Comcast Answers Critics

On September 23 Comcast and Time Warner Cable submitted to the Federal Communications Commission what’s called “Applicants’ Opposition to Petitions to Deny and Respond to Comments” – basically, the companies’ answers to filings arguing against Comcast’s acquisition of Time Warner Cable. [For the full skinny on how the FCC and the Department of Justice review a transaction like this, see Andrew Jay Schwartzman’s Here’s How The Government Handles A Deal Like Comcast/Time Warner Cable] Back in April, we looked at the companies’ claims that the deal is in the public interest and, more recently, we published a series on what public interest advocates, competitors, and politicians are saying about the transaction. Today we look at how Comcast and Time Warner Cable replied to opposition – focusing just on how they argue the deal could impact broadband services in the U.S.

The companies remind everyone that the FCC’s public interest review differs from traditional antitrust analysis insofar as the FCC examines both potential anticompetitive effects and whether the transaction will serve the public interest more generally. The FCC limits its consideration to whether the proposed transaction “could result in public interest harms by substantially frustrating or impairing the objectives or implementation of the [Communications] Act or related statutes” but “[m]ere possibilities are not of decisive significance in competitive analysis.” And, even if the FCC identifies potential public interest harms, it must weigh those potential harms “against the potential public interest benefits” to determine whether the proposed transaction as a whole will serve the public interest. The FCC may impose “narrowly-tailored, transaction-specific conditions to ensure the public interest is served,” rather than deny the application.

First, in general, the applicants argue that this acquisition “will produce substantial, verifiable public interest benefits” and will:

• Greatly expand the quality of communications services available to millions of additional consumers and businesses;
• Provide the combined company with the greater scale and synergies essential to continue to invest in and upgrade its networks, innovate, and compete more effectively against the growing number of communications, media, and technology providers with national and global scale; and
• Spur greater competition, investment, and innovation by other providers.

Specifically, the companies claim that the deal will accelerate deployment of higher broadband speeds and enhanced broadband services – a claim the companies argue “not a single opponent or commenter demonstrates otherwise.” In addition, the deal will “extend Comcast’s acclaimed broadband adoption program, Internet Essentials, to millions of additional low-income families throughout the acquired systems.” Since Comcast’s last huge acquisition of NBC Universal won regulatory approval with conditions that have not expired yet, this transaction would mean the expansion of standalone broadband offerings and the protections of the FCC’s 2010 Open Internet rules even though some parts of those rules were overturned by a Federal court earlier this year.

The companies assert that there are no “credible rebuttals” that the transaction will:

I. Accelerate deployment of an upgraded broadband network, faster broadband speeds, innovative broadband technologies, and a more robust Wi-Fi network

Although some commenters note that Time Warner Cable has announced plans to upgrade a portion of its systems to all-digital and increase broadband speeds, Comcast is promising to upgrade Time Warner Cable systems within 36 months so that current TWC customers have access to all of Comcast’s products including broadband service up to 150 Mbps. The transaction will enable the combined company to surpass and accelerate existing TWC deployment plans and to upgrade the entire TWC service footprint.

Customers in the acquired TWC and Charter systems will gain access to the fastest in-home Wi-Fi gateways (capable of speeds of up to 270 Mbps – over three times as fast as the prior-generation technology), which millions of Comcast customers already have access to. They will also benefit from greater access to public Wi-Fi hotspots. Comcast has made Wi-Fi deployment a priority and is building the most expansive and robust Wi-Fi network in the country, providing convenient, on-the-go Internet access to qualified Xfinity customers at no additional charge. To date, Comcast has deployed over three million hotspots nationwide and plans to reach eight million hotspots by early next year. II. Increase competition and innovation throughout the broadband ecosystem

The companies states that every consumer will have the same number of choices among broadband providers after the transaction as before. Thus, this transaction “will simply not have a negative effect on the current state of broadband competition in America.” They argue that the acquisition will accelerate and encourage even more investments in R&D, innovation, and infrastructure -- all of which will be good for broadband investment, good for broadband competition, and good for consumers.

The companies state that the transaction will also benefit Internet edge providers. As the combined company continues to enhance its broadband services, edge providers will be able to innovate and improve their services as well, increasing the value of broadband for all end-users. This, in turn, will create additional incentives for other ISPs to improve their own broadband services. Some commenters ignore the fact that the transaction “is already spurring greater availability of these higher-speed services” and will “extend Comcast’s Open Internet commitment, including application of the now-vacated no-blocking and non-discrimination rules in the Commission’s 2010 Open Internet Order, to millions of additional customers in the acquired systems.” The companies state: “This will further benefit edge providers, promote continued growth of the broadband ecosystem, and allay any reasonable concern that Comcast might use the Transaction to thwart future online offerings.”

The companies also address allowing ISPs to charge edge providers or their transit partners for arrangements that offer dedicated direct connection to their networks. “Such arrangements have been in place for years, and, if anything, have helped the Internet’s expansion.”

III. Expand Comcast’s acclaimed Internet Essentials broadband adoption program

Comcast launched Internet Essentials, a condition of the Comcast-NBCUniversal transaction, during the 2011 back-to-school season and it has connected more than 1.4 million Americans, from 350,000 families, to the Internet. By expanding Internet Essentials to the acquired territories and fine-tuning its approach, Comcast will connect many more low-income households to today’s high-speed Internet. “There is no equivalent program in any of the acquired systems, and thus no question that this would be a significant advancement of the public interest.”

Critics complain that only 13 percent of the eligible low-income population in the United States has been connected through Internet Essentials. But Dr. John B. Horrigan notes that “[a]pproximately one-quarter of the overall broadband adoption growth rate for low-income families with children since 2009 can be credited to Internet Essentials.”

Families with National School Lunch Program (NSLP) -eligible children of any age may participate in the Internet Essentials program. The assertion that Comcast seeks to “enroll” the oldest eligible child in a family is just false – and makes no sense: families, not individual children, are enrolled in the program. Comcast does not even ask for the ages of children, and families may continue to participate so long as there is one child living in the household who is eligible to participate in the NSLP.

Unaddressed in the filing is what will happen to current Internet Essentials customers when 2.5 million Comcast customers are "spun off" to GreatLand Connections. Households in the affected communities -- including Detroit and other cities in Michigan, Minneapolis-St. Paul, much of Indiana, and parts of Kentucky, Tennessee, Southern Illinois and Alabama -- would no longer be Comcast customers and therefore, no longer eligible for Internet Essentials.

Addressing Broadband Competition Concerns

The companies write that several claims about the transaction rest, explicitly or implicitly, on unsustainable definitions of the “relevant market.” For example, certain commenters claim that the broadband market should be defined as a national market that excludes all DSL, wireless, and satellite providers, and further claim that, if the FCC so defines the market, the transaction will result in a combined company with a problematic level of market power under antitrust precedent and guidelines. Commenters claim that DSL and wireless mobile should not be part of the relevant broadband product market, because the high-speed Internet access market requires sustained speeds of 10 Mbps for individuals and at least 25 Mbps for households. But the companies argue that:

• The proper geographic market for broadband is local, and the transaction does not change competition at the local level. As the FCC has observed, a consumer’s choices are limited to those companies that offer high-speed Internet access services in his or her area, and the only way to obtain different choices is to move.
• Based on marketplace realities and trends, the FCC cannot reasonably exclude all DSL, wireless, and other technologies from the relevant broadband market. The transaction should be reviewed based on the current regulatory landscape, in which the FCC has defined broadband as 4 Mbps. Consumers not only consider various technologies to be an alternative to cable broadband service, but also are likely to take advantage of those alternatives.
• Homes passed is not a relevant metric here for assessing market concentration or competitive issues for any service. In an industry where companies compete for paying end user customers, customer share undoubtedly is a more accurate picture of a company’s position in the marketplace relative to its competitors.

The retail broadband market is local, and Comcast and TWC (and Charter), all of which offer broadband service in discrete, non-overlapping local markets, do not compete and do not constrain one another’s retail broadband pricing. The companies also argue that estimates of national broadband market share are inflated. Commenters such as Netflix, Cogent, Dish, Free Press, and Public Knowledge contend that Comcast’s post-transaction national share will approach 50 percent, but the applicants argue that using the FCC’s currently applicable definition of broadband service, Comcast’s post-transaction share of fixed broadband connections will be 35.5 percent, and if wireless broadband connections are considered, its share will be as low as 15.3 percent. Moreover, they note, these figures represent a decline from the shares calculated based on data from only six months earlier. And, the applicants argue, since commenters seem to want to define the market as broadband service of at least 25 Mbps, any alleged increase in national market share from the transaction would increase by less than one percent since TWC does not presently offer the service.

Some have raised concerns about Comcast’s use of its broadband service to block or degrade online video distributors (OVDs) in order to bolster Comcast’s video business. Comcast will, the argument goes, use its increased number of broadband subscribers to foreclose their access to Internet content in order to bolster Comcast’s video business. But the applicants argue that Comcast will acquire only modest additional programming assets through this acquisition. “Thus, the transaction does not create any new or additional risks of harm in this area.” The applicants argue that the FCC already dealt with the issue in reviewing and overseeing conditions of Comcast’s acquisition of NBCUniversal. Moreover, the companies argue that the combined entity will have no enhanced incentive to block OVDs: degrading access to OVDs would harm Comcast’s broadband business more than it would benefit its cable-TV business.

FCC Chairman Tom Wheeler argued in a speech earlier this month that the broadband market isn't competitive, especially at the higher speeds needed for online video, which is the source of most peak Web traffic. [See Where There Is…] Chairman Wheeler noted most Americans have only one or two choices for high-speed residential broadband access, typically their local cable provider, and said 10 megabits per second is the minimum level of speed to stream high definition video. That rules out most DSL and wireless providers, which typically offer speeds below 5 megabits per second.

Of course, one might ask, too, why don’t Comcast and Time Warner Cable compete against each other? Comcast executive David Cohen said it’s too expensive to compete against other cable companies—even though Comcast is spending $45.2 billion to purchase Time Warner Cable. Comcast and TWC aren’t likely to start competing against each other even if they remain separate, Cohen explained:

“Despite claims by certain commenters, Comcast and TWC have never had plans to expand into each other’s territory and overbuild each other. Indeed, no incumbent cable operator ever has,” the companies wrote in their FCC filing. They quote economist Mark Israel, as saying that “the relevant potential competitors are fiber-based broadband providers like Google and municipalities, as well as the growth of wireless broadband providers, all of which have established plans to expand into the merging parties’ territories and thus which place actual constraints on the merging parties’ behavior.”

Reaction to Filing

Coverage of the filing has focused mainly on the aggressive stance the companies take. The headlines read: Comcast accuses Time Warner Cable deal critics of ‘extortion’, Comcast Lashes Out at Rivals Opposed to Merger Plan, Comcast Mocks Critics Of Its Time Warner Deal Ahead Of FCC Comment Deadline, Comcast Accuses Time Warner Cable Deal Opponents of “Extortion”, Comcast Blasts TWC Deal 'Extortion', Comcast comes out swinging in defense of merger, blasts Netflix and Discovery, Comcast, TWC Blast Critics of Merger.

In Politico, Brooks Boliek writes, Comcast says opponents made “self-interested requests” of the cable giant, “almost always with an express or at least an implicit offer to support” its Time Warner Cable bid if the demands were met. Comcast calls out high-profile opponents of the deal, including Netflix, Discovery Communications, and DISH, for having engaged in such tactics. “The significance of this extortion lies in not just the sheer audacity of the demands, but also the fact that each of the entities making the ‘ask’ has all but conceded that if its individual business interests are met, then it has no concern whatsoever about the state of the industry, supposed market power going forward, or harm to consumers, competitors or new entrants,” the company wrote.

Comcast took particular aim at Netflix, which has been engaged in a war of words with Comcast over network connections and who should pay for upgrading them. “What its comments and trumped-up economic theories show is that Netflix will use any proceeding, in any context, to try to shift the costs for carrying its content onto the backs of others -- a great business for Netflix, but one that would increase prices to consumers and disserve the public interest,” Comcast argues. “Netflix deliberately sent its traffic on routes that could not support it, and ignored other routes that could easily have handled it.”

According to Comcast, Netflix CEO Reed Hastings wrote to Comcast executives in April asking that as a condition of the merger Comcast agree not to charge for interconnection. Without that assurance, Netflix and other Internet companies would "have to protest the merger," Hastings wrote, according to Comcast's account. Now Hastings questioned why Comcast is so unwilling to part with the tiny amount of money it is making from the interconnection deal. Though it is small for Netflix too, Hastings said it's "worth it" to take a stand because "this is the chance to bring it out in the open."

“It is not extortion to demand that Comcast provide its own customers the broadband speeds they’ve paid for so they can enjoy Netflix,” Netflix spokesman Jonathan Friedland responded. “It is extortion when Comcast fails to provide its own customers the broadband speed they’ve paid for unless Netflix also pays a ransom.”

Comcast’s tone also raised eyebrows among public interest advocates. Common Cause demanded an apology for being branded an extortionist. “We’ve never sought anything from Comcast, directly or indirectly, and the company knows it,” said Michael Copps, special adviser to Common Cause’s Media and Democracy Reform Initiative and former FCC Chairman. [Copps is also a frequent writer for Benton’s Digital Beat blog.] "Comcast owes us an apology."

"They are mixing apples and oranges," said a Comcast spokesperson. "The only references to Common Cause and the consumer groups in the opposition were (1) to rebut their criticisms against the transaction and (2) to point out that they have been claiming since 1998 that the sky is falling and that cable mergers will mean the end of the Internet." The spokesman said Comcast is drawing a distinction "between companies that approached Comcast with a handout on the one hand and consumer groups who continue these apocalyptic predictions of Internet demise on the other."

“It is like ‘Snow White and the Seven Dwarfs,’ and Comcast has become like Snow White,” said Amy Yong, a media analyst with Macquarie Securities. “Comcast has just become so powerful in media and distribution that it is somewhat scary and intimidating for other companies.” She added that the media companies that have not denounced the Comcast-Time Warner Cable combination were most likely keeping quiet because they are exploring their own consolidation deals.

“This is not a case of individual businesses looking to get leverage over Comcast,” wrote John Bergmayer, the Senior Staff Attorney at Public Knowledge, “but of an entire industry realizing the threat Comcast poses to open markets and competition.”

Some analysts said that Comcast’s accusations of extortion were not likely to sway regulators’ assessment of the deal. “Regulators are a sophisticated audience,” said Craig Moffett, a media analyst with MoffettNathanson Research. “They can assess the merits of the various arguments without having to be coached on what incentives might be behind why someone did or didn’t say what they did.”

But Comcast executive David Cohen said this week that although it is "absolutely possible" the FCC could demand such stringent conditions that Comcast walks away from the deal, he has "no instinct, no message that we are remotely in that situation."

We will continue to track all the filings, news and events related to the transaction review – and we’ll see you in the Headlines.