Thursday, February 18, 2010

Net Neutrality critical in the Comcast-NBC merger

The last couple of weeks I've been traveling the US, which has proven to be a productive and enjoyable trip. While vacationing in California I visited the Annenberg School at USC, and now I'm in Chicago at Northwestern Law School for a week. It's been inspirational to meet with experts in telecoms law and economics, like Jim Speta, Peter DiCola and Shane Greenstein. Besides, yesterday I was invited by visiting professor (and my advisor) Pierre Larouche to do a guest lecture in his Comparative Antitrust Law seminar. As the students had indicated they were interested to learn about merger cases, I addressed the ongoing merger proceedings between cable giant Comcast and programming mogul NBC Universal.

Slides are up on my website.

The basic argument that I wanted to put forward, was first to lay out the motivation for this merger. It seems as if the merger was mainly driven by Comcast, in an attempt to forego the commoditization of cable. Cable is bound to be facing stiff competition from satellite, and potentially online and mobile TV platforms. With a vertically integrated TV programming family on its distribution platform, Comcast opens up new ways to generate revenue. In fact, it turns out the merger is more of an acquisition, as Comcast is mainly buying NBC from GE.

While the merger proceedings are being reviewed by both the DoJ and de FCC, a rather fierce debate erupted as well in the public sphere on whether the merger should be allowed or not. I had the students read two opposing position papers on the merger (here and here), and let them discuss the arguments put forward. From here, we proceeded to a more analytical review of the merger, stepping in the shoes of a competition authority.

The two main questions for a competition authority to ask in any (predominantly) vertical merger is whether (a) the merged firm is able to foreclose on competitors, and (b) whether it has the incentive to foreclose. Answering the first question is of course highly dependent on market definition. After all, only in a situation of market power will the merged firm be able to foreclose competitors. Given NBC's ranking in TV programming, it seems unlikely that the merged firm will be able to foreclose upstream, in the programming market. Downstream, in distribution is a different story though: given that Comcast enjoys local monopolies in certain geographic markets, its ability to foreclose may depend on the robustness of intermodal competition from satellite and online TV.

Now, as the merged firm is able to foreclose downstream, does it also have the incentive? It depends. If Comcast were to exclusively bundle NBC's content on its cable platform, this is only a viable strategy if this bundling generates more revenue that selling licenses for NBC's content to other platforms. This is the toughest nut to crack for a regulator, and a question I won't be able to answer at this point.

However, I do think that conditions should be imposed on the merger. It happens to be that NBC owns, the main outlet for free online TV in the US. Comcast owns cable architecture in a duopoly setting, so it could be possible for Comcast to prioritize Hulu's traffic over competitors (say, Netflix) and lock up the online TV market. This is where the network neutrality debate comes in. In order to allow the emergence of online video as a serious competitor to cable and satellite TV, I therefore concluded in the lecture that conditions to prevent foreclosure of the online TV market may be justified.

In the end however, the experience with the AOL-Time Warner merger seems to suggest that Comcast-NBC is not going to be a happy marriage. We'll see. In any event, GE is likely to emerge as the winner in this merger.


chris said...

Force them to divest Hulu or at least impose FRAND conditions on its terms?

Jasper said...

Divestiture would be an option. As long as Netflix doesn't buy it ;-)

The problem is that under Comcast's wings, Hulu is very unlikely to emerge as a competitor to cable for obvious reasons. So FRAND will not help much in my view...