Opinion

The Great Debate

The antitrust case against Comcast-Time Warner

February 20, 2014

For Netflix viewers, the proposed $45.2 billion Comcast-Time Warner Cable deal is simple: Will they get their House of Cards and how much it will cost?

For regulators, the proposed deal is rife with complexities. Now that Netflix’s efforts to secure a spot with Time Warner Cable reportedly are stalled, the video-streaming service is a prism for understanding how the federal government might approach the deal.

Netflix is a content provider and original programmer, and its 30-plus million users will depend on the proposed cable giant for a reliable broadband connection. Like ESPN, CBS, the National Football League, AT&T, Verizon and other stakeholders, Netflix’s entire business model could be undermined. It will be negotiating for a chunk of the country’s audience, but it is also subject to a limited market share if the proposed Comcast-Time Warner Cable offers it a less preferential stream.

Comcast and Time Warner Cable already enjoy local monopolies. It would be hard to successfully make the case that their market power as sellers is pitted against consumers. Instead, the antitrust scrutiny at the Justice Department and Federal Trade Commission will likely center on its role as a monopsony

An economic term coined during the Great Depression, monopsonies are mirror images of monopolies. Instead of a single, dominant seller in a particular market, monopsonies involve buyers.

Wal-Mart offers a good example. The mega-retailer has so much buying power that it bargains with suppliers and drives down prices, imposing economic inefficiencies. That’s why there’s been so much public and private opposition to a New York City store. Mom and pops and others would struggle to compete if Wal-Mart had opened the store they planned to develop in Brooklyn.

For years, these purchasers were known as “monopoly buyers” That continued until 1932, when Cambridge economist Joan Robinson wrote a paper on how illogical the term was. She suggested the Greek-derived “monopsony” after having tea with colleague B.L. Hallward, a classics scholar, who officially coined the term.

Monopsonies have been litigated less often than monopolies. Though sections of the Sherman Antitrust Act, the Clayton Antitrust Act and the Federal Trade Commission Act all restrict monopsonies when they interfere with trade and market competition, the Supreme Court was slow to extend antitrust protection beyond monopolies. In 1948, three California sugar refiners were prohibited from price collusion of beets because farmers complained that the practice undermined competition.

There have been a handful of cases since then, largely centered around price purchasing power. In 1960, for example, the court held in FTC v. Anheuser-Busch that the beer maker unfairly engaged in price discrimination when it sold a “premium” beer at a lower price than regional and local breweries in St. Louis — but not elsewhere. Even though the price of the new beer varied from market to market at different times.

In the 1990s, more monopsony cases followed, given the increase in dominant buyers in technology, healthcare, sports, agriculture and retail. Microsoft, for example, was accused of leveraging its software-buying power when it installed the Internet Explorer browser in its personal computers. Pharmaceutical monopsonies have become notorious for price-fixing schemes. One 2007 monopsony case involved the nation’s largest lumber manufacturer. The court ruled that one form of behavior that undermines competition is when a purchaser pays sets prices so high that other buyers are eliminated.

But no case replicates the technological and economic complexities that this proposed Comcast-Time Warner Cable merger would present.

A Goliath-Goliath deal will not be hard to defend. Comcast-Time Warner Cable likely will argue that it faces suppliers like Netflix with significant market power. As Eric Talley, a professor at the University of California, Berkeley College of Law, explains, it will argue that for too long these content providers have had too much influence over local cable companies and that consumers will win because Comcast-Time Warner Cable will have more bargaining power.

Even if the new cable behemoth succeeds in negotiating better prices, it is questionable whether those savings will be passed along to users unless they start discontinuing service in droves.

Netflix’s position also raises the specter of net neutrality. An appeals court’s recent invalidation of rules prohibiting preferential streaming means that Comcast-Time Warner Cable could interfere with the speed and quality of Netflix’s broadband down the road.

“It’s an awkward situation,” said James Chen, a professor at Michigan State University College of Law, “in which Comcast is providing a pipe to a competitor on the content side.”

In that scenario, Federal Communications Commission Chairman Tom Wheeler, who is a former lobbyist, could enter the fray. The FCC’s mandate is less to bust trusts than to diversify content. If Comcast-Time Warner Cable can ensure that it won’t make it difficult for Netflix users to watch shows because of unequal streaming privileges by honoring existing net neutrality rules beyond its January 2018 commitment, the agency might be dissuaded from causing headaches for the merger

There might be no one better than Wheeler, an industry titan whom President Barack Obama once called the “Bo Jackson of telecom” to put a cable monopsony in its place.

 

PHOTO (TOP): The news ticker outside the Today Show announces GE’s sale of NBC to Comcast, in New York, December 3, 2009. REUTERS/Chip East

PHOTO (INSERT 1): Reuters/Joshua Lott

PHOTO (INSERT 2): FCC Chairman Tom Wheeler testifies before the House Communications and Technology panel on Capitol Hill in Washington, December 12, 2013. REUTERS/Gary Cameron

Comments
One comment so far | RSS Comments RSS

“There might be no one better than Wheeler, an industry titan whom President Barack Obama once called the “Bo Jackson of telecom” to put a cable monopsony in its place.” Well, let’s hope he does. I don’t care what you call it but every regulation OUR government imposes should be to benefit all of us – not corporate greedsters in their quest to gobble up innovation and competition.

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