This TV Megamerger Would Actually Be Anti-Competitive

Consumer advocates are up in arms about the proposed Comcast-Time Warner Cable merger. However, they should really be scared of AT&T's interest in buying DIRECTV.

May 14, 2014 at 3:05PM

Earlier this year, reports that top U.S. cable provider Comcast (NASDAQ:CMCSA) intended to merge with No. 2 outfit Time Warner Cable (NYSE:TWC) set off a firestorm of controversy. Consumer advocates claimed the deal would stifle competition, even though Comcast and Time Warner Cable do not compete in a single market.

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Comcast and Time Warner Cable do not compete in any markets, but regulators are still concerned about their proposed merger.

Meanwhile, there has been a much more muted reaction to recent reports that AT&T (NYSE:T) is close to buying satellite TV leader DIRECTV (NASDAQ:DTV). Yet this merger would actually be a far more serious threat to competition. An AT&T-DIRECTV combination would reduce the pay-TV options for tens of millions of Americans, potentially leading to higher prices.

It's all about the cable bill
The proposed merger between Comcast and Time Warner Cable has put a spotlight on the issue of net neutrality -- and more broadly, control over the Internet. Cable companies typically offer much faster Internet speeds than telecom operators such as AT&T. As a result, open Internet advocates worry that a Comcast-Time Warner Cable merger would give one company too much control over access to the Internet.

However, what most consumers really care about is a far more parochial issue: their cable bills. On this front, Comcast hasn't won very many fans by telling Congress and the media that customers probably won't see any rate cuts if its merger with Time Warner Cable is approved.

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Comcast has admitted that its merger with Time Warner Cable won't lead to lower cable prices.

Yet the Comcast-Time Warner Cable merger could slow the rise of cable TV prices. After all, the main driver of rising cable bills is not cable company greed so much as the skyrocketing retransmission fees demanded by broadcast and cable TV networks.

With more scale, Comcast would be better positioned to push back against outrageous demands for fee increases from programmers. On the other hand, Comcast would not have any more market power with respect to consumers. Since Comcast and Time Warner Cable don't directly compete against each other anywhere, there would be no change in the competitive dynamic of any market.

One more step toward oligopoly
By contrast, an AT&T-DIRECTV merger could harm consumers because the two companies compete directly in many markets. DIRECTV has nationwide reach -- although it may not be a practical alternative for some people, such as apartment-dwellers. Meanwhile, AT&T is on pace to offer its U-verse TV service in up to 33 million households by 2016.

That means there are tens of millions of people today who have a choice between AT&T and DIRECTV (as well as the local cable company and satellite TV rival DISH Network (NASDAQ:DISH)). A merger would reduce many consumers' pay-TV options from four to three, giving the remaining companies more pricing power.

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If AT&T buys DIRECTV, tens of millions of consumers will have fewer pay-TV options.

Furthermore, DISH Network has historically been wary of paying up for local sports channels. For example, DISH in recent years has carried none of the four regional sports networks in the New York metropolitan area. Since DISH is not a viable option for many sports fans, an AT&T-DIRECTV merger would leave them with just two options: the local cable company or AT&T.

Foolish conclusion
AT&T and DIRECTV executives have previously talked about merging the companies, but they never went ahead with the idea due in part to regulatory concerns. With consumer groups, Congress, and the public focused on the much more innocuous Comcast-Time Warner Cable merger proposal, there is a significant risk that the AT&T-DIRECTV deal will slip through the cracks now.

There is still a chance that regulators could let the Comcast-Time Warner Cable merger go ahead while blocking an AT&T-DIRECTV tie-up. Indeed, that would probably be the right move when it comes to protecting consumers.

If regulators instead permit AT&T to buy DIRECTV, consumers in current AT&T service areas will need to watch out. Before long, the telecom giant and the local cable monopolies could start using their increased market power to push through even bigger price increases than what customers have already seen.

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Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends DIRECTV. 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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