Will Comcast, Time Warner Merger Lead To Higher Prices?

The merger will create a huge cable company which would Comcast would have 30% of the nation’s pay-TV subscribers and nearly 40% of U.S. broadband subscribers.

Apr 10, 2014 at 9:57AM

The Senate Judiciary Committee has begun its hearing on the $45 billion purchase of Time Warner's cable assets by Comcast (NASDAQ:CMCSA) -- whether the joining of the two companies would result in higher bills for consumers was a key topic of discussion.

Tuesday, the day before the Senate hearing, Comcast filed a 180-page document with the Federal Communication Commission, which argued that the company needed to be bigger in order to be competitive.

"Sometimes big is necessary and good," said Comcast Executive Vice President David L. Cohen, Forbes reported. "We are looking for scale to take on our competitors. Without it, we have one arm tied behind out backs."

In a blog post on the Comcast website, Cohen listed  AT&T (NYSE:T), Verizon (NYSE:VZ), DirecTV (NASDAQ: DTV), DISH (NASDAQ: DISH), Netflix (NASDAQ: NFLX), Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL), Sony (NYSE: SNE), Google (NASDAQ: GOOG), and Facebook (NASDAQ: FB) as competitors.

"Today, traditional boundaries between media, communications, and technology companies are rapidly becoming obsolete," he wrote. "The competitive ecosystem in which we operate includes companies with national and global footprints, all of whom are competing with each other, and with us, in unprecedented ways – and all to the benefit of consumers."

If you read the whole blog post, you would think that Congress and the FCC not approving the merger would be akin to spitting in the eye of the Statue of Liberty while stomping on a piece of apple pie.

If the deal is approved Comcast would have 30% of the nation's pay-TV subscribers and nearly 40% of U.S. broadband subscribers, Wall Street Journal reported.

The merger would give Comcast tremendous leverage over its digitally streaming competitors as recent rulings have struck down the net-neutrality rules that forced Internet service providers to treat all web traffic equally. Because of that, and the fact that its subscribers were seeing slower speeds when using Comcast, Netflix and Comcast recently made a deal where Netflix paid Comcast for faster and more reliable access to the cable company's broadband customers.

Will prices rise for cable customers?

Senate Judiciary Committee Chairman Patrick Leahy (D-VT) asked Cohen directly about pricing during the hearing and Cohen only sort of answered the question.

"There is nothing in this transaction that will make anyone's bills go up.... Consumers today are in the driver's seat," Deadline reported. He also declared that programming costs have appreciated 98% over the last decade, which implied that future events (and costs) could lead to higher prices.

Sen. Al Franken (D-Minn.) -- who knows a thing or two about television given his background on Saturday Night Live -- phrased the question a different way, asking whether shareholders would force the company to raise prices. Cohen offered a non-answer to that one saying, "we have made it a point of significant discussion about our need to continue to invest to compete better with national and global competitors." 

Public Knowledge's Gene Kimmelman — a former Justice Department antitrust lawyer — addressed the hearing to give the opposing argument. He said that if Comcast and Timer Warner merge the combined company would be able to drive up costs since the company would control the Internet pipeline. He said it would be "anathema to Comcast" if programmers want to offer content directly to consumers via the Internet for a low cost, Deadline reported. "The cable giant is committed to charging top dollar and, as owner of NBCUniversal, would be like an octopus with tentacles each capable of squeezing innovation."

Both sides have a point

Cohen's blog post laid out a number of ways the combined company would use its new-found heft to invest in areas that would benefit consumers and the all the other fabulous prizes the American people will receive if Congress just ignores the other side of the argument.

Our investment will bring Time Warner Cable customers faster Internet speeds, more programming choices, next-generation TV, and more robust Wi-Fi. These aren't just empty promises. We have a proven record of investing billions in new technologies and networks. We're leaders in high-speed Internet – and with today's Internet speed announcement, we've increased the speed of our high-speed data service 13 times in 12 years. We carry more than 160 independent networks and we committed to launch 10 new independent cable channels in 2011, eight of which were to be minority-owned (five of these 10 networks have already launched).

He goes on for quite a while about all the great things that will happen if the deal goes through. And while a lot of it seems like competitive imperatives, not the altruism Cohen is selling, he does have a point. Cable companies face all sorts of new competition. If Comcast can grow and take a competitor off the board it should, and doing so does not automatically harm the American public.

Yet Kimmelman is right to be skeptical. The Netflix deal shows Comcast is willing to ransom its customers access to services, and the company does raise its rates every year. 

It's easy to see how some good will come out of the merger and easy to see why people are skeptical.

The deal will go through

The closest example of a recent merger was the joining of satellite radio companies Sirius and XM. They were the only competitors in their space, but had the deal not gone through one or both might have gone out of business, leaving consumers with no alternative to traditional radio. The FCC approved that deal in a 3-2 vote, but imposed conditions, including that it couldn't raise rates for three years and forcing the satellite radio service to set aside channels for non-commercial broadcasters.

Neither Comcast nor Time Warner Cable is in immediate peril if the deal doesn't go through, but it's hard to argue that increased scale won't benefit the companies in an increasingly complex competitive environment. Congress and the FCC can protect consumers by allowing the merger while forcing the combined company to hold prices flat for a period. Congress and the FCC should also take steps to stop ISPs from using control over the Internet to force payments from rival services.

With these conditions in place the merger won't harm consumers and will have the potential to offer some benefit.

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Daniel Kline has no position in any stocks mentioned. He is a Cox cable subscriber. The Motley Fool recommends Amazon.com, Apple, DirecTV, Facebook, Google (C shares), and Netflix. The Motley Fool owns shares of Amazon.com, Apple, Facebook, Google (C shares), and 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.

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