Comcast: How to win at monopoly

February 18, 2014

The proposed merger between the cable television interests of Time Warner Cable and its principal rival, Comcast, demonstrates a neat example of how the theory of the free market differs so radically from the marketplace in practice.

In the storybook version of how business works, companies compete for customers by offering rival services and the company with the best products and prices wins. In this fairytale, everyone wins. Customers benefit from competition through a better choice of products and cheaper prices, the good companies take a handsome profit and prosper, and the bad companies go to the wall.

In real life, this heroic version of how the world spins is far less noble. In the mythical version of the free market, companies fiercely compete with each other for market share by trying to outdo each other in pleasing customers. In reality, companies tend to forego the difficult and expensive art of wooing customers from a rival and resort to buying the competition. Buying business is far easier than earning it.

The untrammeled free market leads inexorably toward gargantuan monopolies with complacent managements that end consumer choice, fix prices, treat customers disdainfully and stifle innovation. Only fierce anti-trust legislation, accompanied by a sharp set of regulators, protects consumers from this tendency to replace healthy competition with a single company (or a duopoly) offering a single line of products.

Cable television already resembles a monopoly commodity. Companies bid to become the sole “triple play” supplier to an apartment block or a neighborhood — providing access to broadcast television programming, the Internet, and landline telephone service in a bundle. On top of this “natural monopoly” — caused by the physical limitations of the cable technology that allows limited access to customers — could now be added the effective monopoly of a single behemoth company enjoying an overweening market share.

There is no doubt the Comcast-Time Warner deal would create a monopoly that will allow the mammoth company to dominate the cable television industry. If completed, the deal will mean that, as well as owning about a third of the total cable market in the United States from the moment the deal is approved, the combined company will have a virtual monopoly in 19 of the 20 richest U.S. television markets.

Those caught in the new monopoly would likely be obliged to pay the monster company’s fees. They should expect not just higher prices, but less choice and — if it is possible — even worse customer service. Already Comcast and Time-Warner are considered the top cable TV companies and Internet providers for treating their customers badly.

There is more. The Comcast-Time Warner merger is not so much about supplying television as selling access to broadband that delivers Internet to the home. Now that the Internet has become a utility as basic as electricity, the expanded company will enjoy not just a monopoly but the monopoly of a modern necessity.

This is crucial because of the way the traditional TV landscape has morphed since the three-network triopoly of the 1950s. Like the landline phone, the traditional television industry looks to be going out of business. An increasing number of disenchanted viewers, known as “cord cutters,” are abandoning cable TV to watch video on their phones and tablets, provided by internet-only TV services such as Netflix and Amazon Prime. In the last five years, 5 million cable subscribers have disconnected, leaving just 40 million hooked on cable.

The shift from cable to Internet is likely to speed up. The streaming TV companies are heavily investing in their own high-quality product and finding a ready audience. Netflix’s political serial “House of Cards” is the shining example. There was unprecedented surge in streaming viewers when the second season premiered last weekend.

A similar revolution is taking place in radio. Old-school, over-the-air broadcast programming, already under assault from the satellite radio service SiriusXM (itself an example of how two fierce rivals opted to combine rather than compete), is fast being replaced by Internet music streaming services like Beats Music, Pandora and Spotify.

So, saying the real goal of the Comcast-Time Warner merger is to win the battle of broadband only draws attention to another monopoly-in-waiting. If the merger provides the means for the company to become monopolists in supplying broadband Internet as well as regular cable television, then customers will doubly suffer.

In the politics of monopolies, a double standard is at play. Some “natural” monopolies are unavoidable. It is generally assumed that, because monopolies are bad, if one comes about through the existence of a limited supply — for example, limited broadcast wavelengths — that the state or some official body, such as the Federal Communications Commission, is set up to administer it fairly.

Still, a state monopoly invariably serves the community poorly. More competition in awarding licenses for rare public commodities would help alleviate the drawbacks. But the potential for unfairness and even injustice is substantial. The fear of the state monopoly provision of healthcare is what made a “single payer option” — or federally administered health system –– so unlikely. Americans simply do not trust a government monopoly to work well or efficiently.

Private monopolies, however, do not appear to attract the same scrutiny or censure. In the days of the robber barons, when the federal and state governments had little to say about business ethics, the market ripped, monopolies emerged, and their owners made vast profits.

Between 1870 and 1911, John D. Rockefeller’s Standard Oil, for example, was America’s monopoly supplier of the oil and gasoline that fuelled the automobile age. It was President Theodore Roosevelt, a Republican, who led the charge against Rockefeller’s firm grip on the oil market. Roosevelt’s words on monopoly continue to ring true when considering private monopolies like the Comcast-Time Warner amalgamation.

“More and more,” Roosevelt declared, “it is evident that the state, and if necessary the nation, has got to possess the right of supervision and control as regards the great corporations which are its creatures; particularly as regards the great business combinations which derive a portion of their importance from the existence of some monopolistic tendency.”

Yet, more than a century later, rampant monopolism continues unabashed.

Nicholas Wapshott is the author of Keynes Hayek: The Clash That Defined Modern Economics. Read extracts here.


PHOTO (TOP): Comcast sign is shown in San Francisco, California, February 13, 2014. REUTERS/Robert Galbraith

PHOTO (INSERT 1): The Time Warner Cable logo is displayed on the back of a van in New York, February 13, 2014. REUTERS/Joshua Lott

PHOTO (INSERT 2): The offices and studios of Comcast Entertainment Group which operates E! Entertainment Television, the Style Network and G4 network is pictured in Los Angeles, November 12, 2009. REUTERS/Fred Prouser

One comment

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“In reality, companies tend to forego the difficult and expensive art of wooing customers from a rival and resort to buying the competition.”

This isn’t necessarily a terrible thing, but I can see how you believe it is when you start from the assumption that monopolies are bad simply for being a monopoly.

If a company continues to provide value for its customers after it has entered into a monopolistic state, what is the problem? I know that many, many people would disagree with me, but the only reason Comcast gets my money instead of Verizon or DirectTV is because I feel that it has provided great service. When Comcast fails to provide that service, which I’m sure it will at some point, I will switch to Verizon.

Free Market theory isn’t about stopping monopolies and maximizing competition. It’s about letting consumers decide what options provide the best value for their needs. When one option fails, opportunities to capitalize on other options arise. The caricatured strawman you offer of free markets is on par with most of the lolbertarian rhetoric you seem to dislike.

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