The FCC risks over-conditioning the Comcast-NBCU merger

Tick-tock goes the Federal Communication Commission’s merger clock counting the days the agency has spent reviewing the proposed Comcast-NBC Universal merger. The FCC says it tries to act on merger applications within 180 days. The clock is now at “Day 215” — more than a month of working days past its self-professed goal.

The good news: The FCC is likely to vote soon to approve the merger. The bad news: There may be so many conditions attached to the approval that the new entity could be constrained from realizing the economic efficiencies envisioned when the merger was conceived.

The combination is primarily a “vertical” rather than a “horizontal” merger. Rather than offering services and products that compete directly (“horizontally”) in the marketplace, Comcast and NBCU offer complementary (“vertical”) services. Comcast mostly is a broadband services provider and cable television distributor, a transmission conduit for others’ content, while NBCU largely is a content provider, with its ownership of broadcast and cable television networks and a movie studio.

The risks of collusion and market concentration are considered much greater with horizontal combinations. In contrast, a vertical integration of complementary services is generally viewed favorably because it is intended — if all works out as the parties envision, which is not always the case — to lead to increased operating efficiencies through reduced transaction costs. The cost savings inure to the benefit of consumers, providing capital for investing in innovative services and facilities.

This is not to say that mergers like the Comcast-NBCU combination shouldn’t be scrutinized by the government to ensure the merged entity will not be in a position to exercise undue market power to the detriment of marketplace competition and consumer welfare. But with the FCC reviewing the merger under the Communications Act’s indeterminate “public interest” standard, the agency ought to exercise a large measure of self-restraint.

The agency’s five commissioners should be wary of the difficulty of predicting the course of the technologically dynamic and competitive communications and media markets — especially so given the agency’s spotty predictive record.

In this instance, the FCC has spent a considerable amount of time worrying about whether the combined entity would have the ability to impede development of the emerging online video marketplace. The suggestion is that the new entity, perhaps concerned about consumers “cutting the cord” — that is, giving up their cable TV subscriptions in favor of satisfying their video appetites online — will withhold programming from Internet video sites. So the FCC is considering conditioning its merger approval on a requirement that Comcast and NBCU share their programming assets with web video sites on “fair” and “nondiscriminatory” terms.

As a matter of sound competition analysis, the FCC’s concern is problematical. The commission has acknowledged that the video distribution marketplace in which Comcast competes is competitive, with two satellite television operators, telephone companies, and now wireless providers. In a January 2009 report, the agency declared, “[t]he marketplace for the delivery of video programming services is served by a number of operators using a wide range of distribution technologies.” And it added, “[t]he amount of web-based video provided over the Internet continues to increase significantly each year.”

The FCC’s handling of the ill-fated AOL-Time Warner merger should be a cautionary tale. Egged on by so-called “consumer” groups, the FCC spent almost a year considering the merger. In April 2000, in language nearly identical to that which the same groups now use to oppose the Comcast-NBCU merger, they proclaimed: “The merger would allow two enormous firms to dominate the market for broadband and narrowband Internet services, cable television, and other entertainment services, which could leave consumers with higher prices, fewer choices, and the stifling of free expression on the Internet.”