The Comcast/Time Warner deal isn’t about competition. It’s about power.

February 19

Defenders of Comcast's acquisition of Time Warner Cable have argued that there's nothing to worry about because the transaction won't reduce competition in the cable industry. They're right. The two companies already serve different parts of the country, they say, so combining the two firms won't reduce consumers' options. But the case against the merger isn't about competition. It's about power.

An infrastructure company like Comcast lives or dies by its success at the negotiating table. Comcast depends on partnerships with television networks, Internet backbone providers, companies running "content delivery networks," device makers, regulators, and more. In this kind of negotiation, size is an inherent advantage. The bigger a firm, the more likely it is to get its way.

As the nation's largest cable and broadband provider, Comcast already has an unparalleled ability to throw its weight around. Add in Time Warner's heft, and it will have even more leverage. That could have serious implications for the future of the Internet, the entertainment industry, and more.

Reshaping the Internet

For the last two decades, the core infrastructure of the Internet, known as the "backbone," has been an unregulated free market. This has been possible thanks to the Internet's unique structure. Large providers including AT&T, Verizon, and Level 3 Communications, sign "peering" deals where they exchange traffic without money changing hands. This structure makes the backbone market highly competitive; if you're not satisfied with your current backbone provider, you can always switch to a different one.

The market for residential broadband is different. In some parts of the country, a cable company such as Comcast or Time Warner is the only option for high-speed broadband service. In many other neighborhoods, there's only one other option—usually Verizon's FiOS or AT&T's U-Verse. But thanks to the competitive structure of the backbone market, this hasn't created significant problems for the Internet economy. Internet start-ups don't have to negotiate directly with Comcast or AT&T. They can sign up for service from an independent backbone provider, which had the heft to negotiate on behalf of their customers.

Traditionally, residential ISPs such as Comcast's were customers of backbone providers such as Level 3. That gave them limited power to dictate terms to the rest of the Internet. But in recent years there have been signs that the balance of power is shifting. In 2010, Comcast forced Level 3 to pay for a network upgrade. Comcast characterized the conflict as an ordinary interconnection dispute, and in a sense it was. But the outcome is significant because Comcast has a monopoly over access to its huge customer base. If Comcast is able to dictate terms of interconnection to the world's largest backbone providers, it will have the power, through them, it dictate terms to online service providers like Netflix and Google.

Acquiring Time Warner Cable would boost Comcast's market share from around a quarter of residential connection to around a third. That would give the company even more leverage in its negotiations with the rest of the Internet, and could upset the delicate balance of power that has allowed a competitive market to thrive online for the last two decades.

Going toe-to-toe with local regulators

The acquisition will also make Comcast less accountable to state and local regulators. Consider the comments of Seattle Mayor Ed Murray. Murray notes that the city's franchise agreement with Comcast—the agreement that gives the cable company permission to operate its network below public streets and other city-owned infrastructure—expires in January 2016. Murray vows to use the renewal process to ensure that Comcast is doing a good job of serving Seattle consumers. "If we determine Comcast has not lived up to their obligations, the City of Seattle will not renew the franchise agreement," Murray warns.

But the reality is that Murray won't have much leverage. If Comcast were a small company that only provided service in the Seattle area, then Murray would hold the power of life or death over it. Comcast would have to work hard to address the mayor's concerns or have its business shut down. But Comcast is a huge company. If the mayor demands major concessions in exchange for a renewal, Comcast can afford to call Mayor Murray's bluff. Cancelling Comcast's franchise would hurt Murray more than Comcast.

At the same time, Comcast's deep pockets give it significant clout in the political arena. Last year, Comcast spent thousands of dollars to defeat Murray's predecessor, Mike McGinn.

The larger Comcast becomes, the more powerful it will be and the less accountable it will be to public officials officials.

Rethinking the set-top box

Modern cable systems revolve around a set-top cable box. The device doesn't just unscramble individual cable channels, it also provides on-demand video functions and much more. These devices have gotten more powerful in the last two decades, but they're still clumsy compared with cutting-edge gadgets such as the iPad that are being designed in Silicon Valley.

Apple was rumored to be in talks with Time Warner Cable to provide a set-top box for the cable company's customers. If successful, such a deal could have revolutionized the set-top box market much as the iPhone revolutionized the smartphone market seven years ago.

Not only is Comcast's acquisition of Time Warner expected to interfere with those negotiations, but a more consolidated cable industry would make it harder for Apple to revolutionize this market. Apple's success with the iPhone depended on wresting control over the user experience from wireless carriers. To gain that control, Steve Jobs played one carrier against the other.

The more consolidated the cable industry becomes, the harder it will be for Apple, or any other Silicon Valley company, to manage a similar feat in the set-top market. A market without Time Warner will mean one fewer potential partner for technology companies, and a little less incentive for Comcast to take the risky step of giving a third party control over its customers' experience.

Feuding with Hollywood

Cable companies regularly feud with the owners of television networks over the cost of television programming. And major content companies like Disney and Fox are among the few entities with the clout to win these arguments. Channels like ESPN and Fox News are so popular that their owners have managed to demand hefty increases every time their contracts are renewed.

Acquiring Time Warner will give Comcast more leverage in these negotiations. This is one place where Comcast's greater size could actually benefit consumers, as the new, larger, Comcast could take a hard line on content costs and pass some of the savings on to its customers.

That raises a broader point. Apple, Disney, and Level 3 Communications are powerful companies in their own right. Maybe they'll do fine even if Comcast is allowed to get bigger. Indeed, maybe the new, larger Comcast will provide a counterweight to these other companies, to the benefit of consumers.

But there's an important difference between Comcast and these other firms: Hollywood and Silicon Valley companies are powerful, but they also operate in competitive markets. If Apple or Disney stops serving their customers well, there are plenty of companies ready and willing to take advantage of their mistakes.

City regulators don't face market competition, but they are accountable to ordinary Americans in another way: if they don't do their jobs well, voters can remove them from office.

Comcast faces limited public oversight and limited market competition. So there's little reason to expect a larger Comcast to use its greater power in ways that benefit consumers. And if Comcast abuses its expanded power, consumers may have little recourse.

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