As big a deal as this is, we shouldn't overreact. The deal may fall through on antitrust grounds. There are legitimate business reasons why cable companies — squeezed as they are by content makers — feel the need to raise prices. And, as Brent Skorup of George Mason University's Mercatus Center points out, not all mergers succeed financially.
I spoke with Skorup by phone Friday. While he didn't come out and endorse the merger, he offered some reasons for giving the idea a chance.
Brian Fung: Okay. Should consumers run and hide from this thing?
Brent Skorup: When the news broke, Twitter just went crazy. My Twitter feed, almost all of it was negative. And I think people forget — we have this self-selection problem where the only firms we remember are the big firms that are around today. We don't necessarily remember the failed deals. AOL-Time Warner is a classic example. There was a lot of knee-jerk reaction on the problems it would cause. It was also a vertical merger — a content company merging with a distribution company. There have been many books written about how they didn't see the market changes that came along later — the rise of broadband, cable broadband and how these things upset markets.
With AT&T Broadband in 1999, that was the largest cable operator in the country — I didn't even know there was such a thing; I wasn't old enough to remember. But in doing some research, I found out it was one of the biggest companies around. They purchased some large cable companies, and then lost billions of dollars, and eventually sold it off for about half of its original valuation — to Comcast, in fact, in about 2002.
Sprint-Nextel: Like Comcast-TWC, it was a horizontal merger between companies in the same business. Sprint and Nextel were, again, a dramatic failure. So people forget this, and so there's all this concern for market power abuses that often don't pan out, particularly when cable companies occupy voice, TV and broadband, and they face large competitors in each one of those segments.
I don't know what the market is going to look like in five or 10 years, and they certainly don't either. And that gives me a little comfort. I don't anticipate the large competitive problems that a lot of people foresee.
As you mention, companies like Comcast are in multiple industries — voice, TV, broadband. If these technologies are all converging, how do we preserve competition?
It gets complex. Phone service is a national service, whereas video service is more local. How those things play out is pretty complicated. And that's one reason why the AT&T-T-Mobile merger — a horizontal merger, but they're national competitors — provided more of a problem than Comcast-TWC, which don't compete in the same markets.
Even if the two companies' service areas don't overlap, how likely is it, really, that customers have a choice of more than one provider?
Every local market will be different in that aspect. In an ideal market, you'd have 20 actors that all price themselves about the same. That's not how it works in the real world. You can still have very competitive markets with only a few players. For instance, I don't think anyone calls Web search a noncompetitive market, because switching costs are very low. Or mobile phones — Apple and Samsung have something like two-thirds of the market. There are a bunch of smaller players, like Motorola or Blackberry, and they're still competitive. Or take mobile operating systems. There's really only two — Android and iOS — but these are all competitive markets. With networks it's a little different; I think there's this mistaken view that you need a dozen competitors for a competitive market.
Building an operating system arguably costs less than rolling out an infrastructure network. Aren't the barriers to entry higher in the telecom industry?
I think Microsoft would disagree with that. They would like to be a mobile operating system major player. But you need substantial upfront costs for an app store. You need app creators to be attracted to your app store. That's very expensive.
How much more consolidation can we expect from the cable industry?
I suspect there are limits. What I predict would be several large players that compete against each other. That's emerging. We still don't know how that'll turn out.
When people think about monopoly, you think about AT&T. A lot of competition problems come with government permissions to be a monopoly. You saw this with AT&T and in the 1970s when cities gave an effective monopoly to the cable companies.
Can you unpack that analogy for me?
I think there's a similar dynamic between AT&T and these cable franchises. Public policy makers made the decision with AT&T that to get universal service, it's hard to do in a competitive market. So they essentially okayed a monopoly for AT&T on the commitment that they would give everyone universal service. You saw a similar thing in the 1970s and 1980s with localities and cable companies. To build out cable to a particular home or town, they gave a franchise to a single company and didn't allow competitors in there.
So those are government-granted franchises, or government-granted monopoly. Maybe that was the right public policy choice at the time, that we want universal service, but we're still living with those ill effects decades later, and it's important we don't misunderstand the nature of these.
That's starting to change in the broadband space, right? You see places like Austin attracting fiber optic competitors.
Yes. My understanding is that with Google Fiber, Google got some cities to waive local requirements to attract them.
Do you think that competition can be replicated in cable?
In cable? I'd say it's unlikely. We now have two national satellite TV companies that serve everyone. So essentially, in every town, you have a cable provider and two satellite TV providers. It would be tough for a cable company to go in and compete with those three. Maybe in some urban areas, but I'm not optimistic.