Comcast and Time Warner want to merge their cable operations in the US. They are the two largest Pay TV companies but the merger would result in them having 30 percent of the US pay TV market. That said, competition is, in many respects local, and the argument is that there the shares of each will not change much.
The issue arises upstream in the market. As Comcast and Time Warner are customer facing, the question is what happens to their bargaining power with respect to ‘content providers.’ We should note that Comcast itself is one of those content providers. Given that the merged entity will have a substantial position on the largest markets in the US, one would expect their buyer power to increase.
Economists have long had a difficult relationship with buyer or monopsony power (including the strange term that is monopsony). If two downstream firms merge and they can’t increase prices to consumers because of competition downstream, they may be able to extract better terms from suppliers. How might they do this? The traditional way would be to ‘withhold demand.’ By doing this they can squeeze suppliers and increase their own price-cost margins. That would not be good news. But that story also relies on their being some downstream market power as well.
Instead, if, and I’m not sure that is the greatest assumption here, there is sufficient competition downstream, then a merged firm has an incentive to squeeze suppliers to either (i) increase their own profits or (ii) give them a competitive advantage over rivals. One option doesn’t impact on downstream consumers while the other may even improve benefits to them. That is why Tim Wu wanted to see evidence of price falls for consumers as part of the rationale for permitting the merger. Similarly, it is why Tyler Cowen wasn’t worried at all.
Now, there is another consideration as pointed out by Paul Krugman; if there is an advantage to size in providing a competitive advantage to Comcast-Time Warner, then consequently, there will be increased difficulty for smaller competitors to compete and also reduced incentive to enter these markets. The only problem with this story is that it is not a full equilibrium story. If the merged entity can get better deals from content providers that, in turn, reduce competition and gives them the ability to have more of those better deals, then what of the content provider’s reaction? They don’t have to hand Comcast-Time Warner a competitive advantage, right? They can give the savings to smaller competitors. If they see through the equilibrium, that is precisely what will occur.
This is where economics seems to get messy but not really. For years this is precisely the set of back and forths that I have been researching on. The papers are technical (for example, here) but their message is simple: where this bites is where there is vertical integration — and that is the missing issue in terms of what has been discussed thusfar.
Comcast is a vertically integrated entity. It bought NBC Universal in 2009, giving it a substantial position in televised content as well as upstream content ownership. That became a full stake in 2013. What does all this mean? Well if Comcast really didn’t face competitive worries downstream (from those other than Time Warner) then it would already have a good bargaining position with content providers and so wouldn’t really need to integrate into them. Instead, when there are competitive worries (especially from other upstream content providers such as, say, Netflix) this is another story. Then there is much to be gained from vertical integration and, in this case, the merger is increasing the degree of vertical integration that now extends to markets where Time Warner had the larger downstream position. In other words, the issue here is not the horizontal merger (which doesn’t look like much). Instead, it is the vertical merger.
What are the consequences of that increased vertical integration? First, higher and not lower prices to Comcast-Time Warner’s competitors downstream both in cable and over the Internet. Second, potentially harsher terms from independent content providers for the merged entity’s cable TV infrastructure but also potentially its broadband infrastructure too — unless, of course, Net Neutrality is really a thing in the US which recent decisions might cause one to doubt.
Of course, with every potential harm to the public benefit is also opportunity. What would happen if, as part of the conditions to approve this merger (a) content assets were divested; and (b) Net Neutrality was enshrined? That may remove more structural impediments to competition and guarantee that this is a long-term win for consumers. It would be nice if someone were to propose that.