April 8, 2014 3:06 PM
In Comcast's public positioning of its proposed acquisition of Time Warner Cable, executives of both companies have chosen to characterize the merger more by what it's not
than by what it is
. So, we know that the merger is not
going to result in any significant efficiencies, because it's not
going to reduce consumer prices
for cable (even an unconstrained monopoly reduces prices when costs decline).
We also know that the merger is not between two competitors, because--as the companies make it a point to tell us--they don't compete
. TWC's CEO says
, "[w]hether you're talking about broadband or video, we don't compete with one another." Comcast's CFO goes as far to state
, "[w]e don't compete in one single zip code."
Doesn't it kind of seem like they're trying just a little too hard to sell the notion that the combined service territory
of Comcast and TWC is not relevant
(because, you know, they don't compete)?Product Market Definition
The last time the DoJ's Antitrust Division ("Government" or "DoJ") looked at a Comcast acquisition, it determined--based on documents from Comcast--that Comcast's "joint venture" (as it was structured at the time) with NBC-Universal would reduce competition in the "video programming distribution" market. See Comp. Impact Stmt. (CES
). The Government seemed especially concerned at the ability of post-merger Comcast to destroy nascent competition from online video distributors. CES
at C and D.
Based upon the Government's concerns in the previous Comcast acquisition, and DoJ's focus on cross-elasticity of demand in defining a relevant product market, let's focus on some recent information
from the Leichtman Research Group to get some valuable insights into how the Government might define a relevant product market.
Consider that, among multi-channel video providers, cable companies lost
1.7 million customers in 2013. But, AT&T and Verizon added
1.5 million MPVD subscribers last year. The Leichtman numbers
show that customers are not so much "cutting the cord" (only 105k customers stopped buying from an MPVD in 2013) as they are switching MVPDs--but customers are choosing MVPDs that are also broadband providers
. Very high percentages (according
to AT&T, well over 90%) of both cable and telco MPVD subscribers are also broadband customers. The Leichtman data confirm this for Comcast and TWC, as well.
Purchasing video service from another broadband provider, allows the customer to purchase services they want from the MPVD, but also purchase services directly from an online vendor, like Netflix. In its earlier analysis of the significant competitive effect of online video distributors, the Government referred to this practice as "cord-shaving." CES
, at C.2(b).
Given consumer behavior, it seems likely that the Government will focus on a broadband market--of a sufficient speed to facilitate a competitive MPVD service--as the primary relevant product market. Because it is this market in which the traditional "hypothetical monopolist" test would yield the greatest supply substitution responses. For all practical purposes, we should consider broadband providers offering service at 10-15Mbps as participants in the "MVPD-bandwidth" market.Geographic Market Definition
If one's primary concern was to look at the area over which the post-merger firm might be able to reduce competition, then that territory would be (at least) the total number of MVPD-bandwidth broadband customers in each geographic market served by Comcast or Time Warner Cable. Within this total subset of homes passed will also include the majority of the customers capable of being served by AT&T and Verizon.
What is difficult to figure out from publicly available data is what percentage of MVPD-bandwidth homes will be served within that area by Comcast, Time Warner Cable, AT&T, and Verizon. For our purposes, just to get a ballpark idea of the type of numbers we would be looking at, we are going to use a datapoint from the Leichtman 1Q 2014 Research Notes
that the number of FiOS and U-Verse addressable homes stands at 41 million, giving the companies a video market penetration rate of 26%.
Let's further assume--and this is a generous assumption toward Comcast--that AT&T and Verizon compete with Comcast and TWC in 70% of their combined service territory, but that all of AT&T and Verizon's customers were won in this territory. This would give us a total denominator of about 59 million homes passed (that could receive MVPD quality broadband).Market Shares
To get useful MPVD-broadband numbers, we are going to work with the Leichtman numbers we used earlier, but, because it is impossible to tell from the telco broadband
numbers how many AT&T and Verizon broadband customers are actually U-verse and FiOS customers, we are going to use MPVD customers
as a proxy, in order to allow us to get some ballpark market share numbers.
So, we can see that the result of this merger, for anyone that has to depend on getting content, carriage, or online video distribution to these 60 million households will be looking at a market that goes from "moderately concentrated" to "highly concentrated" under the DoJ Horizontal Merger Guidelines at Section 5.3
The competitive effects on both MPVD rivals like AT&T, RCN, and Verizon, as well as online video distributors like Netflix, are likely to be significant in terms of their ability to get competitive programming. Add to this the fact that Comcast will also control 12 major regional sports networks, and it is easy to see how the post-merger firm could restrict output of the most inelastic, and "linear," of linear programming to broadband and online video competitors.
This last effect is, potentially, disastrous for the future deployment of more MVPD-bandwidth broadband in the area that would be served by the combined Comcast-TWC, because it eliminates what is potentially the biggest source of pent-up consumer demand for MVPD-quality broadband as a substitute for traditional MVPD bundled service--online access to regional sports programming.
How do we know the significance of real-time sports programming to the value of the broadband Internet? Because the first truly linear, all HD, over-the-top channel--the WWE Network--has attracted almost 700,000 customers paying $10/month, in only 6 weeks
If the DoJ and the FCC value the availability of MVPD-bandwidth broadband throughout the Comcast-TWC territory, then Comcast might have a reason to worry. But, commenters on the political left
have conceded Comcast's powerful influence over the government; so, Comcast probably does have a decent chance of moving forward with this acquisition. Unfortunately, it just postpones the day when consumers can choose to buy only the video content they want from the vendors they want.
July 12, 2013 11:39 AM
So I take my eyes off the spectrum auction debate for a couple months, and what happens? Well, for the most part, absolutely nothing . . . or so it seems. Actually, it's worse than nothing happening, because parties have refused to wisely ignore the DoJ's substance-less April ex parte submission
. Instead, a "tire fire" of a debate (toxic, polluting, and burning for far too long) has rather predictably broken out; a fact that confirms the darkest suspicions of many--that one can never underestimate the FCBA
crowd's appetite for mindless bickering.
She obviously read the DoJ ex parte
The putative beneficiaries of DoJ's casual musings--Sprint and T-Mobile
--are struggling to animate this theory by adding their own piece parts, like the "Dr. Frankensteins" of economic policy creation. Others, who oppose these efforts, are also exaggerating the substance (or lack thereof) of the Department's submission so that they can then "slay" the paper tiger of their own creation.
Fortunately, and finally, one "grownup" expert has, admirably, refused to reflexively engage in the "yea or nay" foreclosure debate, choosing instead to simply, and elegantly, point out that the DoJ submission lacks sufficient substance to even be worthy of discussion. This expert calmly explains that the DoJ never contends that the likelihood of the auction being subverted by a bidder pursuing an "input foreclosure" strategy is high enough to merit any exceptional analytical framework, or specific prophylactic rules.
Before I reveal the identity of our helpful expert, I'll give you one hint. This expert understands, possibly through experience, that the Antitrust Division is well aware of the level of detail and documentation that must accompany a regulatory policy proposal if it is to be taken seriously by the regulator.When DoJ Is Serious About An Economic Framework
When you think about it, this realization becomes a little more powerful. The Antitrust Division knows full well how to provide a regulatory agency with enough factual and theoretical support for its theories to give the agency that adopts its proposals a good chance of surviving appellate review.
A good example of the DoJ at its best is the Department's Evaluation
of the Bell Atlantic (Verizon) Application to provide "long distance" service in New York. The Division filed over 200 pages of advocacy, including 2 economist declarations. The DoJ's evaluation contains 8 single-spaced pages of citation sources. In contrast, the DoJ probably devoted twice as many words to cataloguing the sources it used in its New York 271 analysis than it did in its "police sketch" of a foreclosure theory in the April ex parte.
An even better comparison is the analysis the Antitrust Division provided in its 1992 Comments
on rules for the PCS auction, which was the FCC's very first spectrum auction. The DoJ filed 41 pages of very thorough analysis in November of 1992, which it followed with an equally-thorough 28 pages of Reply Comments
in January of 1993.
Interestingly, the content of the DoJ's rigorous PCS auction comments could not be more different from the more "casual" reasoning in its April ex parte. Even though there were only 2 mobile wireless providers at the time of the PCS auction, the Division opposed a any flat prohibition on wireless mergers (which the Commission was considering adopting). While mergers between the new PCS entrants would certainly result in increased concentration, the Division was unwilling to "foreclose" from consideration mergers that would result in enhanced efficiency of spectrum use, because such mergers could benefit consumers. See 1992 Comments, pp. 23-28. When DoJ Wants To Be "Supportive" Without Providing Support
So, I know you're probably wondering which expert rationally declined to join the melee of parties jousting against the DoJ's "windmill" chimera of input foreclosure. Somewhat ironically, and yet not surprisingly, the expert is former Deputy Assistant Attorney General for Economics of the Antitrust Division, Michael "it's cool for" Katz. Katz, and some other economists, submitted a declaration
(at pp. 5-13) on behalf of AT&T last month.
So how did Katz, et al
., cut through the noise surrounding the DoJ ex parte? Take a look for yourself
(pp. 5-13). The first clue is that it's 8 double spaced pages long, and the first two pages summarize the DoJ filing. The brevity of the Katz, et al., Declaration is its elegance.
The Katz Declaration uniquely approaches the DoJ filing from a generously analytical perspective. Accepting the DoJ's threshold premise--that there could be circumstances in which the largest firms might profitably pursue a foreclosure strategy--Katz, et al., explain essential elements of the theory, as well as factual predicates (i.e., "evidence"), that the DoJ would have discussed if the Department reasonably expected the FCC to adopt such a justification for bidder exclusion.
Professor Katz, of course, is a classy dude, so he never actually says "if the Division was serious . . . ." That's way too vulgar, and--as far as I can tell--it's the only reason AT&T chose him to make this point instead of me. Thankfully, Professor Katz and his colleagues have advanced this docket by demonstrating for all participants that there is no risk of the Commission adopting any part of the Division's ex parte.
Given that the DoJ fails to present their "theory" in an economically correct manner, or to even recklessly
--much less accurately--assert factual predicates that would require the FCC to consider the DoJ's ex parte, it is safe to assume that the Antitrust Division has no intention of providing the FCC with the requisite legal, factual, and economic testimonial support that would give the FCC even the barest excuse to exclude auction bidders on an "input foreclosure" theory. Hopefully, all parties, including the FCC, will soon appreciate this reality, and stop wasting valuable time arguing over an ex parte that not even the DoJ expects the FCC to take seriously.
May 1, 2013 11:12 AM
Has anyone else noticed how nutty the news stories have become about the FCC and DoJ fight to promote wireless competition? Here are some examples: this
, but I'll summarize for you. First we have the DoJ "letter" to the FCC; a letter which I think
the FCC probably sent the DoJ along with a self-addressed, stamped envelope a few months ago.
I mean, seriously, how could two separate agencies--both independently, and within six months of each other--come up with the same notion that the next available spectrum to be auctioned would be put to its best use by Sprint and T-Mobile (who had not even bid on spectrum the last time it was available) because of its radio frequency characteristics
? That last part was highlighted because it's like the peanuts on top of the walnuts on top of the almonds in this all-nut sundae of a theory.
Like most tin foil hat
theories, this one has a small kernel of logic. For a smaller carrier, especially a new entrant, low-frequency spectrum provides a lot more value per cell site--and requires a lot less cell sites--for a carrier to achieve adequate coverage. But do the FCC and DoJ want to promote smaller carriers or new entrants? Of course not; that might provide consumers with some value. And since the FCC/DOJ believe that only national firms count toward improving competition in the marketplace - new entrants as envisioned by these agencies would fail to meet that goal.
The DoJ and the FCC didn't have this theory of theirs until they also seemed to arrive at the conclusion--as near as I can tell, sometime during their analysis of the proposed AT&T/T-Mobile merger--that mobile wireless competition is best measured by market share on a national level. And, with a market artificially defined as "national", despite the fact that consumers make choices locally, a "market" could only be truly competitive if each firm's share (of customers, of spectrum, of cool new handsets, and crunchy nut confections) is roughly equal.
Does anybody recognize the problem with this raison d'etre
? Does the conclusion at the end of the last paragraph sound a little like the description of a commodity market? Yeah, it kind've does, doesn't it? Are wireless services a commodity market? Well, the AT&T iPhone crowd from 2007 didn't seem to think so; nor did the Verizon Droid evangelizers from 2009. So, let's just say no; wireless is not a commodity market. Like with cars, people seem to take a certain personal pride in their selected combination of network and handset.
Why would anyone expect that differentiated product markets would result in competitors having a roughly equal share of sales? After all, some people like (and can afford) fancy overpriced compact cars, while others need
pimped-out, baller SUVs because . . . that's just how they roll. So isn't it nice that we have BMWs and Escalades? Do they have the same market share? Yeah, probably, but that's beside the point.
The problem with the government's idea of what competition should look like is that it starts from a lot of flawed premises--all of which come from the same flawed premise: consumer preferences don't count
. The relevant geographic market is national, not because this is the way consumers actually purchase wireless service, but because this is the way the government likes to look at it.
To the government, market shares are only unequal because firms have unequal amounts of low frequency spectrum, and not the other way around. They don't seem to understand that AT&T and Verizon have customers that, for the most part, have chosen not to buy service
from at least 3 other firms. Now that's
Why doesn't the government just reconcile itself to the reality of consumer driven competition and "wreckanize" that the consequences of choice can produce distinct winners and losers? Yogi Berra told us a long time ago: "If the people don't want to come out to the ballpark, nobody's going to stop them." Why do the DoJ and the FCC keep trying?