Quantifying Comcast's Monopoly Power
from the merger-scrutiny dept
Comcast is a monopoly. The question is, how much of a monopoly is Comcast, and how much of a monopoly will it be after it absorbs Time-Warner Cable (TWC)?
To help quantify market influence, economists use the Herfindahl–Hirschman Index (HHI), a metric that is calculated by adding the squares of the market shares of every firm in an industry. HHI produces a number between 0 (for a perfectly competitive industry) and 10,000 (for an industry with just one firm).
Using HHI, antitrust law puts markets into three categories:
- Unconcentrated Markets: HHI below 1500
- Moderately Concentrated Markets: HHI between 1500 and 2500
- Highly Concentrated Markets: HHI above 2500
For HHI calculations, the question becomes: a percentage of what market? Discussions of the Comcast-TWC merger have often noted companies’ shares of both the broadband and cable TV markets are comparable. Although their market shares in Internet and TV are similar, the difference in importance between the two markets cannot be overstated. Residential broadband is how every person reaches the Internet. In time, the Internet will become the way to reach almost all content.
By contrast, cable television is close to being an anachronism. Companies like Netflix, Amazon and YouTube (Google) already provide most of what cable television offers. In addition, new technology—Internet technology—allows much greater flexibility in the content consumers choose. Consumers do not need to subscribe to individual channels or watch advertisements—at least not to the extent they used to.
Because of how important the Internet is, the Comcast-TWC merger is primarily about broadband, not cable television. So the question is, what share of the high-speed Internet service will Comcast have? According to Free Press, Comcast-TWC would have 47% of truly high-speed broadband service. This figure is extremely conservative. It ignores that the Comcast-Verizon duopoly has many methods at its disposal—most importantly, dividing up geographic markets (“I’ll take Philadelphia, you take New York”) and dividing up entire industries (“I’ll take residential broadband, you take wireless”).
Comcast’s CEO has admitted that Verizon FiOS is Comcast/Time-Warner’s only competitor in high-speed Internet service. And, Comcast has admitted that it has 40% of the high-speed broadband market. Comcast-TWC would have a subscriber base that reached 70 million, and, according to CableTV.com, Comcast-TWC service would be available to 70% of the United States. According to WSJ, More than 61% of consumers would have one cable company serving them.
These figures do not take into account regional dominance, which means that they dramatically underestimate the limited consumer choice and market consolidation across industries. Competition (or lack thereof) in geographic markets is extremely significant. Here, by Comcast’s own admission, pre-merger Comcast and Time-Warner did not compete in any markets.
In addition, Comcast’s national market share does not take into account market share in related markets?which present additional anticompetitive harms, but are not factored into the HHI calculation. For Comcast, its market share ignores its interest in Hulu, NBC Universal, and other content industries. In addition, Comcast ties its high-speed broadband connections to cable television and landline phone service?another factor not taken into account in the HHI calculation.
Recall that markets with a Herfindahl?Hirschman Index (HHI) between 1500 and 2500 are problematic; above that, the market is consolidated. Therefore, Comcast’s admission of 40% market share automatically puts the Internet service market into the middle category of a “moderately concentrated” industry. In other words, without factoring in the market share of Comcast’s competitors, and using Comcast’s own figure, there is still limited competition in high-speed Internet service.
This market share calculation also ignores the effect of dominating local markets, the tying of television and phone service, and the business interest in competing content industries. In short, a raw calculation of market share ignores market power.
Comcast has argued that—regardless of the competitive landscape in Internet service and cable television—the merger will not result in “merger-specific” harm. That is, the Internet may already be monopolized, but allowing it to acquire Time-Warner Cable will not make it any worse.
When analyzing merger-specific harm, antitrust law puts substantial weight on whether a “significant” competitor will be eliminated and how the merger will affect market concentration:
Mergers resulting in highly concentrated markets that involve an increase in the HHI of between 100 points and 200 points potentially raise significant competitive concerns and often warrant scrutiny. Mergers resulting in highly concentrated markets that involve an increase in the HHI of more than 200 points will be presumed to be likely to enhance market power. The presumption may be rebutted by persuasive evidence showing that the merger is unlikely to enhance market power.
According to conservative estimates, Time-Warner has about 13% of broadband customers in the U.S. That means that the increase in HHI resulting from the merger is 169 points. According to the Merger Guidelines, Comcast’s acquisition of Time-Warner Cable would “raise significant competitive concerns and warrant scrutiny,” even if Comcast didn’t have dominant market share (which it does). Scrutiny of the deal reveals that Comcast-TWC would have significant leverage in other industries: cable television, content (such as sports), and phone service.
Acquisitions involving a firm with a majority stake are almost always anti-competitive, because, by definition, they occur in a concentrated industry and result in the largest firm gaining market share. When a merger between smaller competitors occurs, it is less likely to be anti-competitive. The best examples of this distinction between dominant-firm acquisitions and non-dominant firm mergers are the Comcast-TWC, Sprint-T-Mobile, and AT&T-DirecTV transactions.
Comcast and Time-Warner are the two largest firms in both residential internet service and cable television. By contrast, Sprint and T-Mobile are second-tier competitors, with the third and fourth highest market share in the mobile market, respectively. And the proposed consolidation of AT&T-DirecTV, like the Sprint-T-Mobile transaction, does not result in the elimination of a significant competitor; rather, it unites companies that primarily operate in different, though related, industries.
The AT&T and Sprint transactions still require scrutiny. With AT&T and DirecTV, there is a concern that AT&T will leverage its position in the wireless and broadband industries to expand DirecTV’s U-verse video service. And, Sprint’s acquisition of T-Mobile has raised concerns that consumers will see higher cell phone bills because T-Mobile will stop undercutting prices and paying to buy out its customers’ contracts. Still, because AT&T and Sprint do not have market power across multiple markets, the acquisitions of those companies pose a lesser threat to consumers.
By contrast, a Comcast-TWC transaction unites companies that dominate across multiple markets. A more liberal, and perhaps more accurate, way to calculate Comcast-TWC’s market share is to reverse-engineer it by subtracting its competitors’ share from 100. Susan Crawford, citing Verizon, calculates that FiOS serves 14% of the country. Tim Wu calculated that Verizon FiOS has 8% market share (Google Fiber has 1%). (Crawford and Wu may both have calculated accurate figures. Crawford was calculating “coverage” or “service” area; Wu was calculating actual subscribers.)
Comcast and Time-Warner’s combined market share in the extremely important Internet service market could be 75% or more. Comcast’s competitors may have less than 10%, depending on how you define “high-speed” broadband. It doesn’t take a mathematician or an antitrust scholar to know that consumers are losing. In sum, a straightforward application of antitrust law says the merger is in a highly concentrated market posing an extraordinary danger to consumers.