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Comcast and Time Warner would like regulators to joint the 21st century

I just finished listening to a hearing in front of the U.S. House Sub-committee on Regulatory Reform, Commercial and Anti-Trust Law.  Eight panelists tried to persuade the committee that the proposed merger between  Comcast Corporation and Time Warner Cable was either great for the delivery of innovative products and services to consumers or would harm consumers with higher prices and restriction on the availability of content.  What I barely heard was any analysis regarding what type of companies Comcast and Time Warner actually are today.

Based on most of the questions posed by the sub-committee members, their constituents look at Comcast and Time Warner as either 20th century cable companies, sitting somewhere with a huge dish catching satellite signals from HBO, Cinemax, or Disney and sending their programming down some cable wire into a consumer’s home or the company’s that connect us to the Internet.  And the discussion regarding whether the merger will be harmful to competition seemed to center on competition in broadband access or the last mile.

Comcast and Time Warner don’t appear to look at their relevant market as just last mile or broadband services.  From the near beginning of their joint testimony Comcast and Time Warner describe their proposed combination as creating a “world-class communications, media, and technology company.”  Not only are Comcast and Time Warner responding to and servicing the commercial activity generated by online companies such as Amazon, Apple, Google, Facebook, and Netflix, but they are now competing against these companies as these edge providers enter the world of digital voice and broadband access.

The question the U.S. Department of Justice will have to answer is why should we treat the services of each company as a silo such that we carve out one relevant market by which to analyze two companies that operate in multiple markets based on the multiple services they provide.  If the Justice Department identifies a relevant market, then can they say that there is a monopoly in the relevant market and was that monopoly power abused?

Yes, Comcast is already a monster of a company.  It has two main businesses; Comcast Cable and NBC/Universal. Assuming that the Justice Department finds that the relevant market is a national one, can the DOJ conclude that Comcast would have a monopoly in cable services?  How about in content production?  In theme park ownership?  In broadcast television station ownership?  In broadband?

Speaking of broadband, will the merger mean no more deployment of broadband facilities?  Probably not.  It would be highly irrational for a going concern that invests in a DOCSIS 3.0 digitized platform to not squeeze the last ounce of value out of it by not selling broadband services to more consumers.  For this reason alone I don’t see broadband adoption being harmed by the merger.

Cries of the big bad broadband wolf by the opponents of the merger tells me that they are still living in the late 1980s.  Comcast and Time Warner aren’t cable companies anymore.  Ironically it is because they have grown beyond their original core cable service and gotten larger in the process that they are able to escape antitrust concerns, assuming regulators admit they are in the 21st century.

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Regarding Comcast, what would be the best scenario for content providers?

How would entrepreneurs, providers of information and services via the internet, be disadvantaged by this deal? Would they see any difference in terms of access to their consumers? Probably not. The current monopolist would be replaced by another monopolist.

Should content providers have to pay broadband providers to carry their content to consumers? In an ideal world, broadband providers should pay to acquire content and then resell it to their subscribers. Unfortunately that would mean either paying every rinky-dink content provider in the known universe or providing access to much fewer content providers.

The best option for the content provider would be for Comcast to enter into Time Warner Cable’s local franchise areas and compete head-to-head. That scenario could reduce content provider cost of access and increase a content providers profits.

Unfortunately for Comcast or other broadband providers they must face onerous and costly local franchise authority requirements just to enter a market.  A company of Comcast’s size is well aware of the franchising process and used to how long it takes, but this is not the issue of the day.  For Comcast it is about better leverage over programmers and reducing costs.

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FCC’s monopoly creates a monopoly on the H block

The Federal Communications Commission may be getting closer to fulfilling FCC member Jessica Rosenworcel’s worst nightmare for the H block spectrum auction, where instead of selling 65 megahertz of airwaves as authorized by Congress in the Middle Class Tax Relief and Job Creation Act, only 10 MHz will be sold and that sale will likely be to Dish Networks.

“I fear this approach fails the test”, Mrs. Rosenworcel stated back on 13 September 2013.  ”That is because holding a single auction of all 65 megahertz at once is bound to yield more interest, more bidders, and more revenue than dividing this spectrum up and holding an auction of the 10 megahertz H block alone.  As Wall Street analysts have noted, splitting this spectrum up for auction will likely limit interest in the H block to only one or possibly two bidders.  If that is true, we will have a retail sale–not an auction.”

Telecommunications analyst Larry Downes reiterated Mrs. Rosenworcel’s concerns in a piece for Forbes.com, arguing that not only has the expected competition for the H block been stymied, but the FCC has once again shown that picking winners and losers in a market results in failure versus letting market-based competition determine spectrum value while inviting more participants to bid.

In my opinion, the FCC is naive as to its own market power, that of a monopolist.  With the U.S. Department of Justice and the FCC playing anti trust tag team on large companies preferring to acquire spectrum in the secondary markets, the FCC is a bottleneck channel to additional spectrum.  Whatever supply signals the FCC sent out to the big four wireless carriers to ensure a multi-carrier demand, those signals probably didn’t have enough spectrum themselves.  AT&T and Verizon did not bid, which does not surprise me given their preference for the good stuff in the 600 and 700 megahertz range, and T-Mobile and Sprint decided to opt out.  Sprint, after jockeying for terms to its liking in the end decided it didn’t like the terms of the auction.  Mr. Downes writes:

“Sprint’s about-face is hard to explain.  According to an article in The Kansas City Star, Sprint CFO Joe Euteneuer surprised financial analysts in announcing that the company was walking away from the auction just a few weeks before bidder applications were due. Euteneuer ‘said the company took issue with the rules governing the auction,” according to the article, “but didn’t specify any complaints.’ “

Dish created a monopolist’s worse nightmare.  It became the only buyer of spectrum on an aggregated, national basis and with no other buyers available to bid up the per megahertz per population rate, the FCC, as Mr. Downes puts it in his article, was left holding the bag.

If this auction foreshadows the possible outcome of the reverse auction for broadcast television spectrum, the FCC should make sure that no restrictions are placed on carriers that wish to participate.

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Do I sense anti-trust promotion from smaller wireless carriers?

I just finished tuning into The Communicators on CSPAN-2. The guest was Steven Berry, president and chief executive officer of the Competitive Carriers Association. They represent a bunch of wireless carriers from T-Mobile and Sprint on down. Mr. Berry managed to give interim Federal Communications Commission chairman Mignon Clyburn some love this evening for her ability to move AT&T towards voluntarily allowing smaller carrier devices to inter-operate on the larger carrier’s network.

Mr. Berry addressed what he saw as the disadvantages of smaller carriers not being able to transmit a national footprint without the ability of their devices operating on a larger carrier’s network and touted Ms. Clyburn pro-consumer proclivities as helping bringing AT&T around in the 700 MHz band and hoped that the FCC would be able to help bring about the same results in 600 MHz band.

If you are a Run-DMC fan, think of the line from the “King of Rock” where the rap duo boasts that they and their music can knock down ceilings and walls. That’s why the 600 MHz and 700 MHz portions of the airwaves are preferably where cell phone companies would like to transmit their phone signals. Phone signals can travel long distances on these frequencies, which is ideal for rural wireless communications. Signals traveling on these airwaves can penetrate walls which is advantageous to urban communications where someone may be making a phone call from the basement.

What got my ears up was Mr. Berry’s discussion on consolidation in the wireless market. Mr. Berry expressed his concern that Tier 2 carriers were riding off into the sunset, pointing out that at least five Tier-2 carriers had gone the way of the Dodo bird over the last twelve months. Mr. Berry asked how far consolidation should go. His question sounded like an invitation for more anti-trust action on the part of the federal government, especially given his belief that Ms. Clyburn and perceived new chairman Tom Wheeler have consumer interests at heart. That’s a red flag for government action that promotes competition. We heard those words before two years ago when the U.S. Department of Justice sued to stop the acquisition of T-Mobile by AT&T.

Is anti-trust law designed to promote competition while protecting consumers or is it designed to keep a couple competitors at bay while leveling the technology playing field for everyone else? Again, Mr. Berry appeared to be hinting so considering the question may be premature.

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I thought the FCC liked it by the numbers

I admit while I respected their passion for consumers and telecommunications, I didn’t agree much with former Federal Communications Commissioners Michael J. Copps and Jonathan Adelstein. They had no problem keep the screws on the broadband industry. If a phrase started with the word “regulation” they were probably all for it. One thing I did appreciate them for, especially Mr. Copps, were their calls for better data collection by an agency allegedly driven by data.

Mr. Copps called for better data collection by the FCC back in 2009 as the agency addressed broadband adoption, determining competition in the video marketplace, and diversity in the ownership of broadcast media.

I never see progressive advocates for net neutrality or restrictive access to the reverse broadcast spectrum auctions make quantitative arguments for their positions. It’s as if mere assertions about how large broadband providers, such as Verizon and AT&T would foreclose the ability for smaller national or regional carriers, like T-Mobile and Sprint, from getting licenses necessary to access airwaves and provide service.

Last week, Verizon gave the FCC what it allegedly wants: data and quantitative analysis, this time in support of the New York-based broadband provider’s position that its participation in upcoming spectrum reverse auctions should be capped or otherwise restricted in any way. The study was conducted by Duke University professor Leslie M. Marx. Ms. Marx knows a little about telecommunications having served as the FCC’s chief economist. Here are some of her major findings:

1. Proposals to restrict the participation of Verizon and AT&T in the Incentive Auction do not address any real world problem, according to Professor Marx. The assertion that some smaller wireless operators are at risk of being foreclosed from the spectrum necessary for them to compete is inconsistent with those firms’ own behavior, including their repeated decisions to forego opportunities to acquire low frequency spectrum. Other evidence, including Sprint’s and T-Mobile’s marketing of unlimited usage plans, further belies the assertion that those operators face capacity constraints that could be exploited though a foreclosure strategy.

2. According to Professor Marx, even if a strategy by Verizon and AT&T to attempt to foreclose rivals was rational, implementing it would be difficult. A foreclosure strategy is particularly difficult to implement in the context of the Incentive Auction because higher bids on the part of buyers result in a greater quantity of spectrum being made available from sellers, thus increasing the costs of foreclosure. In addition, says Professor Marx, in an auction with anonymous bidding, it would be difficult for AT&T and Verizon to know whether they are bidding against the foreclosure targets or against one another. Furthermore, even if a foreclosure strategy were feasible, Verizon and AT&T would each have an incentive to “free ride” on the other’s willingness to pay supra-competitive prices for spectrum.

3. Based on the economics literature, empirical data from past FCC auctions, and a model of a two-sided auction mechanism, Professor Marx concluded that restricting Verizon and AT&T in the Incentive Auction would put at risk its twin priorities of raising significant revenue and reallocating a substantial amount of spectrum from broadcast to mobile wireless services. Her simulations of past auctions showed that, without Verizon and AT&T, revenue in the 700 MHz auction would have been 45% lower and revenue in the AWS-1 auction would have been 16% lower.

4. Professor Marx also analyzed bidding restrictions that would not fully exclude Verizon or AT&T, such as spectrum aggregation caps. According to her findings there are indications that any restriction that causes a material reduction in the participation of Verizon and AT&T risks a significant reduction in auction revenue and a failure of the auction.

In short, Sprint and T-Mobile don’t act like they are hurting for spectrum and have ample access to it given their recent mergers with SoftBank and MetroPCS respectively. Good old fashioned economics doesn’t support their policy position either given that the more bidders participating in an auction, the greater the bids and the revenues that come along with it.

Rather than listen to David vs. Goliath assertions as espoused by the U.S. Department of Justice, the FCC pay attention to the numbers and admit to the conclusion that everyone else has arrived at: that capping access to spectrum is bad public policy.