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Comcast-NBC merger gives regulators a key opportunity

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By Steven Pearlstein
Friday, December 4, 2009

Normally, I'm rather skeptical about mega-mergers -- more often than not, they wind up reducing competition without creating anything in the way of value for shareholders.

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I'm even more skeptical about mega-mergers that involve monopolists, which is how most cable companies started out in life, as holders of exclusive local franchises that, like broadcast licenses, became licenses to print money.

So it is particularly strange that I now find myself rather indifferent about the news that Comcast is buying up NBC Universal.

To begin with, rather than combining two companies that are head-to-head competitors, this deal combines companies that are located at different points of the value chain. NBC is primarily a producer of video content -- TV news and entertainment programming, along with movies from its Hollywood studio -- while Comcast is primarily a distributor of such content, most of which it buys from somebody else.

There was a time when this kind of "vertical" integration was viewed skeptically by economists and antitrust regulators, and it led to decisions like the one requiring big Hollywood studios to sell off their local movie theater chains in the 1950s. By the Reagan era, however, the intellectual pendulum had swung the other way, and as a result of the work of academics like Robert Bork and conservative economists of the "Chicago school," vertical mergers were largely viewed as benign. It was by that logic that mergers creating AOL Time Warner and Viacom were approved. As it turned out, the much-ballyhooed "synergies" proved elusive, the shareholders got hosed and those companies are now in the process of breaking themselves apart.

It's hard to know whether Comcast-NBC will meet the same fate as these earlier media mergers. The technology and the business models are now changing so fast that nobody knows how things are going to turn out.

It wasn't that long ago that it looked as if all the power was moving downstream to the distributors -- cable providers, phone companies and satellite operators -- which would extract most of the profit and turn content into a low-margin commodity, or no-margin, in the case of pirated music and free news Web sites.

But as the technology advanced and cable and phone companies invested billions to build and expand their next-generation networks, the competition has now become so intense that those huge profits are now in jeopardy. Now that you can get a bundle of phone, television and Internet service from any number of sources at roughly the same price, the focus is turning back to content, applications and services that can be accessed through these "pipes." Suddenly, it's distribution that's looking like the low-margin commodity and content that is king.

The logic of the Comcast-NBC merger is that by having a strong position in both content and distribution, it won't matter how all this plays out. For both Comcast and NBC, vertical integration is a hedging strategy that will ensure each emerges from the current competitive chaos as a survivor, no matter where on the value chain the profits and power end up.

Given how fast things are changing, and how uncertain the future is, it would be a mistake for the government to step in and stop such a merger on traditional antitrust grounds. Rather, the Justice Department, the Federal Trade Commission and the Federal Communications Commission should use the merger review process as an opportunity to craft a set of regulations for this new media world that would apply not only to Comcast-NBC, but to all competitors.

Broadly speaking, these rules should ensure that consumers can purchase the digital content and services they want, from whomever they want, without having to buy bundles of services or content that they don't want.

They should guarantee that independent creators of content have fair and reasonable access to distribution networks of vertically-integrated competitors such as Comcast-NBC.

They should ensure that independent distribution networks have fair and reasonable access to the content of vertically-integrated competitors.

And, yes, they should allow vertically integrated companies that invest in both distribution networks and content creation to earn a competitive return on their risk and their investment.

These are roughly the same principles of open access and non-discrimination that were used to open the Bell telephone monopoly to local and long-distance competition. They were the same principles that successfully brought competition to local cable monopolies from satellite TV and phone companies. And they are the principles that will ensure that the Internet continues to be a disruptive and democratizing force that lowers costs, stimulates innovation and enhances consumer choice, no matter who merges with whom.

There's still a week left to make submissions for my annual holiday column on corporate philanthropy. If you know of a company that went above and beyond this year in support of a charity or nonprofit, drop me an e-mail at pearlsteins@washpost.com. Briefly describe the effort, include a contact name and phone number and be sure to put "Holiday Column" in the subject line.

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