The FCC’s Merger Conditions in Charter-TWC

Some economic thoughts are just too complicated for Twitter. I need about 560 words to vent properly on the merger conditions that the FCC imposed on Charter-TWC. So sit back.

The first condition that deserves economic scrutiny is the FCC’s seven-year zero-price regulation on interconnection. For seven years, Netflix will make zero contribution to Charter’s recovery of broadband infrastructure costs. Although economists object on efficiency grounds to placing 100 percent of cost recovery on the more price-sensitive side (broadband users) of this two-sided market, at least this condition bears some resemblance to the FCC’s theory of harm–namely, that the combination of Charter and TWC would increase the merged firm’s pricing power vis-a-vis national content providers such as Netflix. But if you really believe this, as my liberal friends do, then why not just block the merger? Why approve a merger that facilitates the exercise of market power only to regulate that exercise out of existence?

That Charter offered up this condition to see the deal though, or that Charter had not previously charged for interconnection fees does not make this condition anything less than blatant price controls. Apparently, price controls are in vogue these days, with the FCC regulating the price of business broadband service at both the wholesale and retail level. But to an economist, this stuff is hard to swallow. Consumers hate higher prices, but high prices are also a signal to broadband rivals to deploy duplicative networks. If you think there aren’t tradeoffs, check out what’s going on across the pond, where price regulation (in the form of mandatory unbundling) and the absence of facilities-based competition go hand in hand.

The second condition that riled me up was the obligation for Charter to invade a rival cable operator’s territory. This requirement is misguided for at least two reasons. First, the merger of Charter and TWC does not reduce competition in the provision of broadband service to any household in America, as the two cable operators serve non-overlapping territories. This condition, like so many other FCC merger-related requirements in the past, is completely divorced from the competitive harms raised by the merger. It is yet another example of the FCC using the merger review process as a means to regulate the industry.

Second, if Charter satisfies this overbuild requirement in the territory of a cable operator with fewer broadband subscribers, then the requirement perversely increases concentration at the national level.

To see how, consider the following illustrative example: Charter invades the territories of Cox, Cablevision, and other smaller cable operators, shifting three percentage points of market share (about 1.3 million subscribers with speeds of 10 Mbps down or faster) towards Charter. (The market share figures are from a January 26, 2016 story in Ars Technica.)

 Provider Subs Post Merger Share Squared Subs Post Invasion Share Squared
Comcast 29% 841 29% 841
New Charter 24% 576 27% 729
Cox 5% 25 4% 16
Cablevision 4% 16 3% 9
Suddenlink 1% 1 1% 1
Mediacom 1% 1 1% 1
Wide Open West 1% 1 1% 1
Cable One 1% 1 1% 1
RCN 0% 0 0% 0
Other Cable 5% 25 4% 16
Verizon 9% 81 9% 81
AT&T 12% 144 12% 144
Century   Link 4% 16 4% 16
Frontier 1% 1 1% 1
Windstream 1% 1 1% 1
Fairpoint 0% 0 0% 0
Cincinnatti Bell 0% 0 0% 0
Other LECs 1% 1 1% 1
Other 1% 1 1% 1
TOTAL 100% 1,732 100% 1,860

As the table shows, if Charters takes subscribers from smaller cable operators, then nationwide concentration (or HHI) increases from 1,732 to 1,860. This is just one illustration, and the result would hold so long as Charter invades any cable operator’s territory save Comcast.

Recall the FCC’s theory of harm is that the merger would permit Charter to exercise market power vis-a-vis Netflix. By perversely increasing nationwide concentration, the FCC’s overbuild requirement will have strengthened Charter’s pricing power!

There. I’m done.

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