Hold up there, Comcast.

Pulling the Plug on Comcast's Merger

Susan Crawford, the John A. Reilly visiting professor in intellectual property at Harvard Law School, is the author of "Captive Audience." Her book "The Responsive City," with co-author Stephen Goldsmith, will be published in September.
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Three years ago, cable titan John Malone -- chairman of Liberty Global, the largest cable company in the world -- said that when it comes to high-capacity data connections in the U.S., "cable's pretty much a monopoly now." Last month, Federal Communications Commission Chairman Tom Wheeler proved Malone's point: For high-capacity wired data connections to the Internet, Wheeler said that more than 80 percent of Americans have just one choice -- their local cable company.

The cable companies long ago divided the country among themselves, and it's about to get worse. A proposed $45 billion merger between Comcast and Time Warner Cable would strengthen the industry's near-monopolistic power. If the merger goes through, the chances of fiber competition emerging to challenge cable's dominance become even lower than they already are.

It's far from a done deal. Last week, the FCC stopped its 180-day merger-review shot clock, saying that answers to the commission's questions were incomplete. It looks as if there is a substantial chance that the deal may not be approved; the commission similarly stopped its informal clock for the AT&T/T-Mobile combination three years ago -- a merger that was eventually blocked.

It also looks as if the FCC is taking a serious look at the economic impact a more powerful Comcast would have on American consumers and businesses. And the FCC is not necessarily pleased that Comcast is introducing new facts many months after asking permission to merge: The commission said that 850 pages of documents recently filed by Comcast introduced "a relatively substantial body of new material" that is "critical to the review." The FCC's pause is good news for the country.

Should the merger be approved, and when the smoke clears after a series of ensuing swaps and sales among friendly cable guys, Comcast would control most of California, Oregon, Washington, and the eastern seaboard from North Carolina to New England.

At the same time, Comcast would stop serving Minnesota, Wisconsin, Indiana, Kentucky, Michigan and Ohio in order to avoid having more than 30 percent of the market of pay TV customers -- a threshold the FCC has considered as indicating too much market share. Even so, the deal would give Comcast control over the pipes to at least half of American homes.

And the deal would put Malone center stage, because his company Liberty Media now owns 26 percent of Charter Communications, which would benefit from the transaction, too -- swapping customers with Comcast in a way that allows the company to cluster its operations. (The companies call this division of markets "enhanced geographic rationalization.") Charter would become the second-largest cable company in the country.

If a nutshell, the Comcast-Time Warner merger would strengthen cable's already overwhelming power along the coasts while potentially relegating cable customers in important Midwestern cities -- including Detroit, Minneapolis and Indianapolis -- to second-class service. That's because they will be served by a new entity, GreatLand, that is being created by the lawyers at Comcast and Charter for purposes of the merger. The new company will be burdened with extensive debt, leaving it with what one analyst called "less-than-middling" finances.

From the perspective of the cable industry, none of this behavior is noteworthy. Cable thrives on scale and scope, and the plans of both Comcast and Charter -- to spread their costs across more customers in tightly focused areas -- is rational. The FCC has blessed this kind of clustering activity in the past, approving in 2006 an elaborate series of swaps in connection with the dismantling of Adelphia Cable of Philadelphia.

But here's the problem: Because none of these cable companies faces real competition, they have no incentive to invest in the fiber networks America will need to compete in the modern world. They have no incentive to pass along to consumers the lower prices their scale makes possible.

And they have no incentive to allow data to flow unimpeded between their "eyeball" networks and other connecting networks. Those connection points, such as between Comcast and so-called "transit" networks carrying traffic from data centers that don't want to buy services from Comcast, have become an opportunity to charge yet more fees untethered to any market mechanism.

What's good for the industry is this case isn't good for the consumer. The FCC staff should take its time.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the editor on this story:
Christopher Flavelle at cflavelle@bloomberg.net