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4 Bogus Arguments Against Comcast Corporation's Mega-Deal

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.

Time Warner Cable does not compete directly with Comcast in any market

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 purchase of NBCUniversal was a bigger threat to competition than the current deal

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.

Some observers worry that Comcast will interfere with Netflix streaming

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.

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Read/Post Comments (6) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 22, 2014, at 12:07 PM, msorrentino wrote:

    Except that on their internet service Comcast has data caps whereas Time Warner Cable does not, after the purchase of Time Warner; customers would be faced with data caps. Also, a lot of smaller internet providers like EarthLink (which I have) piggy-back on Time Warner's System, Comcast would most likely increase the fee to those third-party providers, which would increase prices for customers.

  • Report this Comment On February 23, 2014, at 9:11 AM, TMFGemHunter wrote:

    I don't really believe that Time Warner Cable would have kept unlimited internet long-term. Broadband data caps are pretty high, and they are only really a problem for people who are streaming hours of HD video a day.

    There are obviously significant capital costs involved in boosting bandwidth. I watch some streaming video on my Roku, but not anything that would get me close to my data cap. If somebody else is downloading 1 TB a month by binge-watching HD and 4K TV shows, they probably should be paying more than me for internet -- or else I'm getting ripped off.


  • Report this Comment On February 25, 2014, at 11:37 PM, msorrentino wrote:

    @TMFGemHunter the problem however is that from a technical point of view there is unlimited bandwidth, the amount of data going across the network has nothing to do with bandwidth capacity. The Ethernet cables can't tell the difference between 10MB of data or 1TB of data, the ISPs create a difference in order to convince people that they have to pay more. The problem lies in traffic congestion which has nothing to do with bandwidth, that lies in processing on the servers that pass the data through the network from one cable to another.

  • Report this Comment On February 25, 2014, at 11:56 PM, msorrentino wrote:

    These guys explain everything in this video:

  • Report this Comment On February 26, 2014, at 7:15 PM, TMFGemHunter wrote:

    @msorrentino: I don't think you're interpreting the video properly. I was only able to watch half, but basically what they're saying is that the cost of transit is miniscule once you have the infrastructure in place. But the infrastructure is extremely expensive. It's not just servers, switches, and routers; most people in the U.S. still rely on copper connections rather than fiber, and that places some limit on how much traffic can be handled at once.

    From the estimates I've seen, the cost of building out Google Fiber comes to about $1000/household. I don't think it would be much cheaper for cable companies to build something comparable, as they'd basically have to rip out all of their current equipment and replace it with fiber to the home.

    To make that investment worthwhile, you'd have to expect to be able to raise prices by at least $10-$15/month.


  • Report this Comment On February 27, 2014, at 2:23 PM, msorrentino wrote:

    Except that there is a ton of unused fiber that is available for the cable companies to rent from those that own it. As stated here:

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Adam Levine-Weinberg

Adam Levine-Weinberg is a senior Industrials/Consumer Goods specialist with The Motley Fool. He is an avid stock-market watcher and a value investor at heart. He primarily covers airline, auto, retail, and tech stocks. Follow him on Twitter for the latest news and commentary on the airline industry!

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