By Susan Crawford
CAMBRIDGE, MASS.: The big four U.S. cable companies, which control more than 60 percent of the U.S. market, may soon become just three. Charter Communications, now the fourth largest, has since last June been trying to buy Time Warner Cable, the second largest. And it now looks as if the shareholders of TWC, which has been floundering recently, may force the company’s board to sell.
If merger and acquisitions activity in the telecommunications realm had a soundtrack, this moment would be accompanied by the menacing bass rumble of Jaws. For if this deal goes through, customers of TWC, Charter and also Comcast Corp. — as well as all the content companies that want to reach those customers — will probably see prices rise, with no corresponding improvement in service.
After all, cable is a business that relies on scale; the game is to increase the number of subscribers and lower all possible costs, then grind away with one price increase after another. And when big operators get bigger, their scale grows.
Cable companies are also unregulated and face little competition. In 77 percent of the U.S., they operate even without competition from Verizon’s fiber-optic FiOS service, so their pricing power is almost unrestrained.
One big player working behind the scenes to push the proposed Charter-TWC deal is billionaire John Malone, who commands Liberty Global, the largest cable company in the world. Last March, Liberty Media, another company controlled by Malone, spent $2.6 billion for a 27 percent stake in Charter. With just 4.5 million subscribers, Charter is far smaller than Time Warner Cable (which has 11 million subscribers) and Comcast (20 million), but Malone knows that the combined company will be able to pay less than Charter spends now for pay-TV programming — because Charter would automatically assume the benefits of TWC’s programming contracts.
Charter also assumes that it can help TWC save on overhead costs and in other ways run the business better. Although the deal it’s offering is highly leveraged — the combined company would have about $60 billion in debt — Charter could use the payments on that debt to offset taxes. So far, this all sounds routine.
Here’s what’s not routine about this deal. More than 90 percent of Americans who subscribe to high-speed Internet access also subscribe to pay TV, and the relevant market is the bundle. The biggest distribution companies, with the largest number of subscribers, pay less for video programming than smaller companies do. In effect, anyone building communications infrastructure to compete with a large cable company has to enter two markets at once: the high-speed Internet access market and the pay TV market. A bulked-up Charter would pay even lower video programming prices and thus have even greater ability to block competition.
Malone likes the Charter-Time Warner Cable merger in part because it increases the consolidation of the cable industry, which has driven steep increases in stock prices for the entire sector — and, accordingly, made Time Warner Cable investors even more enamored of a deal. The price of their shares has already risen 38 percent on rumors of a deal.
Comcast will also probably share in the spoils through “swapping.” This is a practice that cable companies have followed since the 1990s to allow them unchallenged control of entire local markets. In 2002, for instance, after family-run Adelphia, then the nation’s sixth-largest cable operator, went into bankruptcy, its assets were divided between Time Warner Cable and Comcast. Comcast got Houston, Philadelphia and Minneapolis; TWC got Los Angeles, Dallas and Cleveland.
So once Malone gets control of TWC, he could turn around and hand Comcast TWC’s quasi-monopoly in New York state and the Manhattan, Queens, Staten Island and brownstone Brooklyn sections of New York City, thus allowing Comcast to neatly cluster its Connecticut, New Jersey and Philadelphia operations into a region of dominance that spans a huge swath of the East Coast. In return, Comcast could give Charter Los Angeles and cities in the Pacific Northwest and the Midwest. Both companies could do better selling to multi-location businesses that would otherwise straddle two separate cable areas. Both companies could lower their overhead — and raise their prices. Both companies could charge content providers more for access to their data and TV networks and thus access to their subscribers.
A better communications future for America would include choices for consumers and businesses. There are two paths toward increased choice. One is for cities to control their own dark (unlit by lasers), wholesale fiber networks, and allow many providers to compete in offering service. The other is regulatory oversight, something the Federal Communications Commission has so far declined to provide.
Right now, cable companies have the field to themselves, and their business, as John Malone puts it, “looks terrific.”
Crawford, the John A. Reilly visiting professor in intellectual property at Harvard Law School and a fellow at the Roosevelt Institute, is the author of Captive Audience: The Telecom Industry and Monopoly Power in the New Gilded Age. She can be reached at email@example.com. Follow her on Twitter: @scrawford.