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Here’s why blocking the Comcast merger is good for free markets

This Feb. 11, 2011 file photo shows the Comcast logo on one of the company's vehicles, in Pittsburgh. (AP/Gene J. Puskar)
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In the coming months, federal regulators will have to decide whether to allow Comcast, the nation's largest cable company, to acquire Time Warner, the second largest. The combined companies will control around a third of the national broadband market.

Many people, especially on the political right, will encourage regulators to take a hands-off posture, and let the market evolve without government interference. But that may not be a realistic option. If regulators give this deal a green light today, growing industry consolidation may force the feds to engage in more intrusive regulation down the road.

To see why, it's helpful to think about a transaction that was the mirror image of this one: the 1984 breakup of AT&T. In that case, AT&T was forced to break its local phone monopoly into seven "Baby Bells," each of which served a different part of the country.

The breakup didn't end monopolies in local telephone service, it just replaced one big monopoly with seven small ones. The point of the breakup wasn't to create a competitive market in local phone service. Rather, it was to promote competition in other markets, like long distance, telephone handsets, and networking, where AT&T also had a dominant position.

Seeking AT&T's dismemberment was a drastic step, and authorities didn't take it lightly. But they had spent more than a decade prior to that trying to promote competition in telecommunications by regulating AT&T's business practices. For example, a series of regulations governed AT&T's interactions with the nascent computer networking industry. These were the network neutrality regulations of their era, and they sought to ensure that AT&T wouldn't use its immense power to squash small computing companies that could eventually emerge as rivals. Similar regulations sought to promote competition in the market for long-distance phone calls and for telephones and other end-user devices.

Regulating AT&T effectively proved to be almost impossible. Before the breakup, the Federal Communications Commission was dependent on AT&T for the information it needed to regulate the monopoly effectively. The agency struggled to craft clear rules for an industry that was complex and changing quickly. And the need to constantly revise the rules created uncertainty for start-ups that entered the market based on the assurances of FCC rules. Investors were reluctant to invest in a business that was one rule change away from being crushed by a monopolist.

After AT&T was broken up, the FCC's job suddenly got a lot easier. Initially, the Baby Bells were still subject to many of the same regulations as their former parent company had been. But these new, smaller monopolies had a lot less bargaining power than their former parent had. Companies in the long-distance, device, and online service markets could bargain on a more even footing. And that meant that market competition, not regulation, provided the first line of protection for disruptive innovators. By 1996, things were going so well that Congress relaxed many of the rules that had bound the Baby Bells and, before them, the old AT&T.

But in recent years, the telecommunication market has been consolidating. The Seven "Baby Bells" have been reduced to three. The post-merger Comcast would control almost 60 percent of all cable broadband connections. And as a result, the FCC is increasingly being dragged into the same kind of issues it wrestled with a generation ago.

Take the 2010 interconnection dispute between Comcast and the Internet backbone provider Level 3. Level 3 got a big new contract to stream Netflix videos, and asked Comcast to upgrade the connection between the companies. Comcast, which had previously paid Level 3 for connectivity, demanded that Level 3 compensate Comcast instead. Level 3 cried foul, arguing that Comcast was abusing its market power.

The dispute was so complex that I won't try to delve into the details. Both sides made some good arguments. But the key thing to note about the dispute is that it wouldn't have happened in the first place if Comcast weren't as large as it is. A small cable company wouldn't have had the leverage to make this kind of demand.

There's a danger that Comcast will be able to use its growing power over broadband to undermine competitive threats such as Netflix. We don't know exactly how large Comcast needs to be before it will be able to do this. But the larger it gets, the greater the cause for concern. And it's much easier to block a merger before it happens than to seek the breakup of a company after it has merged.

So in the short run, approving the merger entails less government regulation than blocking it. But it will also put growing pressure on the FCC to adopt other, more intrusive regulations of Comcast's business practices. In the wake of Comcast's dispute with Level 3, some observers called for the FCC to begin regulating the rates that Internet Service Providers charge one another for interconnection. That's probably unnecessary given the present state of the market. But the larger Comcast becomes, the stronger the argument for that kind of regulation will be.

Correction: This story originally said Comcast would have more than 60 percent of cable broadband subscriptions. The figure, based on data from the third quarter of 2013, is actually 59.2 percent.