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Friday, 14 March 2014

Comcast - TWC: Should they be allowed to merge?

Since the announcement of Comcast's planned acquisition of Time Warner Cable (TWC) most observers argue that the union will lead to increased monopoly power and (so goes the logical argument) even higher cable subscription fees for consumers. The most recent "authority" weighing in the debate is The Economist, which devoted an article to the topic in its prestigious Leaders section. While I agree with much of what is said in the article (and in general) about the market power of cable operators in the U.S., I disagree with the statement that acquiring TWC will increase Comcast's market power over consumers in particular, and thus leading to higher subscription fees. First, the two cable operators do not have overlapping networks so they are de facto monopolies as it is. In the case of TWC, I even believe that prices might come down. Why? Because TWC is a pure operator so when it buys content (generally provided by another monopolist), there is double marginalization that leads to higher prices than what a cartel would provide (yes, there is no mistake: a cartel providing complementary products prices lower than two independent complement providers). Comcast owning a lot of content may prevent this. Another concern is precisely Comcast's vast content assets. Given Comcast's increased clout due to the acquisition, it can now extract more surplus from other content providers or lock them out of its offering altogether, substituting its own content in the bundle. This may happen but neither of these strategies is likely to lead to higher subscription fees for consumers. It would simply mean less profit to other content providers. While in some cases one tends to we feel sorry, in others (think ESPN) less so.

Now, are high subscription fees a problem? The answer is a resounding YES! But they are not caused by mergers between cable operators. Rather, the issue is that there is not enough competition across network types. This may change if Telecom companies, DBS operators and Google develop alternative infrastructure. An enlightened regulator may not like this however, as this may lead to excess infrastructure investment. Another approach would be to regulate part of the offering. This is the case to some extent, but the approach needs an update. A good solution could be to regulate broadband access fees over cable. This could keep video prices in check and force cable companies to provide reasonably priced content bundles to consumers.