FSF Comments on Proposed Charter/TWC/BHN Merger Free State Foundation President Randolph May and Senior Fellow Seth Cooper submitted comments yesterday to the Federal Communications Commission in response to the Commission's request for comments regarding the proposed acquisition of Time Warner Cable, Inc. (TWC) and Bright House Networks (BHN) by Charter Communications, Inc. The complete set of Free State Foundation comments, with the footnotes, is here. Immediately below is the "Introduction and Summary" to the comments, without the footnotes. These comments are filed in response to the Commission's request for comments concerning the agency's review of the transfer of control of licenses in connection with the proposed acquisition of Time Warner Cable, Inc. (TWC), and Bright House Networks (BHN) by Charter Communications, Inc. These comments do not specifically endorse or oppose the proposed merger. Rather, they set out basic principles by which the Commission should evaluate all mergers, and they provide insights into the way this merger should be considered in view of those principles. Above all, the Commission's review should be guided by rigorous economic analysis with the focus on consumer welfare benefits. At all times it should be kept in mind that the proposed Charter/TWC/BHN merger is a "non-horizontal" merger. Commission precedents recognize that non-horizontal mergers typically do not pose anticompetitive threats. Charter, TWC, and BHN do not compete head-to-head. They serve different consumers in different geographic markets. Therefore, under the proposed merger, consumers will not lose a choice among video service providers or broadband providers. Subscribers in the markets served by any of the merging entities will have exactly the same number of choices of providers after the merger as before if it is approved. Furthermore, Charter/TWC/BHN poses no likely harm of foreclosure involving video programming because none of these entities have significant ownership interests in national video content. It appears all but certain that the merger would not enable new Charter to withhold affiliated video programming from competing MVPDs or OVDs. Charter/TWC/BHN likely would bring at least three significant benefits to consumers. First, the merger likely will enable acceleration of all-digital video service upgrades to more consumers than would be the case without the merger. Not all of TWC's or BHN's footprints have been converted from analog to all-digital channels. The merger likely will accelerate the pace of that important analog to digital technology transition. Second, consumers will also likely benefit from more rapid deployment of high-speed broadband Internet services. Within one year of closing, New Charter plans to increase broadband speeds from 15 Mbps to 60 Mbps throughout TWC's and BHN's all-digital footprints and continue TWC's plans for 300 ultra-high-speed deployments. And third, Charter/TWC/BHN likely will produce more competitive inter-regional and nationwide enterprise broadband service offerings. Further increasing facilities-based competition in the business enterprise market is consistent with the Commission's policy objectives. In fact, the proposed merger likely will further advance existing competition in the so-called "special access" services market far more than wrong-headed pleas for the Commission to re-regulate special access services. Larger geographic scale makes business enterprise offerings more attractive to businesses with multiple locations that are looking for simpler, streamlined services. It is in light of these basic characteristics and likely effects that the Commission, foremost, should undertake an analysis that is rooted in consumer welfare principles. Mergers and acquisitions constitute a critical component of free market competition. They are entrepreneurial activities involving calculated risk-taking in a free market process. Efficiency gains and profits are by-products of successful mergers and benefit consumers by strengthening innovative and competitive capabilities. Compelling justification should be required before government restricts the entrepreneurial freedom of businesses to combine or reorganize. Otherwise, bureaucratic decision-making needlessly and harmfully displaces the marketplace business judgments by competitors possessing critical knowledge about market opportunities and consumer preferences. Commission-imposed regulatory conditions that freeze or otherwise condition pricing options, programming content or lineup decisions, offerings of various service features and functions, network management capabilities, or other business and engineering judgments limit freedom to innovate and develop new products and services. In light of these considerations, any claimed harms must be demonstrated by compelling evidence before the Commission interferes with the entrepreneurial freedom and business judgments that lead to proposed mergers. Requiring clear and convincing evidence of harm helps prevent market competitors from opportunistically manipulating or unduly influencing the merger review process. And, in the event the Commission determines any of the claimed harms rise to the level of impairing consumer welfare, it must target narrowly any remedies imposed to address such harms. In the case of this proposed Charter/TWC/BHN merger, the presence of competitive choices in the broadband marketplace, including cross-platform facilities-based alternatives, makes it all the more essential that any Commission intervention be based on a compelling evidentiary showing that competition will somehow fail to protect consumers. The dynamism that characterizes the advanced telecommunications marketplace - that is, the market for digital, IP-enabled, cross-platform services such as wireline and wireless broadband Internet access services as well as multichannel video program distributor (MVPD) services - must inform the Commission's analysis of Charter/TWC/BHN's likely competitive effects. Data contained in the Sixteenth Video Competition Report (2015) indicates combined shares of cable multichannel video programming distributors (MVPDs) equaled about 53.9% of MVPD subscribers at the end of 2013. Combined shares of Direct Broadcast Satellite (DBS) MVPDs accounted for approximately 33.9% of subscribers. And telco MVPDs accounted for 11.2% of MVPD subscribers. Indeed, following the AT&T/DirecTV merger, the largest MVPD is no longer a cable operator. Today's video market offers consumers IP-based HD-capable MVPD provided set-top boxes, multi-room DVR and home networking solutions, cloud-based user interfaces, mobile applications, gaming consoles, Internet-connected smartphones and table computers, and home monitoring systems are among features available to consumers. Streaming apps and mobile platforms also provide many consumers access to cable programming. And MVPDs also make content available to Smart TVs and video game consoles. The online video distributor (OVD) market segment has been a powerful disruptor and growth engine. Subscription-based OVDs such as Netflix, HuluPlus, and Amazon Prime enable consumers access to video content through third-party media streaming devices, video game consoles, smart TVs, desktop computers, tablets, and smartphones. OVD subscriptions total 100 million or more - roughly equal to the MVPD subscriptions reported at the end of 2013.
The rise of OVDs coincides with the emergence of the streaming media devices. These are Internet-capable devices, and they are provided by firms unaffiliated with MVPDs and, specifically, unaffiliated with the merger applicants herein. Among U.S. broadband households, almost 20% have a streaming media device - whether the Roku 3, Amazon Fire TV, or Apple TV. Estimated global sales of streaming media devices will reach 86 million in 2019. And a new report in Broadcasting & Cable on October 12, 2015, says this: "Consumers with visions of streaming video dancing in their heads will have a new batch of over-the-top devices available to them this holiday season. Those choices will run the gamut with respect to pricing and capabilities, starting on the low end with the new (but more-capable) Google Chromecast adapter; to new players from Roku, Amazon and Apple; to higher-end products from TiVo and Nvidia." To be sure, OVDs and media streaming devices constitute video market segments in competition with the MVPD and MVPD-provided device market segments that include the merger applicants.
The rapid growth and ubiquity of broadband functions and applications have made that market a potent source of dynamism in the 21st century economy. As of mid-2014, wireline broadband networks with download speeds of 25 Mbps or more had been deployed to 85.3% of the U.S. population, and wireline networks with speeds of 10 Mbps or more had been deployed to 92.9% of the U.S. population. Wireless broadband networks with download speeds of 10 Mbps or more had been deployed to 98.2% of the population. Indeed, next-generation wireless network upgrades continue to increase speeds and capacity of wireless networks, making wireless an increasingly viable competitor to wireline broadband. Average LTE speeds range between 30 and 40 Mbps, enabling a wide range of video viewing functionalities. Far and away, most consumers now have wireless access to high-capacity wireless broadband services capable of streaming HD video. Given the horizontal nature of the merger and the dynamic state of today's video and broadband marketplaces, the Charter/TWC/BHN merger's potential consumer welfare-enhancing benefits likely outweigh any possible harms. The probability seems very low that Charter/TWC/BHN would create any problematic market power scenario or cause likely consumer harm. As already pointed out, the merging parties lack material ownership interests in nationwide video programming networks. This lack of vertical integration - that is, the lack of video programming to be delivered through its cable video service - reduces merger-specific foreclosure concerns to about zero. For that matter, however outdated and unnecessary they may be in today's marketplace, program access rules are already in place to address any claimed anticompetitive harms from foreclosure in video programming. Nor does the merger pose any recognizable potential that the combined entity would withhold affiliated video from competing OVDs or interfere with consumer access to OVD services. The merging parties' lack of vertical integration renders such concerns irrelevant. For that matter, the new Charter would not possess market share sufficient to ever succeed in such a strategy. The combined Charter/TWC/BHN would result in a broadband market share of only 21% of the nation's subscribers. Even assuming for the sake of argument that the new Charter had the means to attempt foreclosure, it almost certainly would lose public goodwill and customers to its many rivals who would hold themselves out as offering unfettered access to the Internet. * * * Randolph J. May, President of the Free State Foundation, is a former FCC Associate General Counsel and a former Chairman of the American Bar Association's Section of Administrative Law and Regulatory Practice. Mr. May is a current public member of the Administrative Conference of the United States, and a Fellow at the National Academy of Public Administration. Mr. May is a nationally recognized expert in communications law, Internet law and policy, and administrative law and regulatory practice. He is the author of more than 180 scholarly articles and essays on communications law and policy, administrative law, and constitutional law. Most recently, Mr. May is the co-author, with FSF Senior Fellow Seth Cooper, of the recently released The Constitutional Foundations of Intellectual Property and is the editor of the book, Communications Law and Policy in the Digital Age: The Next Five Years. He is the author of A Call for a Radical New Communications Policy: Proposals for Free Market Reform. And he is the editor of the book, New Directions in Communications Policy and co-editor of other two books on communications law and policy: Net Neutrality or Net Neutering: Should Broadband Internet Services Be Regulated And Communications Deregulation and FCC Reform. The Free State Foundation is a non-profit, independent free market-oriented think tank.
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