Since top cable operator Comcast (NASDAQ:CMCSA) agreed to purchase No. 2 Time Warner Cable (NYSE:TWC) last week, public-interest advocates and others have been up in arms. The deal's numerous critics claim that a merger between Comcast and Time Warner Cable would be terrible for consumers.
As customer-unfriendly as cable companies like Comcast and Time Warner Cable can be, none of the arguments against the combination hold up to scrutiny. After all, while the combined company would hold about 30% of the pay-TV market, Comcast and Time Warner Cable do not compete against each other in a single zip code.
In fact, most of the backlash against this megadeal stems from anger over spiraling cable TV prices. However, while most people blame cable companies for these ever-rising costs, the true instigators are the companies that own cable TV channels. If anything, Comcast's purchase of Time Warner Cable could actually help keep cable costs down.
Arguments against the deal
The arguments for blocking the Comcast-Time Warner Cable deal revolve around four main issues: 1) Comcast's pricing power over consumers, 2) Comcast's position as a content owner as well as a distributor; 3) Comcast's control over the Internet, and 4) Comcast's negotiating power with other content owners.
The first two arguments are not very convincing. Comcast and Time Warner Cable have never been competitors; instead, they both compete with telecom companies like AT&T (NYSE:T) and satellite TV firms like DIRECTV (NASDAQ:DTV) and Dish Network (NASDAQ:DISH).
As a result, merging Comcast and Time Warner Cable would not change the competitive dynamic anywhere from a consumer perspective. If anything, synergies from combining the two companies will allow Comcast to offset other cost increases and therefore raise prices more slowly than it otherwise would. There's no reason to believe Comcast's purchase of Time Warner Cable will lead to bigger price increases.
Comcast's position as a content owner is potentially anticompetitive because Comcast could theoretically deny NBCUniversal content to other pay-TV services. However, this is an argument against Comcast's already-approved purchase of NBCUniversal, and has nothing to do with its purchase of Time Warner Cable. Besides, regulators specifically mandated that Comcast can't discriminate against other pay-TV providers in distributing NBCUniversal content.
Dominating the Internet?
The strongest argument against allowing Comcast to beef up is that it would gain too much control over the Internet by becoming the broadband provider for a third of the U.S. Netflix (NASDAQ:NFLX) users have sometimes complained of odd problems with streaming video over Comcast Internet connections. Some believe that Comcast is deliberately degrading the quality of Netflix streams.
However, these issues won't be any different with a larger Comcast than with Comcast and Time Warner Cable as separate entities. The problem doesn't stem from Comcast's size. It's a result of the inherent competitive relationship between cable companies as video distributors/broadband providers and Netflix as an alternative video content distributor that depends on its customers' broadband access.
In fact, the merger would be good for "net neutrality" because Comcast has already agreed to treat all Internet traffic equally until 2018. By contrast, since the net neutrality rules were overturned in federal court, Time Warner Cable is legally permitted to discriminate against certain types of Internet traffic or demand extra payment for carrying it.
Holding the line against channel owners
The last argument for why Comcast's purchase of Time Warner Cable might be anticompetitive is that it would give Comcast undue influence in its negotiations with cable channel owners over pricing.
It's not clear just how much Comcast's increased scale would affect its bargaining leverage. Some channels have made themselves so indispensable that even a bigger Comcast might not have much negotiating power. Other companies without prime content might get squeezed a little more.
However, that would actually be a good thing for consumers. Today, content owners tend to have disproportionate power in their negotiations with distributors. The recent spat between The Weather Channel and DIRECTV -- which ended with The Weather Channel no longer available through DIRECTV -- represented a rare case of a distributor standing firm.
The ability of cable channel owners to demand and receive big increases every time they are up for a contract renewal is the No. 1 factor behind spiraling cable bills. Giving distributors like Comcast more leverage for their negotiations would not hurt the public, and could even help!
Foolish bottom line
It's easy to hate cable companies. Service tends to be spotty or downright terrible -- I had a horrible bait-and-switch experience when trying to start Comcast service last year -- and prices keep going up. However, this doesn't justify stopping Comcast's purchase of Time Warner Cable.
Comcast and Time Warner Cable do not compete anywhere in the U.S., so the merger is unlikely to impact pricing or service. Additionally, Comcast has agreed to respect net neutrality (unlike Time Warner Cable), which is good for consumers. Lastly, if the acquisition gives Comcast more leverage in content negotiations, it might reduce the spiraling increases in Americans' cable bills going forward.
Who will win in the Internet TV revolution?
You know the cable TV industry is in trouble. But do you know how to profit from the growth of Internet TV? Fortunately for you, The Motley Fool's top analysts have identified three companies that are poised to benefit. Click here for their names. (Hint: They're not Netflix, Google, and Apple!)
Adam Levine-Weinberg is short shares of Netflix. The Motley Fool recommends DirecTV and Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.