What The Department of Justice Order In Comcast/NBCU Tells UsJanuary 20, 2011
In all the hoo ha about the Comcast/NBCU Merger, few folks troubled to read the Department of Justice Competitive Impact Statement, Complaint, and Consent Decree. That’s rather unfortunate, as these documents sets forth a straightforward case under the antitrust laws for program access conditions for online competitors and for network neutrality. Here’s the short version: Comcast pre-merger makes almost 30 times more money from providing cable service than from programming revenues. Even adding all of NBCU’s revenue, Comcast will still make more than twice as much from selling cable service ($34 billion) as from programming ($16.9 billion). Anyone who can do basic arithmetic would therefore conclude that yes, Comcast’s incentive to protect its cable business from erosion by online distributors (or even from traditional rivals) outweighs the potential gain from increasing programming distribution. As an added bonus, for those ideologically committed to believing otherwise, turns out Comcast’s own documents agree with the simple arithmetic and not the fun theoretical models their experts submitted. Which is why (among other reasons) DoJ continued oversight is not merely something extra. It really matters.
Lets break this out some below . . .
No, I’m Not Happy About The Merger. But That Doesn’t Mean Everything About It Sucks.
As I said back when Comcast/NBCU first announced the merger, I wish it weren’t happening. We filed our opposition, fought alongside our allies in the public interst community, and lost. But as I wrote after the last major Comcast merger, and many times before or since, you rarely get clean wins in the policy game. A lot of times the measure of success or failure is about trying to avert total disaster while simultaneously trying to set up a path to win on the larger issues. Yeah, we all hoped after November 2008 the world had changed and we could take giant steps forward rather than fight for every inch, or even try to hold on. The challenge for all of us comes in gritting our teeth and focusing on the ground game. That includes the debate I seem to have after every major merger on whether we managed to get something valuable or if we got played for suckers.
Next, I need to translate one annoying piece of jargon. The term “multichannel video programming distributor,” usually referred to by its acronym MVPD, means cable or any other subscription television service, like direct broadcast satellite (DBS). To this we now add the new term “online video distributor” or OVD. As we shall, one of the important points is the that DoJ says OVDs are MVPDS like DBS. Say that 3 times fast. Now add a drum beat. Insert music riff on video services competition.
OK, onto the analysis.
Everyone loves to pick on the FCC, tell the FCC how stupid they are, and how wonderful real antitrust is. In fact, both Republican Commissioners took the FCC to task just last month in the Network Neutrality Order for failure to do a market analysis. Enter DOJ to provide some extremely useful market analysis and hard numbers justifying regulation in the “wildly competitive” video market.
The Market and Comcast’s Incentives, Now With Real Numbers and Simple Math!
The DOJ Competitive Impact Statement begins with the description of the merger applicants and the relevant markets for video programming and programming distribution. As noted above, DoJ provides some yummy crunchy number goodness to make the incentives question a matter of simple arithmetic. Now take a brief wander over to the the Complaint. Note that while Comcast’s national share of the MVPD market is around 30%, Comcast remains dominant in all its local markets, with market share above 50%.
Of particular importance, the DoJ analysis places the emerging OVDs as direct competitors to Comcast in the same way as satellite providers or telcos. OVDs represent the only new competition likely to emerge any time soon, and therefore the only hope for further competition in the local markets where Comcast maintains dominance. However, without access to programming – especially “must have” programming such as NBCU programming – OVDs cannot compete. Furthermore, control of NBC programming would allow Comcast to seriously disadvantage even traditional competitors.
The Real Juicy Stuff and Some Speculation About Juicier Stuff
Now we get to the fun part. In the section titled “Comcast and other MVPDs reaction to the growth of OVDs,” the DoJ says:
Comcast and other MVPDs recognize the threat posed to their video distribution business from the growth of OVDs. Many internal documents reflect Comcast’s assessment that OVDs are growing quickly and pose a competitive threat to traditional forms of video programming distribution. In response to this threat, Comcast has taken significant steps to improve the quality of Fancast, its own Internet video service. Among other things, Comcast has attempted to obtain additional – and at times exclusive – content from programmers, and has made Fancast’s user interface easier to navigate. Comcast also has increased the quality and quantity of the VOD content it offers as an adjunct to its traditional cable service.
In addition, Comcast has created and implemented an “authentication” system that enables its existing cable subscribers to view some video content over the Internet if the subscriber already pays for and receives the same content from Comcast through its traditional cable service. Internal documents expressly acknowledge that “authentication” is Comcast’s and other MVPDs’ attempt to counter the perceived threat posed by OVDs.
First let me translate. Whatever Comcast may publicly say about not worrying about competition from Netflix or other OVDs, and whatever delightful theoretical models Comcast’s paid experts produced to show that Comcast would have no incentive to withhold its programming, Comcast’s actual real world strategy was (to paraphrase Conan the Barbarian): CRUSH OUR ENEMIES, DRIVE THEM BEFORE US, AND HEAR THE LAMENTATIONS OF THEIR SHAREHOLDERS! Apparently, Comcast’s executives can do the simple arithmetic that eludes merger critics bemoaning the “shakedown” of innocent little Comcast. When you make $34 billion from providing cable services, and less than half of that from programming, you are going to prefer to protect that revenue stream rather than give a direct competitor the programming it needs to take that money away from you on the chance of making a few extra programming dollars.
Now let me dive off the deep end into pure speculation. I was frankly surprised when I heard that Comcast was willing to accept extensive conditions relating to online video and a requirement for stand alone broadband service, given how much Comcast has strenuously resisted such conditions in the past and in this merger. Given the D.C. Circuit’s active hostility to both antitrust generally and cable regulation specifically, and especially after the November election and general change in atmosphere to more “pro-business/anti-regulation,” why didn’t Comcast tell the DoJ to bugger off and make them file a lawsuit?
The above quote suggests an answer. The DoJ found some really good dirt in the document review. Something like: “Dear fellow MVPD competitors, thank you for attending last week’s meeting on ‘Working Together In Violation of the Antitrust Laws to Crush The OVD Competition Threat.’ As promised, here is the slide deck and summary of our strategy. I remind everyone this only works if we all agree to kick the crap out of any independent programmer that tries to sell content online outside our authentication system. Thank you for your cooperation. We would hate to jack up the price of NBC retrans agreements to compensate us for our lost revenue. 😉 TTFN Comcast.”
Well, maybe not that good. But still, I suspect there was enough really good supporting evidence about Comcast’s effort to snuff out OVD competition and its market power over programmers in the documents that Comcast did not want to risk DoJ filing a lawsuit. Even if the D.C. Circuit would chose to ignore something like that (and I would not put it past them), getting that kind of dirt in the public record would be damn embarrassing and might prompt some kind of regulatory response. I will also note that Comcast refused to turn over some documents to the FCC (although FCC staff reviewed them at DoJ), so that even signatories to the double secret protective order did not get look at them and they are not part of the official FCC record, which makes me a bit more confident in my guess.
But even without this last bit of speculation, the basic and critical point still stands. This isn’t some whacked out speculative flight of fancy by a power-mad FCC to “shakedown” poor little Comcast and NBCU. Even under the highly restrictive Clayton Act antitrust analysis, Comcast has both the incentive to block OVDs and a plan to do so. Acquiring control of NBCU’s programming would further that plan, so we need conditions to keep that from happening.
You may ask, if DoJ had such great stuff, why did they allow the merger at all? Because the sad truth is that the whacky judicial activists on the D.C. Circuit might very well just ignore all the evidence and say “Whatever. We hate regulation. Markets rule!” So rather than risk spending years on litigation and ending up with a precedent saying “Even if Companies say they plan to crush competition, that is not enough to support an antitrust complaint,” DoJ went for conditions.
Antitrust Analysis In Support of Network Neutrality
DoJ then takes this basic antitrus analysis and says “well, if I want to crush OVDs, and I am the largest broadband provider in the country, would I possibly mess with their traffic just a tad to persuade subscribers to stick with my cable service rather than ‘cut the chord.'” Using the same simple arithmetic, (protect my $34 billion cable service market) x (no cost to me)=I Will Mess With Netflix Traffic In A Friggn’ Heartbeat, the DoJ determined that, yes, there was a likelihood Comcast might be tempted to do that to kill OVDs and imposed a suitable network neutrality condition.
Although DoJ’s antitrust analysis applies only to Comcast, we should consider how it extends to network neutrality as a whole. At this point, just about every wireline broadband provider is also an MVPD. While I expect most don’t make nearly as much money as Comcast from their cable services, the basic equation is still the same: (protect my cable business from competition) x (at no cost)=I Will Mess With Netflix Traffic In A Friggin’ Heartbeat.
As this argument has not persuaded diehards in the five years we’ve been fighting about this, I’m not sure if DoJ basically confirming this in the antitrust context will have huge impact. But again, it’s not just whacky-mad-to-regulate-FCC and the Raging Infocommies with their looney conspiracy theories. If you respect what our antitrust experts say, then you ought to respect it when the FCC says the same thing.
The Importance of DoJ’s Independent Enforcement
Finally, I want to stress the importance of continuing DoJ oversight, and not simply because of my usual skepticism about the FCC actually standing up to the cable industry. If Congress actually does succeed in stripping the FCC of any authority for anything having to do with the Internet, that would arguably compromise the FCC’s ability to enforce the merger conditions. Furthermore, apart from the effectiveness of the conditions themselves (about which I hope to write more later), the fact that the DoJ will maintain a watchful eye over Comcast from this point forward does have impact. For those who scoff, I will point out that Apple owes its continued existence today to the fact that Microsoft, in an effort to stave off DoJ action to enforce its 1994 decree, rescued Apple from financial collapse and reinstated Steve Jobs as head of the company. Finally, unlike the FCC conditions, the DoJ can petition the court to extend the conditions if circumstances warrant. That seems unlikely to happen, but it does improve the odds that Comcast will behave, or at least moderate its behavior, in the meantime.
Folks Ought To Show DoJ Some Love Here
As FCC-bashing is the craze currently sweeping our nation’s capital for the umpteenth time, I don’t expect the DoJ action to get much notice. To the extent folks do notice it, I expect they regard the DoJ as shamefully caving to Big Media. But the sad truth is that the D.C. Circuit and the Supreme Court have done a heck of a job together over the last few years gutting the antitrust laws — including permitting with no conditions a number of mergers DoJ and the Federal Trade Commission (FTC) had tried to block. In the circumstances, I think the DoJ did damn fine work that lays the foundation for a genuinely competitive and successful online video distribution to emerge. They ought to get credit for that.
About Harold Feld
Harold Feld is Public Knowledge’s Senior Vice President and author of “The Case for the Digital Platform Act,” a guide to what government can do to preserve competition and empower individual users in the huge swath of our economy now referred to as “Big Tech.” Former FCC Chairman Tom Wheeler described this book as, “[...] a tour de force of the issues raised by the digital economy and internet capitalism.” For more than 20 years, Feld has practiced law at the intersection of technology, broadband, and media policy in both the private sector and in the public interest community. Feld has an undergraduate degree from Princeton University, a law degree from Boston University, and clerked for the D.C. Court of Appeals. Feld also writes “Tales of the Sausage Factory,” a progressive blog on media and telecom policy. In 2007, Illinois Senator Dick Durbin praised him and his blog for “[doing] a lot of great work helping people understand how FCC decisions affect people and communities on the ground.”