How will regulators assess the competitive impact of the proposed mega-mergers in the media industry?

In the 2010 Merger Guidelines, federal regulators emphasized their intent “to identify and challenge competitively harmful mergers while avoiding unnecessary interference with mergers that are either competitively beneficial or neutral.”  This is easier said than done when it comes to the rapidly evolving media industry. 

Earlier this year, Comcast announced its plan to merge with Time Warner Cable.  If approved, the combined firm would have more than 33 million multi-channel video program distribution (MVPD) and broadband customers nationwide.  In May, DirecTV, the largest direct broadcast satellite (DBS) provider and second largest MVPD announced its intent to merge with AT&T which is the fifth largest MVPD and second largest broadband provider.

Pre-merger: The breakdown of subscribers and market shares in the broadband and MVPD markets are provided in the table below.

	Broadband (1Q14)			MVPD (EOY 2013)
Comcast	21,068,000	24.6%		21,690,000	22.9%
DirecTV				20,253,000	21.4%
Dish				14,057,000	14.9%
Time Warner	11,889,000	13.9%		11,393,000	12.0%
AT&T	16,503,000	19.3%		5,460,000	5.8%
Verizon	9,031,000	10.6%		5,262,000	5.6%
Charter	4,788,000	5.6%		4,342,000	4.6%
Cablevision	2,788,000	3.3%		2,813,000	3.0%
Suddenlink	1,103,100	1.3%		1,177,400	1.2%
Mediacom	984,000	1.2%		945,000	1.0%
CenturyLink	6,057,000	7.1%
Frontier	1,873,000	2.2%
Windstream	1,170,400	1.4%
Other Cable	7,690,868	9.0%		7,213,894	7.6%
Other Telco	601,538	0.7%
	85,546,906	100.0%		94,606,294	100.0%
CR4	58,491,000	68.4%		67,393,000	71.2%
Cable %	50,310,968	58.8%		49,574,294	52.4%
Telco %	35,235,938	41.2%		10,722,000	11.3%
DBS %				34,310,000	36.3%

Source: Leichtman Research Group

So, will the elimination of two competitors in MVPD and one competitor in broadband, enhance the market power of the merged firms so that they are able to more easily raise price, reduce output, diminish innovation, or harm consumers in other ways? 

In approximately 35% of Pay-TV markets, there are two DBS providers—DirecTV and Dish, one cable MVPD, and one telecom MVPD --usually either AT&T or Verizon, but not both.  In the remaining markets, the number of competitors is either two (DBS providers) or three (two DBS providers and a cable MVPD).  Specifically, with the AT-T/DirecTV merger, the national footprint of DirecTV overlaps the local provision of AT&T’s U-Verse service in a subset of these markets.  Where there is overlap, the number of Pay-TV competitors would fall by one and concentration would naturally increase.  As a by-product, market concentration for Pay-TV at the national level would also increase.   With the AT&T/DirecTV merger, there would be no change in broadband competition since DBS providers with only one-way transmission capabilities do not independently provide broadband services. 

With the Comcast/TWC merger, the number of Pay-TV and broadband providers that consumers have to choose from would not change as the cable MVPDs and broadband providers do not compete head-to-head in any market.  However, the market concentration measured at the national level for both Pay-TV and broadband would increase considerably.

Post-Mergers: The subscriber count and market shares of the top firms in broadband and MVPD markets if mergers were approved with no conditions.

Broadband (1Q14) MVPD (EOY 2013) Comcast & TW                  32,957,000 38.5%                 33,083,000 35.0% DirecTV & AT&T                  16,503,000 19.3%                 25,713,000 27.2% Dish                 14,057,000 14.9% Verizon                     9,031,000 10.6%                   5,262,000 5.6% Charter                     4,788,000 5.6%    CR4: post-mergers                  63,279,000 74.0%                 78,115,000 82.6%

Regulators may be concerned with this increase in national concentration for a few reasons, particularly when examining the Comcast/TWC merger.  Among MVPD and broadband providers, Comcast owns the most content.  As a vertically-integrated firm, regulators will assess the likelihood that it will use its influence to extract greater fees from competitive, non-affiliated content providers and/or disadvantage them in other ways (e.g. unfavorable contract terms, discontinuation of service, poor delivery speeds for over-the-top content). 

The dilemma is that we are now at a major technological inflection point in the industry.  Would fewer players with greater scale (and market power) benefit growth and innovation more so than having smaller, regionally-based firms?  Does increased size allowing for greater efficiencies in capital deployment and negotiations for valued programming delivered over multiple devices benefit consumers?  Today, Americans spend less than an hour per week watching video over the internet.  This compares to 34-hours per week watching traditional television.  But, times are changing in consumer preferences as well.  Subscriptions to pay-TV are declining as increasingly consumers (particularly young consumers) consider broadband as a viable substitute to pay-TV (except for live sporting events) as opposed to a complement.  

Firms like Comcast and AT&T recognize that they have to adapt.  Part of that adaption strategy is acquiring assets they believe will solidify their market positions by offering a bundle of services – video and telecom, via wireline and wireless.  Will regulators agree that what is good for these firms is good, or at least not harmful, to the consumer?   It will require a crystal ball.  The rapidity of the change is what is going to make this decision a difficult one.  In a static world, I would say that regulators approve the merger with conditions, particularly to prevent foreclosure or any form of discrimination.  But, the world is not static.  It’s likely that other incumbents will look for strategic merger partners.  It’s possible that other firms will seek entry into broadband.  How will it happen and what will the impact be?  If only we had that crystal ball!