger, as well.

In a recent essay, Allen Grunes & Maurice Stucke (who also have an essay in the CPI issue) pose a thought experiment: If Comcast can acquire TWC, what’s to stop it acquiring all cable companies? The authors’ assertion is that the arguments being put forward to support the merger contain no “limiting principle,” and that the same arguments, if accepted here, would unjustifiably permit further consolidation. But there is a limiting principle: competitive harm. Size doesn’t matter, as courts and economists have repeatedly pointed out.

The article explains why the merger doesn’t give rise to any plausible theory of anticompetitive harm under modern antitrust analysis. Instead, arguments against the merger amount to little more than the usual “big-is-bad” naysaying.

In summary, I make the following points:

Horizontal Concerns

The absence of any reduction in competition should end the inquiry into any potentially anticompetitive effects in consumer markets resulting from the horizontal aspects of the transaction.

  • It’s well understood at this point that Comcast and TWC don’t compete directly for subscribers in any relevant market; in terms of concentration and horizontal effects, the transaction will neither reduce competition nor restrict consumer choice.
  • Even if Comcast were a true monopolist provider of broadband service in certain geographic markets, the DOJ would have to show that the merger would be substantially likely to lessen competition—a difficult showing to make where Comcast and TWC are neither actual nor potential competitors in any of these markets.
  • Whatever market power Comcast may currently possess, the proposed merger simply does nothing to increase it, nor to facilitate its exercise.

Comcast doesn’t currently have substantial bargaining power in its dealings with content providers, and the merger won’t change that. The claim that the combined entity will gain bargaining leverage against content providers from the merger, resulting in lower content prices to programmers, fails for similar reasons.

  • After the transaction, Comcast will serve fewer than 30 percent of total MVPD subscribers in the United States. This share is insufficient to give Comcast market power over sellers of video programming.
  • The FCC has tried to impose a 30 percent cable ownership cap, and twice it has been rejected by the courts. The D.C. Circuit concluded more than a decade ago—in far less competitive conditions than exist today—that the evidence didn’t justify a horizontal ownership limit lower than 60% on the basis of buyer power.
  • The recent exponential growth in OVDs like Google, Netflix, Amazon and Apple gives content providers even more ways to distribute their programming.
  • In fact, greater concentration among cable operators has coincided with an enormous increase in output and quality of video programming
  • Moreover, because the merger doesn’t alter the competitive make-up of any relevant consumer market, Comcast will have no greater ability to threaten to withhold carriage of content in order to extract better terms.
  • Finally, programmers with valuable content have significant bargaining power and have been able to extract the prices to prove it. None of that will change post-merger.

Vertical Concerns

The merger won’t give Comcast the ability (or the incentive) to foreclose competition from other content providers for its NBCUniversal content.

  • Because the merger would represent only 30 percent of the national market (for MVPD services), 70 percent of the market is still available for content distribution.
  • But even this significantly overstates the extent of possible foreclosure. OVD providers increasingly vie for the same content as cable (and satellite).
  • In the past when regulators have considered foreclosure effects for localized content (regional sports networks, primarily)—for example, in the 2005 Adelphia/Comcast/TWC deal, under far less competitive conditions—the FTC found no substantial threat of anticompetitive harm. And while the FCC did identify a potential risk of harm in its review of the Adelphia deal, its solution was to impose arbitration requirements for access to this programming—which are already part of the NBCUniversal deal conditions and which will be extended to the new territory and new programming from TWC.

The argument that the merger will increase Comcast’s incentive and ability to impair access to its users by online video competitors or other edge providers is similarly without merit.

  • Fundamentally, Comcast benefits from providing its users access to edge providers, and it would harm itself if it were to constrain access to these providers.
  • Foreclosure effects would be limited, even if they did arise. On a national level, the combined firm would have only about 40 percent of broadband customers, at most (and considerably less if wireless broadband is included in the market).
  • This leaves at least 60 percent—and quite possibly far more—of customers available to purchase content and support edge providers reaching minimum viable scale, even if Comcast were to attempt to foreclose access.

Some have also argued that because Comcast has a monopoly on access to its customers, transit providers are beholden to it, giving it the ability to degrade or simply block content from companies like Netflix. But these arguments misunderstand the market.

  • The transit market through which edge providers bring their content into the Comcast network is highly competitive. Edge providers can access Comcast’s network through multiple channels, undermining Comcast’s ability to deny access or degrade service to such providers.
  • The transit market is also almost entirely populated by big players engaged in repeat interactions and, despite a large number of transactions over the years, marked by a trivial number of disputes.
  • The recent Comcast/Netflix agreement demonstrates that the sophisticated commercial entities in this market are capable of resolving conflicts—conflicts that appear to affect only the distribution of profits among contracting parties but not raise anticompetitive concerns.
  • If Netflix does end up paying more to access Comcast’s network over time, it won’t be because of market power or this merger. Rather, it’s an indication of the evolving market and the increasing popularity of OTT providers.
  • The Comcast/Netflix deal has procompetitive justifications, as well. Charging Netflix allows Comcast to better distinguish between the high-usage Netflix customers (two percent of Netflix users account for 20 percent of all broadband traffic) and everyone else. This should lower cable bills on average, improve incentives for users, and lead to more efficient infrastructure investments by both Comcast and Netflix.

Critics have also alleged that the vertically integrated Comcast may withhold its own content from competing MVPDs or OVDs, or deny carriage to unaffiliated programming. In theory, by denying competitors or potential competitors access to popular programming, a vertically integrated MVPD might gain a competitive advantage over its rivals. Similarly, an MVPD that owns cable channels may refuse to carry at least some unaffiliated content to benefit its own channels. But these claims also fall flat.

  • Once again, these issue are not transaction specific.
  • But, regardless, Comcast will not be able to engage in successful foreclosure strategies following the transaction.
  • The merger has no effect on Comcast’s share of national programming. And while it will have a larger share of national distribution post-merger, a 30 percent market share is nonetheless insufficient to confer buyer power in today’s highly competitive MVPD market.
  • Moreover, the programming market is highly dynamic and competitive, and Comcast’s affiliated programming networks face significant competition.
  • Comcast already has no ownership interest in the overwhelming majority of content it distributes. This won’t measurably change post-transaction.

Procompetitive Justifications

While the proposed transaction doesn’t give rise to plausible anticompetitive harms, it should bring well-understood pro-competitive benefits. Most notably:

  • The deal will bring significant scale efficiencies in a marketplace that requires large, fixed-cost investments in network infrastructure and technology.
  • And bringing a more vertical structure to TWC will likely be beneficial, as well. Vertical integration can increase efficiency, and the elimination of double marginalization often leads to lower prices for consumers.

Let’s be clear about the baseline here. Remember all those years ago when Netflix was a mail-order DVD company? Before either Netflix or Comcast even considered using the internet to distribute Netflix’s video content, Comcast invested in the technology and infrastructure that ultimately enabled the Netflix of today. It did so at enormous cost (tens of billions of dollars over the last 20 years) and risk. Absent broadband we’d still be waiting for our Netflix DVDs to be delivered by snail mail, and Netflix would still be spending three-quarters of a billion dollars a year on shipping.

The ability to realize returns—including returns from scale—is essential to incentivizing continued network and other quality investments. The cable industry today operates with a small positive annual return on invested capital (“ROIC”) but it has had cumulative negative ROIC over the entirety of the last decade. In fact, on invested capital of $127 billion between 2000 and 2009, cable has seen economic profits of negative $62 billion and a weighted average ROIC of negative 5 percent. Meanwhile Comcast’s stock has significantly underperformed the S&P 500 over the same period and only outperformed the S&P over the last two years.

Comcast is far from being a rapacious and endlessly profitable monopolist. This merger should help it (and TWC) improve its cable and broadband services, not harm consumers.

No matter how many times Al Franken and Susan Crawford say it, neither the broadband market nor the MVPD market is imperiled by vertical or horizontal integration. The proposed merger won’t create cognizable antitrust harms. Comcast may get bigger, but that simply isn’t enough to thwart the merger.

By Geoffrey Manne & Berin Szoka

As Democrats insist that income taxes on the 1% must go up in the name of fairness, one Democratic Senator wants to make sure that the 1% of heaviest Internet users pay the same price as the rest of us. It’s ironic how confused social justice gets when the Internet’s involved.

Senator Ron Wyden is beloved by defenders of Internet freedom, most notably for blocking the Protect IP bill—sister to the more infamous SOPA—in the Senate. He’s widely celebrated as one of the most tech-savvy members of Congress. But his latest bill, the “Data Cap Integrity Act,” is a bizarre, reverse-Robin Hood form of price control for broadband. It should offend those who defend Internet freedom just as much as SOPA did.

Wyden worries that “data caps” will discourage Internet use and allow “Internet providers to extract monopoly rents,” quoting a New York Times editorial from July that stirred up a tempest in a teapot. But his fears are straw men, based on four false premises.

First, US ISPs aren’t “capping” anyone’s broadband; they’re experimenting with usage-based pricing—service tiers. If you want more than the basic tier, your usage isn’t capped: you can always pay more for more bandwidth. But few users will actually exceed that basic tier. For example, Comcast’s basic tier, 300 GB/month, is so generous that 98.5% of users will not exceed it. That’s enough for 130 hours of HD video each month (two full-length movies a day) or between 300 and 1000 hours of standard (compressed) video streaming. Continue Reading…

Thomas Hazlett and I have posted The Law and Economics of Network Neutrality:

The Federal Communications Commission’s Network Neutrality Order regulates how broadband networks explain their services to customers, mandates that subscribers be permitted to deploy whatever computers, mobile devices, or applications they like for use with the network access service they purchase, imposes a prohibition upon unreasonable discrimination in network management such that Internet Service Provider efforts to maintain service quality (e.g. mitigation congestion) or to price and package their services do not burden rival applications.

This paper offers legal and economic critique of the new Network Neutrality policy and particularly the no blocking and no discrimination rules. While we argue the FCC‘s rules are likely to be declared beyond the scope of the agency‘s charter, we focus upon the economic impact of net neutrality regulations. It is beyond paradoxical that the FCC argues that it is imposing new regulations so as to preserve the Internet‘s current economic structure; that structure has developed in an unregulated environment where firms are free to experiment with business models – and vertical integration – at will. We demonstrate that Network Neutrality goes far further than existing law, categorically prohibiting various forms of economic integration in a manner equivalent to antitrust’s per se rule, properly reserved for conduct that is so likely to cause competitive harm that the marginal benefit of a fact-intensive analysis cannot be justified. Economic analysis demonstrates that Network Neutrality cannot be justified upon consumer welfare grounds. Further, the Commission‘s attempt to justify its new policy simply ignores compelling evidence that “open access” regulations have distorted broadband build-out in the United States, visibly reducing subscriber growth when imposed and visibly increasing subscriber growth when repealed. On the other, the FCC manages to cite just one study – not of the broadband market – to support its claims of widespread foreclosure threats. This empirical study, upon closer scrutiny than the Commission appears to have given it, actually shows no evidence of anti-competitive foreclosure. This fatal analytical flaw constitutes a smoking gun in the FCC‘s economic analysis of net neutrality.

Read the whole thing.  Under review at a law review near you …

Larry Downes (who, like me, is a senior fellow at TechFreedom and a contributor to the excellent book, The Next Digital Decade: Essays on the Future of the Internet) and I taped an episode of Jim Glassman’s talking head show, Ideas in Action, a couple months ago, and it is airing this week on PBS stations around the country.  Except in Portland, where I live.  But have no fear–because the Internet remains sufficiently unregulated, you can get it right here.  The topic is “The Next Digital Decade: How Will the Internet Change by 2020?”  It’s a narrow topic.  In the 27 minutes allotted, we manage to cover telecom regulation, antitrust, net neutrality, privacy, IP, standards, public choice theory, culture, political repression, technological innovation and a few more topics for good measure.  Not to spoil the ending, but asked at the end what we thought the biggest danger to the Internet is in the coming decade, I answered errant antitrust enforcement (when the only tool you have is a hammer . . .); Larry answered privacy.  Enjoy.

I was forced to watch my first episode of “Two and a Half Men” last week.  Family members drugged me unconscious and then bound and gagged me, locked my head in the direction of the television and taped my eyelids open. 

The most horrible moment came when I realized that this was neither satire nor science fiction but a real, top-rated sit-com.  Also, I wasn’t sure about the math.  Who was the “half”?  Shouldn’t it be, say, “One and a quarter men”? 

It turns out that Bud Fox (“Newsflash: I am special, and I will never be one of you”) has misbehaved (or, perhaps, is auditioning to be the next dictator of Libya) and he was canned. The show was then canceled (apparently nobody was interested in “.75 men”).

I will now turn to the interesting part — the economics.

According to the WSJ, the producer (WB) will lose significant revenues from sale and syndication of the show, but the network will lose little or nothing.  CBS will make plenty of money showing reruns (will the audience even notice?).  Also, an analyst told the WSJ that CBS could make more money by replacing the show with one it produces itself rather than paying the high fees to WB (again, will the audience notice?).

This suggests that only producers and not networks make money from hit shows. So why don’t networks show any crap they can come up with on their own, instead of the crap they buy from production companies?  Or, in other words, how do networks make their money apart from production?  Is there enough demand for television shows now that producers are able to suck out all of the profits?

Also, it looks like Charlie Sheen was underpaid, since it seems the show couldn’t go on without him. In other words, two and a half minus one = zero

Jon Baker (FCC, American University) has posted an article summarizing the FCC’s analysis of the Comcast-NBCU merger.  Here is the abstract.

The FCC’s analysis of the Comcast-NBCU transaction fills a gap in the contemporary treatment of vertical mergers by providing a roadmap for courts and litigants addressing the possibility of anticompetitive exclusion. The FCC identified the factors any judicial or administrative tribunal would likely consider today in analyzing whether a vertical merger would lead to anticompetitive input or customer foreclosure, and a range of economic methods potentially relevant to applying that template to the facts of a transaction. Notwithstanding the difference between administrative adjudication under a public interest standard and judicial decision-making under the Clayton Act, the legal framework and economic studies the Commission employed promise to influence the approach that antitrust tribunals will now take in evaluating vertical mergers.

Its well worth reading and provides a good summary of the FCC’s analysis of the transaction (which is also worth reading in its entirety).

As we’ve highlighted, however, notwithstanding the fact that the FCC’s general framework for economic analysis of the merger was consistent with modern antitrust analysis (its hard to comment on anything but the general framework of economic analysis without delving deeply into the details, which I have not done yet), its tough to swallow the Comcast-NBCU Order as a “roadmap” or model given the long list of non-merger specific conditions imposed by the Commission (see here for a list).  The breadth of the conditions tends to undermine the claims that FCC merger review process, or components of it, should be exported.  The Joint Concurrence of Commissioners McDowell and Baker notes a similar objection:

The Commission’s approach to merger reviews has become excessively coercive and lengthy. This transaction is only the most recent example of several problematic FCC merger proceedings that have set a trend toward more lengthy and highly regulatory review processes that may discourage future transactions and job-creating investment.

In this instance, our review exceeded its limited statutory bounds. Many of the conditions in the Memorandum Opinion and Order (Order) and commitments outlined in separate letter agreements were agreed to by the parties. The resulting Order is a wide-ranging regulatory exercise notable for its “voluntary” conditions that are not merger specific. The same is true for the separate “voluntary” commitments outlined in Comcast’s letter of agreement dated January 17, 2011. While many of these commitments may serve as laudable examples of good corporate citizenship, most are not even arguably related to the underlying transaction. In short, the Order goes too far.

Jonathan Adler and Orin Kerr chime in over at VC to make the point that MSNBC’s rules against contributions from television personalities is pointless, or perhaps counterproductive.  Here’s Adler:

I agree with Orin that strict application of rules against political activity by journalists to opinionated commentators and hosts is silly.  No one believes these figures are neutral or objective journalists.  They’re not reporters; they are commentators and entertainers.  They have strong — often quite partisan — political views, and that’s part of their appeal.  Whether or not Olbermann (or Hannity) gives a dime to a political campaign, we all know which candidates and causes they support.

And here’s Professor Kerr:

I find this exceedingly silly. Keith Olbermann is not shy about his personal views, and no one who has watched him has any doubt as to who he supports. Why he should be suspended for donating money to the candidates he supports is a mystery to me.

There appears to be some debate over whether Olbermann’s conduct violated provisions in his contract.  Assuming Olbermann did violate the contractual obligation to seek permission before donating, that seems like a pretty good reason to suspend someone.  I doubt that either Jonathan or Orin mean that flouting contractual obligations is a silly or exceedingly silly or mysterious reason to suspend someone — instead, they must mean that it is silly for those obligations to appear in the contract in the first place.

Maybe.  Maybe not.  But I suspect not.  Here’s why.

Continue Reading…

Markets and art

Larry Ribstein —  13 October 2010

We often seem to assume that market competition is inconsistent with great art.  In fact this is not true.  People like good art, especially rich people, and therefore will pay for it.  Consider, for example, the state of movies and television today. 

Edward Jay Epstein (HT MR) notes that while subscription television has had turn to “original programming that would appeal to the head of the house,” which means “a medium of entertainment for the elite,” Hollywood “has had a gradual downgrade.” Basically, the chains need to fill seats and sell candy on opening weekends.  This means

  • Movies for “tweens and teens” susceptible to “visually-stunning action * * * that can be encapsulated in 30 second spots” and “who also are the group most likely to consume popcorn, candy, and soda.” 
  • “[S]ince anything original is chancy, marketing executives lean towards formulas that gave been successfully used before; hence, the profusion of action movie sequels.”
  • Given the importance of the foreign market, which likes dubbing, movies need to be “short on dialogue, long on action.” Which of course is what the tweens and teens like too.


it [is] hardly surprising that Hollywood is moving more and more towards comic-book sequels and other action-bumped fantasy fare. Meanwhile television, which must to adopt to a new Internet world in which its audience can cherry-pick what it want to see, anytime and anywhere, via ubiquitous DVRs, tablets, and computers, is now providing the sophisticated niche entertainment that movies once provided. It’s after all show business.

The point is not that television overall is now better than movies, but that great art has migrated to some extent from movies to television, and that this is attributable to market forces.  I would also note that most of the really good stuff is on the cable stations and not on “public” television.

Mad Men returns

Larry Ribstein —  23 July 2010

I’ve described Mad Men as a wonderful illustration of my theory about how business is portrayed in film (here it’s television, but much of the theory still holds):

[A]rtists are inclined to view business as not just different from but antithetical to what they do. Artists (at least modern artists) are into self-expression. In other words, they’re inherently selfish. Business people, on the other hand, are into selling. This means they have to discern other people’s wants and cater to them. Artists call that selling out.

Mad Men has interesting insights into an important aspect of business – advertising:

[Protagonist Don] Draper’s artistic crew tend to have a pedestrian approach to selling – figure out what the consumer wants, and promote that. What makes Draper seem brilliant is that he’s always a step ahead: figure out what people want to want – that is, their dreams about themselves – and sell that. For example, to sell an airline, Draper’s guys figure that men fly, men like sex in the sky, so show them stewardesses’ short skirts. Draper says men want to think of themselves as family guys. So show the little girl asking, “what did you bring me daddy.” Draper sells Kodak’s Carousel the same way — as a device for showing a gauzy version of the lives men would like to think they’re living with their families.

The problem is that the show gives the artists’ side of this – that there’s something fishy, essentially evil and manipulative about advertising. Indeed, in my theory filmmakers would consider advertising at the root of all business evil. But as I said in the above post:

Advertising increases aggregate demand, so we’re all richer. Isn’t it great that somebody’s helping us figure out what to want? And Draper, at least, often shows us a better version of ourselves – sort of like religion.

This debate has important policy implications. After all, much of the current push for more consumer financial regulation is that financial advertising lies. Films have helped pre-condition the electorate to believe this message (though apparently not to be more careful in reading disclosures).

The show is also interesting because of its insights about how firms operate. In my post about the season-ender last November I discussed what the story about the break-up of an ad agency revealed about ad-agency contracts compared to law firms. I concluded:

By the end of the show, individual freedom has prevailed over firms. The evil CEO of the British parent has been vanquished. But will everybody be happy in their new world of instability? I guess we’ll see in Season 4.

Well, Season 4 is here, and the WSJ’s Dorothy Rabinowitz discusses it, focusing on the show’s vivid social commentary. On this I’ll only add that the show has the structure of a situation comedy: the characters are trapped in a folly that the viewer understands but is helpless to do anything about. In this case the folly is our own recent past. The interesting thing is what it tells us about our current illusions.