Following the U.S. Department of Justice and Federal Communications Commission’s approval of the deal between cable operator Comcast Corporation and NBC Universal (NBCU),
Tasneem Chipty provides an overview of what the formation of this joint venture – which gives Comcast, the nation’s largest cable operator and Internet service provider, control over all of NBCU’s programming content – might mean for competition.
Dr. Chipty, who has studied the marketplace for video programming distribution for more than two decades, explains the reviewing agencies’ antitrust concerns with the deal and why it was ultimately approved.
Dr. Chipty: This is the marketplace for the timely distribution of professional, full-length video programming to residential customers. (For an overview of the industry structure, see the figure below left.) On the demand side are the consumers who watch full-length video programs, and the advertisers who pay to have their advertisements reach these consumers. On the supply side are the traditional multichannel video program distributors (MVPD): cable operators, broadband service providers, direct broadcast satellite companies, and the telephone companies. Comcast is the largest MVPD in the marketplace today. These companies distribute basic cable networks like ESPN and the Food Network, pay cable networks like HBO and Showtime, broadcast networks like NBC and ABC, and on-demand programming.
Also on the supply side are online video programming distributors, such as Hulu and Netflix. They deliver video programming over the Internet but do not own their own distribution facilities; instead, they pay for access to Internet service providers. The marketplace for online video programming distributors is still emerging, but some believe that in the long term, these players could significantly alter the competitive landscape.
DBS – Direct Broadcast Satellite; BSPs – Broadband Service Providers; OVDs – Online Video Distributors; ISPs – Internet Service Providers; Telcos – local exchange telephone companies
*The dark teal boxes indicate where in the vertical chain Comcast controls assets.
Dr. Chipty: The deal introduces substantial vertical integration between programming and distribution. Comcast already had a foothold as a cable distributor and an Internet service provider, serving approximately 23 million cable subscribers and providing Internet service to more than 16 million homes. It also owned some cable networks. As a result of the deal, Comcast gains majority control (and eventually complete control) of all NBCU programming assets – including content producers, broadcast networks, national cable networks, and locally owned and operated TV stations. Comcast also acquires NBCU’s 32% ownership stake in Hulu. Comcast has significantly deepened its control of programming assets and has gained a foothold in online video distribution. Comcast now controls assets at every level of the vertical chain (see the figure above right).
The reviewing agencies raised three interrelated concerns regarding the merger, all of which have to do with access to critical inputs that promote competition in the distribution of video programming.
One concern was that Comcast would have the ability to control the prices charged to its rivals for NBCU’s content by raising its rivals’ costs or outright denying them the ability to offer popular content. In evaluating this concern, one has to recognize the role of the Commission’s program-access rules, which explicitly prohibit certain vertically integrated MVPDs from refusing to sell popular programming to their competitors or from selling the content on discriminatory terms. It is worth noting, however, that the program-access rules do not apply to retransmission of broadcast network content or to online distribution.
Another concern, according to the agencies, was that Comcast could have an incentive to intentionally slow the growth of Hulu, one of the more promising online distributors in the marketplace today. Though Comcast would not have majority interest in Hulu, the agencies’ concern is that Comcast may be able to influence critical strategic decisions at Hulu.
The agencies were also concerned that, as a provider of Internet access services, Comcast could have an increased incentive to selectively block or otherwise discriminate against online video distributors in the delivery of web content that would compete with their cable operations or with Hulu. To the extent that the Commission’s net neutrality rules survive the legal challenges they are currently facing, Internet service providers would be prohibited, at least in principle, from such discriminatory pricing. Even if the rules do not survive the legal challenges, however, Comcast has agreed to abide by them for a period of seven years.
Dr. Chipty: Ultimately, the agencies concluded that these concerns could be addressed with certain behavioral stipulations – with which Comcast has agreed to abide. In addition, Comcast agreed to a number of other public-interest commitments intended to increase local news coverage, enhance media diversity, and make broadband access more affordable to low-income families. For all these reasons, the agencies concluded the deal would be in the public interest. ■
Dr. Chipty has served as a consultant to Comcast, but she was not involved in the company’s recent deal with NBC Universal.
This feature was published in February 2011.