Why does it make sense for Comcast and Time-Warner to merge?

Folks:

I’ve been reading about the proposed merger of Comcast and Time-Warner (example from The  Guardian). Comcast is the monopoly Internet supplier here in Cambridge, Massachusetts. They provide a sluggish service that no tech enthusiast in Romania, Latvia, Israel, South Korea, or Japan would pay for (see Figure 15 in this Akamai report). If they have enough money to pay investment bankers, management consultants, etc., wouldn’t they be better off improving their service in order to compete with Time-Warner and Verizon? Could it really cost more to offer Latvian-grade Internet to American consumers than to merge two cable monopolies?

[Alternatively, if Comcast can't figure out how to deliver Latvian-grade services to Americans at a reasonable cost, maybe it would make more sense to merge with a Latvian cable/phone/Internet provider?]

Related: This BBC article on broadband costs worldwide; it turns out that Latvians pay very little for their luxurious Internet service.

12 Comments

  1. Steven

    February 18, 2014 @ 10:15 am

    1

    You ask: “Comcast is the monopoly Internet supplier here in Cambridge, Massachusetts. They provide a sluggish service that [...] wouldn’t they be better off improving their service in order to compete with Time-Warner and Verizon?”

    Wouldn’t they be smarter to go for true monopoly instead of half-assed duopoly (or whatever the situation is in Cambridge, Massachusetts)?
    With a real monopoly and weak legislation they should be able to provide sluggish Internet-access at an unreasonable price for another decade.

    And make sure that Netflix was throttled good and well for the benefit of Comcasts other offerings
    http://mattvukas.com/2014/02/10/comcast-definitely-throttling-netflix-infuriating/
    (Comcast really hates Netflix and most american isps provide a sluggish seervice: http://ispspeedindex.netflix.com/usa )

  2. ND

    February 18, 2014 @ 11:28 am

    2

    I think they probably have little incentive to improve their service, as they are close to a monopoly. I would imagine the real reason for the merger is on the buying end, not the selling end. They have to purchase programming from folks like NBC and so on. They’re constantly getting into skirmishes over those fees. If they merge they’re closer to being a monopsony (one buyer) and can squeeze the content providers.

  3. lv

    February 18, 2014 @ 2:17 pm

    3

    They’re not competing with Time Warner (for consumers) in any zip-code they “serve”. That’s their entire argument for allowing them to merge. Improving service and competing makes no sense at all in such a situation. Natural monopolies such as cable or utilities increase service mainly when governments regulate heavily (price and standard setting). They do compete in purchasing content

    What the merger would allow Comcast to accomplish is precisely to keep enforcing a monopoly and purchasing power for content – while locking/pricing out of content any other smaller players who may try to innovate or break into the market. No need to improve internet speed, while being able to keep raising prices, for example for TV content that’s not available to netflix, HULU, etc.

    I have Time Warner, and as much as I don’t like them, I dread Comcast if this is allowed. I don’t know if NBC is this horrible on their own or because Comcast owns them but the last time I watched Olympics online before Comcast bought NBC, I remember at least somewhat better experience than the junk site and commentary we got this time.

  4. gallbladder

    February 19, 2014 @ 12:02 am

    4

    Lattelcom is Latvian Internet company.

    “51% of Lattelecom shares are owned by the Latvian government, but the remaining 49% – by the Scandinavian company TeliaSonera AB. Lattelecom in turn owns 23% of the Latvian mobile operator’s Latvijas mobilais telefons shares.”

    “The telecom regulator SPRK tries to provide a competitive environment so that new operators can compete with Lattelecom which owns most of the last-mile connections.”

    Whereas Comcast has captured Congress and FCC…

    [Edited by moderator]

  5. patrick

    February 19, 2014 @ 12:48 pm

    5

    To be fair, it is easier to provide better service to a small country like Latvia or South Korea, than it is in the more sparsely populated US. If you have a thousand people living on one city block, you get a much better return on investment for upgrading service to that block.

    The other reason is perhaps that providers in other countries have some sense of shame and would rather “sleep the sleep of the just” by providing a quality product over squeezing out a few more dollars in profit. But then again, publicly traded companies are legally bound to maximize shareholder value, not maximize customer satisfaction.

  6. Michael

    February 19, 2014 @ 5:31 pm

    6

    Philip

    You likely saw this but if not it might help:

    http://blogs.reuters.com/felix-salmon/2014/02/17/monopolizing-bandwidth/

  7. Javier

    February 19, 2014 @ 10:44 pm

    7

    What about the notion of municipalities installing fiber and/or copper to each home (or at least to the curb), and allowing competing ISPs to provide Internet connectivity over said last mile circuits?

  8. philg

    February 19, 2014 @ 10:52 pm

    8

    Javier: I think almost anything is better than what we’ve got now. Competition sometimes works well. Government-provided service sometimes works well. An effectively unregulated monopoly like most Americans endure for their cable/Internet service is not something that anyone would expect to work well.

  9. Walter Mitty

    February 21, 2014 @ 7:45 am

    9

    I think the real problem is vertical integration between what I see as four distinct industries in the age of information.

    The first industry is conveyance. The best example is the old “phone comany” of forty years ago, when they were the only game in town, and when it was illegal to plug your own modem into their phone line. My local cable company and my local phone company each enjoy a kind of legal monopoly on “the last mile”. The idea of avoiding “wastefulk duplication” even if it means establishing a legal monopoly goes back to the 1880s, at least. This is likely to remain that way.

    The second industry is content creation. I don’t want to give just one example, but any film studio or even book publisher will do. And a book publisher could be just a mom and pop shop todey. This is where we most want free competion to prevent the suppression of content that some find useful or entertaining.

    The third industry is content reselling. I’ll give Netflix as an example. It’s not at all clear that this is a viable industry going forward. There are few people that choose their content besed on the reputation of the reseller. A company like Blockbuster bloomed and died in a very short span. And Blockbuster’s demise was mostly because it couldn’t change its business model to accomodate downloading fast enough. Downloading is really about conveyance rather than content reselling.

    The fourth industry is social network mediation, like Facebook or Twitter. The content here is mostly contributed by volunteers who expect that the benefits of social networking justify the efforts they put into providing free content.

    What I see companies like Comcast doing is attempting to leverage the monopoly status we give to conveyors into the other three industries, by buying out or subjugating the major players in the other three industries.If we’re going to have laws about this, we need laws that will obstruct vertical integration.

  10. J. S. Greenfield

    February 23, 2014 @ 3:47 pm

    10

    The Akamai data doesn’t support the argument you are making about broadband performance. It may not show the US to have the highest performance, but it certainly shows the US to have high performance.

    What’s more, Akamai identifies Massachusetts as the highest-performing state. So it’s hard to imagine that service in Cambridge truly is “sluggish” as you say.

    If there’s a problem with your connection, perhaps you need a service call. ;)

    As for cost, the data referenced in the BBC article is bogus. For a detailed explanation, see:

    http://cimc-greenfield.com/2014/02/18/are-isps-gouging-us-broadband-users/

    And as for Latvia, in particular, Ookla reports the average Latvian price for broadband is $26.40 with a median cost per Mbps/delivered of $2.49. If we PPP-adjust these figures (as the BBC-referenced data claims to be, and as Felix Salmon vehemently argued is the proper methodology), the PPP conversion factor for Latvia is 0.35, making the purchasing-power equivalent costs $75.43 and $7.11/Mbps. This compares to Ookla-reported US costs of $53.92 and $3.65/Mbps.

    Accordingly, it would seem that the Latvians are actually paying considerably more than those of us in the US.

  11. philg

    February 27, 2014 @ 2:51 am

    11

    J.S: Thanks for the info. I don’t understand the idea of adjusting Internet connection costs by PPP. It would make sense to me for restaurant meals where there is a lot of labor involved, but not for Internet where carriers all over the world pay the same for a roll of cable or a Cisco router.

    As for Massachusetts being the speed leader within the U.S. (like being a dwarf among midgets) I think that might be because a lot of towns have Verizon FiOS. Cambridge is not among them, however (nor Boston). And I have not heard of any plans for further expansion of FiOS.

  12. Paul Houle

    February 27, 2014 @ 6:10 pm

    12

    Wall Street put the kibosh on FIOS long ago. The trouble is that FIOS costs like $70 a month and why should they offer you that when you could use cell phone broadband and it costs more like $200 a month.

    They’ve really got people fooled into thinking that FTTH is expensive, while the truth is that FTTH is the least cost option everywhere, even in hard-to-serve rural areas.

    The issue with FTTH is that there are high labor costs in building it, but once you have built it is good for 50 years or more. Even if costs $3000 to wire a rural property it’s really nothing compared to (1) the lifespan of the system, (2) what you’ll pay in broadband, phone, TV bills, or (3) what money goes to fund the school that my son doesn’t go to because it is a magnet school for behaviorally disturbed kids from other schools in the district.

    All FTTN systems have expensive hardware that consumes electricity and fail a lot. DSL technology is hamstrung with patents, so there’s a good risk that the company that made the proprietary boxes in your network won’t have the right to make them anymore when a teenager drives through one next year.

    If you consider more than a 5 yr timespan, FTTH beats everything in terms of economics, but you see, Wall Street likes to make a quick buck and then make you pay for the high running costs of the network over the long term rather than put a little more money in the pot and run something that’s more profitable in a long term.

    We need a major restructuring in the telecom industry like the breakup of AT&T; at the least wireless and wired providers should be separated (AT&T and Verizon are campaigning in 50 states to be allowed to abandon wirelelines) and there should be reforms such as you buy “video dialtone” separately from TV so on one broadband network you could buy TV from competitive providers.

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