The Demise of Comcast-Time Warner: The Cost of Schizophrenia

On the Friday morning Comcast announced that it was abandoning its proposed merger with Time Warner Cable, CEO Brian Roberts went on NBCUniversal’s business channel to assure the street that Comcast was “Okay, and looking forward to the future.”

He respected the government’s judgment against the deal, he said, stressed there was no financial penalty or “walk away fee,” and insisted that the 14-month ordeal had been worth it, because of what it taught the company about itself.

But, query yet whether the company has learned the antitrust lesson from the ordeal.

Although the show’s hosts used their best efforts to elicit from Mr. Roberts the government’s rationale for blocking it, he diplomatically demurred. So, the legalities got lost. To block the deal, the DOJ’s Antitrust Division is required to convince a federal district court that the merger would tend substantially to lessen competition. And the FCC has to weigh whether the applicants carried their burden of showing that the deal is in the public interest.

Because the merging parties territories didn’t overlap, the DOJ’s draft complaint setting forth its antitrust case against the deal (they had 14 months to draft one) probably focused on the transaction’s vertical effects, that is, on the effects on websites that depend on reaching customers through broadband Internet access (57% of broadband consumers would have been served by Comcast-TWC) and on programmers that supply video to the cable-TV industry (30% of cable-TV subscribers would have been served by Comcast-TWC).

U.S. antitrust law struggles with anticompetitive conduct by which market power in one market is exercised in a complementary market. While the European “abuse of dominance” standard hands antitrust authorities there a tool to attack monopolists who leverage market power from one market to another, U.S. law has no analogous provision. Rather, U.S. law usually applies the rule of reason to determine whether contractual relationships between parties in separate markets constitute an unreasonable restraint or whether there is attempted monopolization of the complementary market. Such analyses are considered “vertical” because these markets frequently are at different levels of the distribution chain,

By contrast, the central concern of American antitrust law is with “horizontal” restraints, such as cartels, where rivals in the same market agree to restrain competition rather than compete on the merits or monopolization of a market by illegitimate means.

No doubt one reason the parties thought the Comcast-TWC merger would pass antitrust muster is that the company’s cable and broadband operations did not compete horizontally anywhere. Thus, any case the Antitrust Division would have brought would have entailed a rule of reason analysis of the merger agreement in light of its vertical effects on parties in adjacent markets, forcing the government to confront in court difficult issues of anticompetitive effects, market foreclosure, and buyer power in the programming and edge provider markets. The Comcast team probably thought these legal difficulties would carry the day for them at the DOJ.

They may even have been right, since the conventional wisdom is that the final blow came at the hands not of the DOJ but when Jonathan Sallet, the FCC’s general counsel, told the parties that he planned on recommending the transaction be sent to a year-long hearing before an FCC Administrative Law Judge. It would be war, but a war of attrition, without a defining battle. At that point the parties abandoned the deal.

The issues considered by the FCC are much broader, because it’s up to the Commission to judge whether the parties have carried their burden of showing that the transaction is in the public interest. The competition issues that faced the FCC in reviewing the deal under the public interest standard, however, were precisely the same vertical issues that confronted the DOJ under the Clayton Act.

Nonetheless, Comcast had more to work with at the FCC. For example, Comcast could tout the powerful near-national integrated telecommunications infrastructure the deal would have created, or the more efficient and rational coverage maps that would have resulted for itself and Charter, or make commitments to provide economical broadband to disadvantaged communities, or promise to invest immediately to improve the lot of TWC customers, or promise to continue to observe the conditions of the NBCUniversal merger, including open Internet rules, all of which they did.

But, this put the FCC is a bind. On the one hand, the network that Comcast was proposing would have been an engineering marvel and a truly capable rival to the legacy incumbent wireline networks operated by AT&T and Verizon, particularly in the business enterprise space. On the other hand, many players elsewhere in the industry were urging the Commission not to let the deal proceed, raising the same putative anticompetitive effects they had brought to the DOJ. It’s no wonder that when faced with an indeterminate public interest outcome the Commission’s staff recommended another year of study.

So, what is the lesson of the failure of Comcast-TWC? It was foreshadowed in the Wall Street Journal some months ago when they wrote that Comcast would be better off divesting NBCUniversal and making its money as a broadband provider. It takes only a moment’s reflection to trace nearly all of Comcast-TWC’s problems with the government to its vertical integration into content and its control of NBCUniversal.

This continues to be lost on Mr. Roberts, who reiterated that Comcast always wanted to be a “diversified company with the best networks.” But that’s not possible. If you want to be the best network, you can’t also be the best content provider.

It seems to be clear is that Comcast’s management is enamored with show business and that divestiture of its content assets to create a nationwide broadband network was for them a non-starter. “NBCU gave us a real opportunity to invest in theme parks,” Roberts said. “And Universal’s Fast and Furious 7 is the leading movie.” In other words, don’t worry about creating the Bell system for the 21st Century. We’re a great content company.

But, that’s because the government said they couldn’t be both. Comcast’s schizophrenia cost it this deal.

“Got to move the studio to Philly,” said Andrew Ross Sorkin.

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