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Yesterday Learfield and IMG College inked their recently announced merger. Since the negotiations were made public several weeks ago, the deal has garnered some wild speculation and potentially negative attention. Now that the merger has been announced, it’s bound to attract even more attention and conjecture.

On the field of competition, however, the market realities that support the merger’s approval are compelling. And, more importantly, the features of this merger provide critical lessons on market definition, barriers to entry, and other aspects of antitrust law related to two-sided and advertising markets that can be applied to numerous matters vexing competition commentators.

First, some background

Learfield and IMG specialize in managing multimedia rights (MMRs) for intercollegiate sports. They are, in effect, classic advertising intermediaries, facilitating the monetization by colleges of radio broadcast advertising and billboard, program, and scoreboard space during games (among other things), and the purchase by advertisers of access to these valuable outlets.

Although these transactions can certainly be (and very often are) entered into by colleges and advertisers directly, firms like Learfield and IMG allow colleges to outsource the process — as one firm’s tag line puts it, “We Work | You Play.” Most important, by bringing multiple schools’ MMRs under one roof, these firms can reduce the transaction costs borne by advertisers in accessing multiple outlets as part of a broad-based marketing plan.

Media rights and branding are a notable source of revenue for collegiate athletic departments: on average, they account for about 3% of these revenues. While they tend to pale in comparison to TV rights, ticket sales, and fundraising, for major programs, MMRs may be the next most important revenue source after these.

Many collegiate programs retain some or all of their multimedia rights and use in-house resources to market them. In some cases schools license MMRs through their athletic conference. In other cases, schools ink deals to outsource their MMRs to third parties, such as Learfield, IMG, JMI Sports, Outfront Media, and Fox Sports, among several others. A few schools even use professional sports teams to manage their MMRs (the owner of the Red Sox manages Boston College’s MMRs, for example).

Schools switch among MMR managers with some regularity, and, in most cases apparently, not among the merging parties. Michigan State, for example, was well known for handling its MMRs in-house. But in 2016 the school entered into a 15-year deal with Fox Sports, estimated at minimum guaranteed $150 million. In 2014 Arizona State terminated its MMR deal with IMG and took it MMRs in-house. Then, in 2016, the Sun Devils entered into a first-of-its-kind arrangement with the Pac 12 in which the school manages and sells its own marketing and media rights while the conference handles core business functions for the sales and marketing team (like payroll, accounting, human resources, and employee benefits). The most successful new entrant on the block, JMI Sports, won Kentucky, Clemson, and the University of Pennsylvania from Learfield or IMG. Outfront Media was spun off from CBS in 2014 and has become one of the strongest MMR intermediary competitors, handling some of the biggest names in college sports, including LSU, Maryland, and Virginia. All told, eight recent national Division I champions are served by MMR managers other than IMG and Learfield.

The supposed problem

As noted above, the most obvious pro-competitive benefit of the merger is in the reduction in transaction costs for firms looking to advertise in multiple markets. But, in order to confer that benefit (which, of course, also benefits the schools, whose marketing properties become easier to access), that also means a dreaded increase in size, measured by number of schools’ MMRs managed. So is this cause for concern?

Jason Belzer, a professor at Rutgers University and founder of sports consulting firm, GAME, Inc., has said that the merger will create a juggernaut — yes, “a massive inexorable force… that crushes whatever is in its path” — that is likely to invite antitrust scrutiny. The New York Times opines that the deal will allow Learfield to “tighten its grip — for nearly total control — on this niche but robust market,” “surely” attracting antitrust scrutiny. But these assessments seem dramatically overblown, and insufficiently grounded in the dynamics of the market.

Belzer’s concerns seem to be merely the size of the merging parties — again, measured by the number of schools’ rights they manage — and speculation that the merger would bring to an end “any” opportunity for entry by a “major” competitor. These are misguided concerns.

To begin, the focus on the potential entry of a “major” competitor is an odd standard that ignores the actual and potential entry of many smaller competitors that are able to win some of the most prestigious and biggest schools. In fact, many in the industry argue — rightly — that there are few economies of scale for colleges. Most of these firms’ employees are dedicated to a particular school and those costs must be incurred for each school, no matter the number, and borne by new entrants and incumbents alike. That means a small firm can profitably compete in the same market as larger firms — even “juggernauts.” Indeed, every college that brings MMR management in-house is, in fact, an entrant — and there are some big schools in big conferences that manage their MMRs in-house.

The demonstrated entry of new competitors and the transitions of schools from one provider to another or to in-house MMR management indicate that no competitor has any measurable market power that can disadvantage schools or advertisers.

Indeed, from the perspective of the school, the true relevant market is no broader than each school’s own rights. Even after the merger there will be at least five significant firms competing for those rights, not to mention each school’s conference, new entrants, and the school itself.

The two-sided market that isn’t really two-sided

Standard antitrust analysis, of course, focuses on consumer benefits: Will the merger make consumers better off (or no worse off)? But too often casual antitrust analysis of two-sided markets trips up on identifying just who the consumer is — and what the relevant market is. For a shopping mall, is the consumer the retailer or the shopper? For newspapers and search engines, is the customer the advertiser or the reader? For intercollegiate sports multimedia rights licensing, is the consumer the college or the advertiser?

Media coverage of the anticipated IMG/Learfield merger largely ignores advertisers as consumers and focuses almost exclusively on the the schools’ relationship with intermediaries — as purchasers of marketing services, rather than sellers of advertising space.

Although it’s difficult to identify the source of this odd bias, it seems to be based on the notion that, while corporations like Coca-Cola and General Motors have some sort of countervailing market power against marketing intermediaries, universities don’t. With advertisers out of the picture, media coverage suggests that, somehow, schools may be worse off if the merger were to proceed. But missing from this assessment are two crucial facts that undermine the story: First, schools actually have enormous market power; and, second, schools compete in the business of MMR management.

This second factor suggests, in fact, that sometimes there may be nothing special about two-sided markets sufficient to give rise to a unique style of antitrust analysis.

Much of the antitrust confusion seems to be based on confusion over the behavior of two-sided markets. A two-sided market is one in which two sets of actors interact through an intermediary or platform, which, in turn, facilitates the transactions, often enabling transactions to take place that otherwise would be too expensive absent the platform. A shopping mall is a two-sided market where shoppers can find their preferred stores. Stores would operate without the platform, but perhaps not as many, and not as efficiently. Newspapers, search engines, and other online platforms are two-sided markets that bring together advertisers and eyeballs that might not otherwise find each other absent the platform. And a collegiate multimedia rights management firms is a two-sided market where colleges that want to sell advertising space get together with firms that want to advertise their goods and services.

Yet there is nothing particularly “transformative” about the outsourcing of MMR management. Credit cards, for example are qualitatively different than in-store credit operations. They are two-sided platforms that substitute for in-house operations — but they also create an entirely new product and product market. MMR marketing firms do lower some transaction costs and reduce risk for collegiate sports marketing, but the product is not substantially changed — in fact, schools must have the knowledge and personnel to assess and enter into the initial sale of MMRs to an intermediary and, because of ongoing revenue-sharing and coordination with the intermediary, must devote ongoing resources even after the initial sale.

But will a merged entity have “too much” power? Imagine if a single firm owned the MMRs for nearly all intercollegiate competitors. How would it be able to exercise its supposed market power? Because each deal is negotiated separately, and, other than some mundane, fixed back-office expenses, the costs of rights management must be incurred whether a firm negotiates one deal or 100, there are no substantial economies of scale in the purchasing of MMRs. As a result, the existence of deals with other schools won’t automatically translate into better deals with subsequent schools.

Now, imagine if one school retained its own MMRs, but decided it might want to license them to an intermediary. Does it face anticompetitive market conditions if there is only a single provider of such services? To begin with, there is never only a single provider, as each school can provide the services in-house. This is not even the traditional monopoly constraint of simply “not buying,” which makes up the textbook “deadweight loss” from monopoly: In this case “not buying” does not mean going without; it simply means providing for oneself.

More importantly, because the school has a monopoly on access to its own marketing rights (to say nothing of access to its own physical facilities) unless and until it licenses them, its own bargaining power is largely independent of an intermediary’s access to other schools’ rights. If it were otherwise, each school would face anticompetitive market conditions simply by virtue of other schools’ owning their own rights!

It is possible that a larger, older firm will have more expertise and will be better able to negotiate deals with other schools — i.e., it will reap the benefits of learning by doing. But the returns to learning by doing derive from the ability to offer higher-quality/lower-cost services over time — which are a source of economic benefit, not cost. At the same time, the bulk of the benefits of experience may be gained over time with even a single set of MMRs, given the ever-varying range of circumstances even a single school will create: There may be little additional benefit (and, to be sure, there is additional cost) from managing multiple schools’ MMRs. And whatever benefits specialized firms offer, they also come with agency costs, and an intermediary’s specialized knowledge about marketing MMRs may or may not outweigh a school’s own specialized knowledge about the nuances of its particular circumstances. Moreover, because of knowledge spillovers and employee turnover this marketing expertise is actually widely distributed; not surprisingly, JMI Sports’ MMR unit, one of the most recent and successful entrants into the business was started by a former employee of IMG. Several other firms started out the same way.

The right way to begin thinking about the issue is this: Imagine if MMR intermediaries didn’t exist — what would happen? In this case, the answer is readily apparent because, for a significant number of schools (about 37% of Division I schools, in fact) MMR licensing is handled in-house, without the use of intermediaries. These schools do, in fact, attract advertisers, and there is little indication that they earn less net profit for going it alone. Schools with larger audiences, better targeted to certain advertisers’ products, command higher prices. Each school enjoys an effective monopoly over advertising channels around its own games, and each has bargaining power derived from its particular attractiveness to particular advertisers.

In effect, each school faces a number of possible options for MMR monetization — most notably a) up-front contracting to an intermediary, which then absorbs the risk, expense, and possible up-side of ongoing licensing to advertisers, or b) direct, ongoing licensing to advertisers. The presence of the intermediary doesn’t appreciably change the market, nor the relative bargaining power of sellers (schools) and buyers (advertisers) of advertising space any more than the presence of temp firms transforms the fundamental relationship between employers and potential part-time employees.

In making their decisions, schools always have the option of taking their MMR management in-house. In facing competing bids from firms such as IMG or Learfield, from their own conferences, or from professional sports teams, the opening bid, in a sense, comes from the school itself. Even the biggest intermediary in the industry must offer the school a deal that is at least as good as managing the MMRs in-house.

The true relevant market: Advertising

According to economist Andy Schwarz, if the relevant market is “college-based marketing services to Power 5 schools, the antitrust authorities may have more concerns than if it’s marketing services in sports.” But this entirely misses the real market exchange here. Sure, marketing services are purchased by schools, but their value to the schools is independent of the number of other schools an intermediary also markets.

Advertisers always have the option of deploying their ad dollars elsewhere. If Coca-Cola wants to advertise on Auburn’s stadium video board, it’s because Auburn’s video board is a profitable outlet for advertising, not because the Auburn ads are bundled with advertising at dozens of other schools (although that bundling may reduce the total cost of advertising on Auburn’s scoreboard as well as other outlets). Similarly, Auburn is seeking the highest bidder for space on its video board. It does not matter to Auburn that the University of Georgia is using the same intermediary to sell ads on its stadium video board.

The willingness of purchasers — say, Coca-Cola or Toyota — to pay for collegiate multimedia advertising is a function of the school that licenses it (net transaction costs) — and MMR agents like IMG and Learfield commit substantial guaranteed sums and a share of any additional profits for the rights to sell that advertising: For example, IMG recently agreed to pay $150 million over 10 years to renew its MMR contract at UCLA. But this is the value of a particular, niche form of advertising, determined within the context of the broader advertising market. How much pricing power over scoreboard advertising does any university, or even any group of universities under the umbrella of an intermediary have, in a world in which Coke and Toyota can advertise virtually anywhere — including during commercial breaks in televised intercollegiate games, which are licensed separately from the MMRs licensed by companies like IMG and Learfield?

There is, in other words, a hard ceiling on what intermediaries can charge schools for MMR marketing services: The schools’ own cost of operating a comparable program in-house.

To be sure, for advertisers, large MMR marketing firms lower the transaction costs of buying advertising space across a range of schools, presumably increasing demand for intercollegiate sports advertising and sponsorship. But sponsors and advertisers have a wide range of options for spending their marketing dollars. Intercollegiate sports MMRs are a small slice of the sports advertising market, which, in turn, is a small slice of the total advertising market. Even if one were to incorrectly describe the combined entity as a “juggernaut” in intercollegiate sports, the MMR rights it sells would still be a flyspeck in the broader market of multimedia advertising.

According to one calculation (by MoffettNathanson), total ad spending in the U.S. was about $191 billion in 2016 (Pew Research Center estimates total ad revenue at $240 billion) and the global advertising market was estimated to be worth about $493 billion. The intercollegiate MMR segment represents a minuscule fraction of that. According to Jason Belzer, “[a]t the time of its sale to WME in 2013, IMG College’s yearly revenue was nearly $500 million….” Another source puts it at $375 million. Either way, it’s a fraction of one percent of the total market, and even combined with Learfield it will remain a minuscule fraction. Even if one were to define a far narrower sports sponsorship market, which a Price Waterhouse estimate puts at around $16 billion, the combined companies would still have a tiny market share.

As sellers of MMRs, colleges are competing with each other, professional sports such as the NFL and NBA, and with non-sports marketing opportunities. And it’s a huge and competitive market.

Barriers to entry

While capital requirements and the presence of long-term contracts may present challenges to potential entrants into the business of marketing MMRs, these potential entrants face virtually no barriers that are not, or have not been, faced by incumbent providers. In this context, one should keep in mind two factors. First, barriers to entry are properly defined as costs incurred by new entrants that are not incurred by incumbents (no matter what Joe Bain says; Stigler always wins this dispute…). Every firm must bear the cost of negotiating and managing each schools’ MMRs, and, as noted, these costs don’t vary significantly with the number of schools being managed. And every entrant needs approximately the same capital and human resources per similarly sized school as every incumbent. Thus, in this context, neither the need for capital nor dedicated employees is properly construed as a barrier to entry.

Second, as the DOJ and FTC acknowledge in the Horizontal Merger Guidelines, any merger can be lawful under the antitrust laws, no matter its market share, where there are no significant barriers to entry:

The prospect of entry into the relevant market will alleviate concerns about adverse competitive effects… if entry into the market is so easy that the merged firm and its remaining rivals in the market, either unilaterally or collectively, could not profitably raise price or otherwise reduce competition compared to the level that would prevail in the absence of the merger.

As noted, there are low economies of scale in the business, with most of the economies occurring in the relatively small “back office” work of payroll, accounting, human resources, and employee benefits. Since the 2000s, the entry of several significant competitors — many entering with only one or two schools or specializing in smaller or niche markets — strongly suggests that there are no economically important barriers to entry. And these firms have entered and succeeded with a wide range of business models and firm sizes:

  • JMI Sports — a “rising boutique firm” — hired Tom Stultz, the former senior vice president and managing director of IMG’s MMR business, in 2012. JMI won its first (and thus, at the time, only) MMR bid in 2014 at the University of Kentucky, besting IMG to win the deal.
  • Peak Sports MGMT, founded in 2012, is a small-scale MMR firm that focuses on lesser Division I and II schools in Texas and the Midwest. It manages just seven small properties, including Southland Conference schools like the University of Central Arkansas and Southeastern Louisiana University.
  • Fox Sports entered the business in 2008 with a deal with the University of Florida. It now handles MMRs for schools like Georgetown, Auburn, and Villanova. Fox’s entry suggests that other media companies — like ESPN — that may already own TV broadcast rights are also potential entrants.
  • In 2014 the sports advertising firm, Van Wagner, hired three former Nelligan employees to make a play for the college sports space. In 2015 the company won its first MMR bid at Florida International University, reportedly against seven other participants. It now handles more than a dozen schools including Georgia State (which it won from IMG), Loyola Marymount, Pepperdine, Stony Brook, and Santa Clara.
  • In 2001 Fenway Sports Group, parent company of the Boston Red Sox and Liverpool Football Club, entered into an MMR agreement with Boston College. And earlier this year the Tampa Bay Lightning hockey team began handling multimedia marketing for the University of South Florida.

Potential new entrants abound. Most obviously, sports networks like ESPN could readily follow Fox Sports’ lead and advertising firms could follow Van Wagner’s. These companies have existing relationships and expertise that position them for easy entry into the MMR business. Moreover, there are already several companies that handle the trademark licensing for schools, any of which could move into the MMR management business, as well; both IMG and Learfield already handle licensing for a number of schools. Most notably, Fermata Partners, founded in 2012 by former IMG employees and acquired in 2015 by CAA Sports (a division of Creative Artists Agency), has trademark licensing agreements with Georgia, Kentucky, Miami, Notre Dame, Oregon, Virginia, and Wisconsin. It could easily expand into selling MMR rights for these and other schools. Other licensing firms like Exemplar (which handles licensing at Columbia) and 289c (which handles licensing at Texas and Ohio State) could also easily expand into MMR.

Given the relatively trivial economies of scale, the minimum viable scale for a new entrant appears to be approximately one school — a size that each school’s in-house operations, of course, automatically meets. Moreover, the Peak Sports, Fenway, and Tampa Bay Lightning examples suggest that there may be particular benefits to local, regional, or category specialization, suggesting that innovative, new entry is not only possible, but even likely, as the business continues to evolve.

Conclusion

A merger between IMG and Learfield should not raise any antitrust issues. College sports is a small slice of the total advertising market. Even a so-called “juggernaut” in college sports multimedia rights is a small bit in the broader market of multimedia marketing.

The demonstrated entry of new competitors and the transitions of schools from one provider to another or to bringing MMR management in-house, indicates that no competitor has any measurable market power that can disadvantage schools or advertisers.

The term “juggernaut” entered the English language because of misinterpretation and exaggeration of actual events. Fears of the IMG/Learfield merger crushing competition is similarly based on a misinterpretation of two-sided markets and misunderstanding of the reality of the of the market for college multimedia rights management. Importantly, the case is also a cautionary tale for those who would identify narrow, contract-, channel-, or platform-specific relevant markets in circumstances where a range of intermediaries and direct relationships can compete to offer the same service as those being scrutinized. Antitrust advocates have a long and inglorious history of defining markets by channels of distribution or other convenient, yet often economically inappropriate, combinations of firms or products. Yet the presence of marketing or other intermediaries does not automatically transform a basic, commercial relationship into a novel, two-sided market necessitating narrow market definitions and creative economics.

Last week concluded round 3 of Congressional hearings on mergers in the healthcare provider and health insurance markets. Much like the previous rounds, the hearing saw predictable representatives, of predictable constituencies, saying predictable things.

The pattern is pretty clear: The American Hospital Association (AHA) makes the case that mergers in the provider market are good for consumers, while mergers in the health insurance market are bad. A scholar or two decries all consolidation in both markets. Another interested group, like maybe the American Medical Association (AMA), also criticizes the mergers. And it’s usually left to a representative of the insurance industry, typically one or more of the merging parties themselves, or perhaps a scholar from a free market think tank, to defend the merger.

Lurking behind the public and politicized airings of these mergers, and especially the pending Anthem/Cigna and Aetna/Humana health insurance mergers, is the Affordable Care Act (ACA). Unfortunately, the partisan politics surrounding the ACA, particularly during this election season, may be trumping the sensible economic analysis of the competitive effects of these mergers.

In particular, the partisan assessments of the ACA’s effect on the marketplace have greatly colored the Congressional (mis-)understandings of the competitive consequences of the mergers.  

Witness testimony and questions from members of Congress at the hearings suggest that there is widespread agreement that the ACA is encouraging increased consolidation in healthcare provider markets, for example, but there is nothing approaching unanimity of opinion in Congress or among interested parties regarding what, if anything, to do about it. Congressional Democrats, for their part, have insisted that stepped up vigilance, particularly of health insurance mergers, is required to ensure that continued competition in health insurance markets isn’t undermined, and that the realization of the ACA’s objectives in the provider market aren’t undermined by insurance companies engaging in anticompetitive conduct. Meanwhile, Congressional Republicans have generally been inclined to imply (or outright state) that increased concentration is bad, so that they can blame increasing concentration and any lack of competition on the increased regulatory costs or other effects of the ACA. Both sides appear to be missing the greater complexities of the story, however.

While the ACA may be creating certain impediments in the health insurance market, it’s also creating some opportunities for increased health insurance competition, and implementing provisions that should serve to hold down prices. Furthermore, even if the ACA is encouraging more concentration, those increases in concentration can’t be assumed to be anticompetitive. Mergers may very well be the best way for insurers to provide benefits to consumers in a post-ACA world — that is, the world we live in. The ACA may have plenty of negative outcomes, and there may be reasons to attack the ACA itself, but there is no reason to assume that any increased concentration it may bring about is a bad thing.

Asking the right questions about the ACA

We don’t need more self-serving and/or politicized testimony We need instead to apply an economic framework to the competition issues arising from these mergers in order to understand their actual, likely effects on the health insurance marketplace we have. This framework has to answer questions like:

  • How do we understand the effects of the ACA on the marketplace?
    • In what ways does the ACA require us to alter our understanding of the competitive environment in which health insurance and healthcare are offered?
    • Does the ACA promote concentration in health insurance markets?
    • If so, is that a bad thing?
  • Do efficiencies arise from increased integration in the healthcare provider market?
  • Do efficiencies arise from increased integration in the health insurance market?
  • How do state regulatory regimes affect the understanding of what markets are at issue, and what competitive effects are likely, for antitrust analysis?
  • What are the potential competitive effects of increased concentration in the health care markets?
  • Does increased health insurance market concentration exacerbate or counteract those effects?

Beginning with this post, at least a few of us here at TOTM will take on some of these issues, as part of a blog series aimed at better understanding the antitrust law and economics of the pending health insurance mergers.

Today, we will focus on the ambiguous competitive implications of the ACA. Although not a comprehensive analysis, in this post we will discuss some key insights into how the ACA’s regulations and subsidies should inform our assessment of the competitiveness of the healthcare industry as a whole, and the antitrust review of health insurance mergers in particular.

The ambiguous effects of the ACA

It’s an understatement to say that the ACA is an issue of great political controversy. While many Democrats argue that it has been nothing but a boon to consumers, Republicans usually have nothing good to say about the law’s effects. But both sides miss important but ambiguous effects of the law on the healthcare industry. And because they miss (or disregard) this ambiguity for political reasons, they risk seriously misunderstanding the legal and economic implications of the ACA for healthcare industry mergers.

To begin with, there are substantial negative effects, of course. Requiring insurance companies to accept patients with pre-existing conditions reduces the ability of insurance companies to manage risk. This has led to upward pricing pressure for premiums. While the mandate to buy insurance was supposed to help bring more young, healthy people into the risk pool, so far the projected signups haven’t been realized.

The ACA’s redefinition of what is an acceptable insurance policy has also caused many consumers to lose the policy of their choice. And the ACA’s many regulations, such as the Minimum Loss Ratio requiring insurance companies to spend 80% of premiums on healthcare, have squeezed the profit margins of many insurance companies, leading, in some cases, to exit from the marketplace altogether and, in others, to a reduction of new marketplace entry or competition in other submarkets.

On the other hand, there may be benefits from the ACA. While many insurers participated in private exchanges even before the ACA-mandated health insurance exchanges, the increased consumer education from the government’s efforts may have helped enrollment even in private exchanges, and may also have helped to keep premiums from increasing as much as they would have otherwise. At the same time, the increased subsidies for individuals have helped lower-income people afford those premiums. Some have even argued that increased participation in the on-demand economy can be linked to the ability of individuals to buy health insurance directly. On top of that, there has been some entry into certain health insurance submarkets due to lower barriers to entry (because there is less need for agents to sell in a new market with the online exchanges). And the changes in how Medicare pays, with a greater focus on outcomes rather than services provided, has led to the adoption of value-based pricing from both health care providers and health insurance companies.

Further, some of the ACA’s effects have  decidedly ambiguous consequences for healthcare and health insurance markets. On the one hand, for example, the ACA’s compensation rules have encouraged consolidation among healthcare providers, as noted. One reason for this is that the government gives higher payments for Medicare services delivered by a hospital versus an independent doctor. Similarly, increased regulatory burdens have led to higher compliance costs and more consolidation as providers attempt to economize on those costs. All of this has happened perhaps to the detriment of doctors (and/or patients) who wanted to remain independent from hospitals and larger health network systems, and, as a result, has generally raised costs for payors like insurers and governments.

But much of this consolidation has also arguably led to increased efficiency and greater benefits for consumers. For instance, the integration of healthcare networks leads to increased sharing of health information and better analytics, better care for patients, reduced overhead costs, and other efficiencies. Ultimately these should translate into higher quality care for patients. And to the extent that they do, they should also translate into lower costs for insurers and lower premiums — provided health insurers are not prevented from obtaining sufficient bargaining power to impose pricing discipline on healthcare providers.

In other words, both the AHA and AMA could be right as to different aspects of the ACA’s effects.

Understanding mergers within the regulatory environment

But what they can’t say is that increased consolidation per se is clearly problematic, nor that, even if it is correlated with sub-optimal outcomes, it is consolidation causing those outcomes, rather than something else (like the ACA) that is causing both the sub-optimal outcomes as well as consolidation.

In fact, it may well be the case that increased consolidation improves overall outcomes in healthcare provider and health insurance markets relative to what would happen under the ACA absent consolidation. For Congressional Democrats and others interested in bolstering the ACA and offering the best possible outcomes for consumers, reflexively challenging health insurance mergers because consolidation is “bad,” may be undermining both of these objectives.

Meanwhile, and for the same reasons, Congressional Republicans who decry Obamacare should be careful that they do not likewise condemn mergers under what amounts to a “big is bad” theory that is inconsistent with the rigorous law and economics approach that they otherwise generally support. To the extent that the true target is not health insurance industry consolidation, but rather underlying regulatory changes that have encouraged that consolidation, scoring political points by impugning mergers threatens both health insurance consumers in the short run, as well as consumers throughout the economy in the long run (by undermining the well-established economic critiques of a reflexive “big is bad” response).

It is simply not clear that ACA-induced health insurance mergers are likely to be anticompetitive. In fact, because the ACA builds on state regulation of insurance providers, requiring greater transparency and regulatory review of pricing and coverage terms, it seems unlikely that health insurers would be free to engage in anticompetitive price increases or reduced coverage that could harm consumers.

On the contrary, the managerial and transactional efficiencies from the proposed mergers, combined with greater bargaining power against now-larger providers are likely to lead to both better quality care and cost savings passed-on to consumers. Increased entry, at least in part due to the ACA in most of the markets in which the merging companies will compete, along with integrated health networks themselves entering and threatening entry into insurance markets, will almost certainly lead to more consumer cost savings. In the current regulatory environment created by the ACA, in other words, insurance mergers have considerable upside potential, with little downside risk.

Conclusion

In sum, regardless of what one thinks about the ACA and its likely effects on consumers, it is not clear that health insurance mergers, especially in a post-ACA world, will be harmful.

Rather, assessing the likely competitive effects of health insurance mergers entails consideration of many complicated (and, unfortunately, politicized) issues. In future blog posts we will discuss (among other things): the proper treatment of efficiencies arising from health insurance mergers, the appropriate geographic and product markets for health insurance merger reviews, the role of state regulations in assessing likely competitive effects, and the strengths and weaknesses of arguments for potential competitive harms arising from the mergers.

Last week, FCC General Counsel Jonathan Sallet pulled back the curtain on the FCC staff’s analysis behind its decision to block Comcast’s acquisition of Time Warner Cable. As the FCC staff sets out on its reported Rainbow Tour to reassure regulated companies that it’s not “hostile to the industries it regulates,” Sallet’s remarks suggest it will have an uphill climb. Unfortunately, the staff’s analysis appears to have been unduly speculative, disconnected from critical market realities, and decidedly biased — not characteristics in a regulator that tend to offer much reassurance.

Merger analysis is inherently speculative, but, as courts have repeatedly had occasion to find, the FCC has a penchant for stretching speculation beyond the breaking point, adopting theories of harm that are vaguely possible, even if unlikely and inconsistent with past practice, and poorly supported by empirical evidence. The FCC’s approach here seems to fit this description.

The FCC’s fundamental theory of anticompetitive harm

To begin with, as he must, Sallet acknowledged that there was no direct competitive overlap in the areas served by Comcast and Time Warner Cable, and no consumer would have seen the number of providers available to her changed by the deal.

But the FCC staff viewed this critical fact as “not outcome determinative.” Instead, Sallet explained that the staff’s opposition was based primarily on a concern that the deal might enable Comcast to harm “nascent” OVD competitors in order to protect its video (MVPD) business:

Simply put, the core concern came down to whether the merged firm would have an increased incentive and ability to safeguard its integrated Pay TV business model and video revenues by limiting the ability of OVDs to compete effectively, especially through the use of new business models.

The justification for the concern boiled down to an assumption that the addition of TWC’s subscriber base would be sufficient to render an otherwise too-costly anticompetitive campaign against OVDs worthwhile:

Without the merger, a company taking action against OVDs for the benefit of the Pay TV system as a whole would incur costs but gain additional sales – or protect existing sales — only within its footprint. But the combined entity, having a larger footprint, would internalize more of the external “benefits” provided to other industry members.

The FCC theorized that, by acquiring a larger footprint, Comcast would gain enough bargaining power and leverage, as well as the means to profit from an exclusionary strategy, leading it to employ a range of harmful tactics — such as impairing the quality/speed of OVD streams, imposing data caps, limiting OVD access to TV-connected devices, imposing higher interconnection fees, and saddling OVDs with higher programming costs. It’s difficult to see how such conduct would be permitted under the FCC’s Open Internet Order/Title II regime, but, nevertheless, the staff apparently believed that Comcast would possess a powerful “toolkit” with which to harm OVDs post-transaction.

Comcast’s share of the MVPD market wouldn’t have changed enough to justify the FCC’s purported fears

First, the analysis turned on what Comcast could and would do if it were larger. But Comcast was already the largest ISP and MVPD (now second largest MVPD, post AT&T/DIRECTV) in the nation, and presumably it has approximately the same incentives and ability to disadvantage OVDs today.

In fact, there’s no reason to believe that the growth of Comcast’s MVPD business would cause any material change in its incentives with respect to OVDs. Whatever nefarious incentives the merger allegedly would have created by increasing Comcast’s share of the MVPD market (which is where the purported benefits in the FCC staff’s anticompetitive story would be realized), those incentives would be proportional to the size of increase in Comcast’s national MVPD market share — which, here, would be about eight percentage points: from 22% to under 30% of the national market.

It’s difficult to believe that Comcast would gain the wherewithal to engage in this costly strategy by adding such a relatively small fraction of the MVPD market (which would still leave other MVPDs serving fully 70% of the market to reap the purported benefits instead of Comcast), but wouldn’t have it at its current size – and there’s no evidence that it has ever employed such strategies with its current market share.

It bears highlighting that the D.C. Circuit has already twice rejected FCC efforts to impose a 30% market cap on MVPDs, based on the Commission’s inability to demonstrate that a greater-than-30% share would create competitive problems, especially given the highly dynamic nature of the MVPD market. In vacating the FCC’s most recent effort to do so in 2009, the D.C. Circuit was resolute in its condemnation of the agency, noting:

In sum, the Commission has failed to demonstrate that allowing a cable operator to serve more than 30% of all [MVPD] subscribers would threaten to reduce either competition or diversity in programming.

The extent of competition and the amount of available programming (including original programming distributed by OVDs themselves) has increased substantially since 2009; this makes the FCC’s competitive claims even less sustainable today.

It’s damning enough to the FCC’s case that there is no marketplace evidence of such conduct or its anticompetitive effects in today’s market. But it’s truly impossible to square the FCC’s assertions about Comcast’s anticompetitive incentives with the fact that, over the past decade, Comcast has made massive investments in broadband, steadily increased broadband speeds, and freely licensed its programming, among other things that have served to enhance OVDs’ long-term viability and growth. Chalk it up to the threat of regulatory intervention or corporate incompetence if you can’t believe that competition alone could be responsible for this largesse, but, whatever the reason, the FCC staff’s fears appear completely unfounded in a marketplace not significantly different than the landscape that would have existed post-merger.

OVDs aren’t vulnerable, and don’t need the FCC’s “help”

After describing the “new entrants” in the market — such unfamiliar and powerless players as Dish, Sony, HBO, and CBS — Sallet claimed that the staff was principally animated by the understanding that

Entrants are particularly vulnerable when competition is nascent. Thus, staff was particularly concerned that this transaction could damage competition in the video distribution industry.

Sallet’s description of OVDs makes them sound like struggling entrepreneurs working in garages. But, in fact, OVDs have radically reshaped the media business and wield enormous clout in the marketplace.

Netflix, for example, describes itself as “the world’s leading Internet television network with over 65 million members in over 50 countries.” New services like Sony Vue and Sling TV are affiliated with giant, well-established media conglomerates. And whatever new offerings emerge from the FCC-approved AT&T/DIRECTV merger will be as well-positioned as any in the market.

In fact, we already know that the concerns of the FCC are off-base because they are of a piece with the misguided assumptions that underlie the Chairman’s recent NPRM to rewrite the MVPD rules to “protect” just these sorts of companies. But the OVDs themselves — the ones with real money and their competitive futures on the line — don’t see the world the way the FCC does, and they’ve resolutely rejected the Chairman’s proposal. Notably, the proposed rules would “protect” these services from exactly the sort of conduct that Sallet claims would have been a consequence of the Comcast-TWC merger.

If they don’t want or need broad protection from such “harms” in the form of revised industry-wide rules, there is surely no justification for the FCC to throttle a merger based on speculation that the same conduct could conceivably arise in the future.

The realities of the broadband market post-merger wouldn’t have supported the FCC’s argument, either

While a larger Comcast might be in a position to realize more of the benefits from the exclusionary strategy Sallet described, it would also incur more of the costs — likely in direct proportion to the increased size of its subscriber base.

Think of it this way: To the extent that an MVPD can possibly constrain an OVD’s scope of distribution for programming, doing so also necessarily makes the MVPD’s own broadband offering less attractive, forcing it to incur a cost that would increase in proportion to the size of the distributor’s broadband market. In this case, as noted, Comcast would have gained MVPD subscribers — but it would have also gained broadband subscribers. In a world where cable is consistently losing video subscribers (as Sallet acknowledged), and where broadband offers higher margins and faster growth, it makes no economic sense that Comcast would have valued the trade-off the way the FCC claims it would have.

Moreover, in light of the existing conditions imposed on Comcast under the Comcast/NBCU merger order from 2011 (which last for a few more years) and the restrictions adopted in the Open Internet Order, Comcast’s ability to engage in the sort of exclusionary conduct described by Sallet would be severely limited, if not non-existent. Nor, of course, is there any guarantee that former or would-be OVD subscribers would choose to subscribe to, or pay more for, any MVPD in lieu of OVDs. Meanwhile, many of the relevant substitutes in the MVPD market (like AT&T and Verizon FiOS) also offer broadband services – thereby increasing the costs that would be incurred in the broadband market even more, as many subscribers would shift not only their MVPD, but also their broadband service, in response to Comcast degrading OVDs.

And speaking of the Open Internet Order — wasn’t that supposed to prevent ISPs like Comcast from acting on their alleged incentives to impede the quality of, or access to, edge providers like OVDs? Why is merger enforcement necessary to accomplish the same thing once Title II and the rest of the Open Internet Order are in place? And if the argument is that the Open Internet Order might be defeated, aside from the completely speculative nature of such a claim, why wouldn’t a merger condition that imposed the same constraints on Comcast – as was done in the Comcast/NBCU merger order by imposing the former net neutrality rules on Comcast – be perfectly sufficient?

While the FCC staff analysis accepted as true (again, contrary to current marketplace evidence) that a bigger Comcast would have more incentive to harm OVDs post-merger, it rejected arguments that there could be countervailing benefits to OVDs and others from this same increase in scale. Thus, things like incremental broadband investments and speed increases, a larger Wi-Fi network, and greater business services market competition – things that Comcast is already doing and would have done on a greater and more-accelerated scale in the acquired territories post-transaction – were deemed insufficient to outweigh the expected costs of the staff’s entirely speculative anticompetitive theory.

In reality, however, not only OVDs, but consumers – and especially TWC subscribers – would have benefitted from the merger by access to Comcast’s faster broadband speeds, its new investments, and its superior video offerings on the X1 platform, among other things. Many low-income families would have benefitted from expansion of Comcast’s Internet Essentials program, and many businesses would have benefited from the addition of a more effective competitor to the incumbent providers that currently dominate the business services market. Yet these and other verifiable benefits were given short shrift in the agency’s analysis because they “were viewed by staff as incapable of outweighing the potential harms.”

The assumptions underlying the FCC staff’s analysis of the broadband market are arbitrary and unsupportable

Sallet’s claim that the combined firm would have 60% of all high-speed broadband subscribers in the U.S. necessarily assumes a national broadband market measured at 25 Mbps or higher, which is a red herring.

The FCC has not explained why 25 Mbps is a meaningful benchmark for antitrust analysis. The FCC itself endorsed a 10 Mbps baseline for its Connect America fund last December, noting that over 70% of current broadband users subscribe to speeds less than 25 Mbps, even in areas where faster speeds are available. And streaming online video, the most oft-cited reason for needing high bandwidth, doesn’t require 25 Mbps: Netflix says that 5 Mbps is the most that’s required for an HD stream, and the same goes for Amazon (3.5 Mbps) and Hulu (1.5 Mbps).

What’s more, by choosing an arbitrary, faster speed to define the scope of the broadband market (in an effort to assert the non-competitiveness of the market, and thereby justify its broadband regulations), the agency has – without proper analysis or grounding, in my view – unjustifiably shrunk the size of the relevant market. But, as it happens, doing so also shrinks the size of the increase in “national market share” that the merger would have brought about.

Recall that the staff’s theory was premised on the idea that the merger would give Comcast control over enough of the broadband market that it could unilaterally impose costs on OVDs sufficient to impair their ability to reach or sustain minimum viable scale. But Comcast would have added only one percent of this invented “market” as a result of the merger. It strains credulity to assert that there could be any transaction-specific harm from an increase in market share equivalent to a rounding error.

In any case, basing its rejection of the merger on a manufactured 25 Mbps relevant market creates perverse incentives and will likely do far more to harm OVDs than realization of even the staff’s worst fears about the merger ever could have.

The FCC says it wants higher speeds, and it wants firms to invest in faster broadband. But here Comcast did just that, and then was punished for it. Rather than acknowledging Comcast’s ongoing broadband investments as strong indication that the FCC staff’s analysis might be on the wrong track, the FCC leadership simply sidestepped that inconvenient truth by redefining the market.

The lesson is that if you make your product too good, you’ll end up with an impermissibly high share of the market you create and be punished for it. This can’t possibly promote the public interest.

Furthermore, the staff’s analysis of competitive effects even in this ersatz market aren’t likely supportable. As noted, most subscribers access OVDs on connections that deliver content at speeds well below the invented 25 Mbps benchmark, and they pay the same prices for OVD subscriptions as subscribers who receive their content at 25 Mbps. Confronted with the choice to consume content at 25 Mbps or 10 Mbps (or less), the majority of consumers voluntarily opt for slower speeds — and they purchase service from Netflix and other OVDs in droves, nonetheless.

The upshot? Contrary to the implications on which the staff’s analysis rests, if Comcast were to somehow “degrade” OVD content on the 25 Mbps networks so that it was delivered with characteristics of video content delivered over a 10-Mbps network, real-world, observed consumer preferences suggest it wouldn’t harm OVDs’ access to consumers at all. This is especially true given that OVDs often have a global focus and reach (again, Netflix has 65 million subscribers in over 50 countries), making any claims that Comcast could successfully foreclose them from the relevant market even more suspect.

At the same time, while the staff apparently viewed the broadband alternatives as “limited,” the reality is that Comcast, as well as other broadband providers, are surrounded by capable competitors, including, among others, AT&T, Verizon, CenturyLink, Google Fiber, many advanced VDSL and fiber-based Internet service providers, and high-speed mobile wireless providers. The FCC understated the complex impact of this robust, dynamic, and ever-increasing competition, and its analysis entirely ignored rapidly growing mobile wireless broadband competition.

Finally, as noted, Sallet claimed that the staff determined that merger conditions would be insufficient to remedy its concerns, without any further explanation. Yet the Commission identified similar concerns about OVDs in both the Comcast/NBCUniversal and AT&T/DIRECTV transactions, and adopted remedies to address those concerns. We know the agency is capable of drafting behavioral conditions, and we know they have teeth, as demonstrated by prior FCC enforcement actions. It’s hard to understand why similar, adequate conditions could not have been fashioned for this transaction.

In the end, while I appreciate Sallet’s attempt to explain the FCC’s decision to reject the Comcast/TWC merger, based on the foregoing I’m not sure that Comcast could have made any argument or showing that would have dissuaded the FCC from challenging the merger. Comcast presented a strong economic analysis answering the staff’s concerns discussed above, all to no avail. It’s difficult to escape the conclusion that this was a politically-driven result, and not one rigorously based on the facts or marketplace reality.