The cable television market is growing more contestable

by on February 15, 2014 at 2:52 pm in Economics, Film, Sports, Television | Permalink

From a 2012 report:

The Satellite TV Providers industry is in the midst of a revolution, supplying popular family shows, news, movies, sports, documentaries and other products to a growing swarm of eager subscribers willing to pay for in-home entertainment. For example, the introduction of high-definition (HD) TV vastly improved the quality of shows and attracted subscribers even as disposable income dropped during the Great Recession. “In addition to a dramatically improved reputation for quality, new networks, channel offerings and bonus features are strengthening the industry’s appeal to consumers,” says IBISWorld industry analyst Doug Kelly. Higher spending on industry services is anticipated to result in 5.6% annualized revenue growth to $41.4 billion in the five years to 2012. This climb includes an expected 3.8% increase in 2012 as more consumers continue subscribing to satellite TV…

Over the next five years, the industry will face escalating competition from other media.

Have I mentioned Hulu TV and YouTube and Netflix, especially the non-broadband requiring discs?  How about reading the internet?  How about using your iPad to watch downloaded movies and TV shows?  New social media for sharing?  “Let them download somewhere else”?  There is a reason why “cable” and “cord cutting” appear so frequently in the same sentence.

There is no big deal with Comcast acquiring Time Warner, also because the two companies serve separate districts.  If anything the new consolidated entity will have stronger monopsony power over programs and can bid their prices down.  (Isn’t ESPN with its sports contracts a monopoly of sorts, just as the sports leagues are?)  We all know that monopolists facing lower marginal costs tend to lower price (contrary to Tim Wu), even if not by as much as we might like.  Krugman worries that “This would, in turn, make it even harder for potential competitors to enter markets served by ComcastTimeWarner, strengthening its monopoly position.”  A better sentence would have been “No five year period has so increased the contestability of the cable sector than the last five years in the United States.”

One might also add that if ComcastTimeWarner can bid down prices on programs, this need not keep out other competitors.  Those programs are non-rivalrous in consumption, and the sellers can extend whatever price discounts they might wish to new competitors, to increase the demand for their products.  The final equilibria here are complex, but in general the ability of a strong firm, in this setting, to bid down input prices is not a bad thing.

Addendum: If you wish to worry about something, it is how to get more competition within a single market, as you might for instance do through municipal wi-fi, the successor to 4G, and so on.  Worrying about the horizontal spread of trading in one monopoly for another is beside the point.  What I am seeing in various comments on Twitter is people with objections to cable monopolies, some of them valid objections, then objecting to possible changes in the market out of basic mood.

Josh M February 15, 2014 at 3:20 pm

Comcast is an ISP just as much as they are a cable provider. You can’t download those videos to your iPad if Comcast sets your caps too low, and if they’re not playing nice with YouLuFlix, you can’t view content from them. You’re left with full lock-in to Comcast’s line-up (which is probably going to be delivered over internet protocols to your set-top box, but that internet traffic won’t count towards your cap…).

somaguy February 15, 2014 at 3:25 pm

“if they’re not playing nice with YouLuFlix”

Which they do all the time, by the way. Just search for “Comcast Netflix caps” – Comcast has show that it is very willing to impose bandwidth caps on content that competes with theirs.

Also, I live in an area where Comcast is the most common ISP. They are by far the worse broadband ISP I have ever had to deal with.

John Thacker February 15, 2014 at 4:46 pm

My understanding is that Comcast has an overall data cap (of 300 GB a month), not a specific Netflix cap. However, since Netflix (and other streaming video providers) are the greatest proportion of network bandwidth, the practical way that most people would go over is via Netflix. The Netflix-specific allegations involve Comcast (and Verizon) letting peering connections degrade to Netflix’s ISP (and similar allegations with YouTube).

However, at the same time, Comcast, Netflix, and Hulu all end up getting much of their content from the same providers. It’s not entirely clear that a fragmented cable market where the content owners can impose terms at their own will is any better or cheaper for consumers. Indeed, my understanding of recent years is that however quickly cable fees have been increasing, the rights fees paid to providers have been increasing even more quickly.

Of course, Comcast is a content producer as well, as a result of the NBCUniversal acquisition, which itself gives them an interesting relationship with Netflix and others. Comcast used to have a lot more control of Hulu, but was forced to divest as a result of the NBCUniversal acquisition. Also note that that acquisition resulted in a consent decree for Comcast that will now presumably be extended to ex-TWC customers.

Peter Schaeffer February 15, 2014 at 11:31 pm

All,

I live in a Comcast service area and have used their Internet service in the past. In spite of being a very heavy down loader, I have never observed any caps or evidence of caps. Eventually I scrapped Comcast for UVerse because of service reliability problems with Comcast. My expectations for UVerse were low (it is cheaper than Comcast in this area). It has proven superior in every respect (a big surprise to be sure).

There are good reasons to oppose the Comcast-Time Warner merger (in my opinion). Caps isn’t one of them (at least in this area).

Brett February 16, 2014 at 1:14 am

They say 300 GB a month, but they may not be enforcing that. On my web account for Xfinity, there’s a notice saying that they’ve suspended enforcement of the data cap for the time being.

dan1111 February 16, 2014 at 3:33 am

300 GB a month is a very high level. You could watch several hours of HD Netflix content per day and still not exceed it.

I believe these types of cap policy are in place so they can stop people from doing things like running file servers, not to limit normal usage.

Brian February 15, 2014 at 3:22 pm

The merger is less about cable (for which your points are valid) and more about internet access. Internet access has far fewer competitors and the majority of the tv competition you mention require fast internet access to exist. In many areas the new Comcast would be the only option. Wireless and satellite don’t compete in the same space yet (they are too constrained in upstream and usage fees).

Brett February 16, 2014 at 1:15 am

To be fair, there wasn’t much in the way of cable competition even before this proposed merger, since Time Warner Cable and Comcast serve almost entirely different areas. They just went from two monopolies to one bigger monopoly.

reed hundt February 15, 2014 at 3:27 pm

Rather confident assertions, Professor, given that the real issue is control over broadband, the bottleneck for Netflix, Amazon, etc. to compete with Comcast/TW. The combined company would have about 45% of bb subs, and would pass about 62% of homes. “Raising rivals’ costs” comes to mind….

ummm February 15, 2014 at 3:34 pm

Krugman’s position is predictable

Yancey Ward February 15, 2014 at 4:55 pm

That is because he has a monopoly on it.

Sam February 15, 2014 at 3:36 pm

Are we going to see the day when LuFlix team up with You to expand google fiber (or YouLuFlix fiber). Amazon could join in as well.

john personna February 15, 2014 at 4:44 pm

You saw the state bill to outlaw Google fiber? It died but it was stunning in its crony transparency.

Dan Weber February 15, 2014 at 5:44 pm

Local utilities are all corrupt in their own ways.

john personna February 15, 2014 at 6:03 pm

As regards Tyler’s addendum, borrowing from Wikipedia:

“There have been several high profile controversies due to legal restrictions on city broadband establishment and expensive lobbying efforts by incumbent ISPs to maintain and extend those restrictions. Recent examples can be found in Longmont, Colorado, San Antonio, Texas, and Seattle Washington. Lobbyist written statewide restrictions on municipal broadband have been passed in several states. For example, the 2012 ALEC bills introduced in South Carolina, Georgia, and Minnesota.”

Mark Thorson February 15, 2014 at 11:41 pm

It will soon be too late. It’s more than “several states”. It’s nearly half the country and rising.

http://arstechnica.com/tech-policy/2014/02/isp-lobby-has-already-won-limits-on-public-broadband-in-20-states/

john personna February 16, 2014 at 4:21 pm

Yikes!

Mark Thorson February 16, 2014 at 7:34 pm

And all of cable and Internet will be consolidated, with the help of the FCC.

http://www.cjr.org/essay/from_the_desk_of_a_former_fcc.php?page=all

Empowered by the demise of net neutrality, without the backing of the media oligopoly you won’t be able to be a politician in this country because they’ll throttle your content flowing on their wires. Nobody will vote for somebody they’ve never heard of.

Ryan February 15, 2014 at 4:10 pm

Any monopoly power that Comcast may have will dissolve as successors to 4G replace cable providers in the internet realm.

JWatts February 15, 2014 at 5:05 pm

+1, this.

Comcast doesn’t have a monopoly in internet service even today. Almost every Comcast customer can get ADSL over a phone line. But it’s incredibly sucky for the price. There are also a host of Satellite internet providers. Which tend to be better than ADSL, but still not as good as Comcast and the other cable companies.

There are just too many competing technologies here for anyone to have any monopolistic leverage. And as Ryan point out, upcoming 5G (or whatever it’s eventually called) will add yet another competitor to the mix.

Dan Weber February 15, 2014 at 6:03 pm

How is satellite internet for streaming video?

I admit it’s been a long time since I looked, but you are sharing the satellite with a bunch of other customers, which puts some hard limits on the total amount that can be sent. Putting up a new satellite is a lot harder than laying new wires through town. How much can you reliably stream over satellite?

(It has high latency, but that doesn’t matter too much for streaming video.)

JWatts February 15, 2014 at 6:51 pm

“How is satellite internet for streaming video?”

Poor. The bandwidth caps are too low, at least currently. That’s the biggest weak point for satellite providers.

F. Lynx Pardinus February 16, 2014 at 12:05 am

Someday. But we’re living in the present, where 4G connections aren’t going to replace wired ISPs for HD video anytime soon.

Alexei Sadeski February 16, 2014 at 12:41 am

Current Verizon LTE is frequently faster than home broadband.

Chris Hansen February 16, 2014 at 4:25 am

Verizon costs over 10 dollars a GB at the margin.

Alexei Sadeski February 16, 2014 at 6:42 am

Only for peasants who didn’t keep unlimited.

john personna February 15, 2014 at 4:42 pm

I am broadband only, from Time Warner. The $50/mo. I pay would buy me more bandwidth in most developed nations, or cost less, but we can’t because free market exceptionalism entangled with cronyism.

If you don’t like the rent, you are a socialist, I guess.

Yancey Ward February 15, 2014 at 4:57 pm

Your complaint is with the government, dude, not the cable company.

Brian H February 15, 2014 at 5:31 pm

I would contend that his complaint is with both; they work in synergy with each other.

john personna February 15, 2014 at 5:56 pm

Exactly, two backs scratched. Re. hand and glove, I heard that one cable company’s technique was to come to town and hire past mayors and past council as local reps. There was no direct bribe, but the local reps were well connected, did the necessary deals to acquire the monopoly.

Chris February 15, 2014 at 4:45 pm

I don’t care about the cable TV side of their business (irrelevant to me), but Comcast is the only way for me to get decent broadband service. And it’s not all that decent for the price compared to basically any other country, or places in the US with actual broadband competition.

Chris February 15, 2014 at 4:48 pm

Hit reply to quick – my worry is simply that allowing them to get even larger makes it easier for them to combine political clout. The two companies probably have similar lobbying schemes now, but combined they certainly only have one. Much easier for them to make sure that the senators from various states are all behind their singular set of goals to perpetuate and strengthen their monopoly.

Turkey Vulture February 15, 2014 at 5:17 pm

If the content providers have too much market power, then something should be done about that. The answer isn’t countervailing market power.

What does it mean exactly that they “serve separate districts?” As in, each has a bunch of local monopolies in different regions? If so, shouldn’t the goal be to keep them separate, in the hopes of eventually leading to entry on the other’s turf?

And then there’s the just the basic problem that combining one huge company with another increases their returns from lobbying, as it decreases their collective action problem (because gains from successful lobbying would tend to flow to other companies in the industry, or at least large companies in the industry). The combined Comcast-Time Warner has even greater incentives to increase barriers to entry or otherwise gain market power through the political process.

Shane M February 15, 2014 at 8:01 pm

I saw the announcement of the merger where they declared they do not compete in any single zip code in the country – yet are the 2 largest providers in the nation. Makes me wonder if this was by design – to not compete.

Bob February 17, 2014 at 1:20 pm

There’s nothing wrong with a company owning a lot of residential fiber. What makes it complicated is that they also own a bunch of content, so they can artificially raise the cost of other content for those people who are stuck with their fiber.

It’s back to the issues of Microsoft using their old OS monopoly to crush competitors in the application space.

Jan February 15, 2014 at 6:30 pm

I don’t know. I kind of think the whole reason for mergers and acquisitions is to extract more money. As for Tyler’s assertion that the mega-company will be able to bargain down prices with content providers and pass the savings on:

“The impact on customer bills is always hard to quantify. We’re certainly not promising that customer bills are going to go down or even increase less rapidly,” Comcast Executive VP David Cohen said in a conference call [Thursday] in response to a question on price.”

Shane M February 15, 2014 at 8:21 pm

Jan, I agree. The position seems blind to lack of options/choices in broadband internet access. I doubt that lowering consumer prices is even seriously considered when modeling pricing of the buyout offer.

Alexeisadeski February 15, 2014 at 6:45 pm

Why be interested in the SUCCESSOR to 4G? It’s already faster than most home internet connections in the US.

EggTimer February 15, 2014 at 6:52 pm

Does anybody else wonder how ludicrous some of this conversation may seem 5-10 years from now? Like Blockbuster and Hollywood Video. The internet ecosystem is much more complicated than many people think; companies that offer substitutes in one “market” offer compliments in another. As TC notes, the last five years have been incredibly dynamic. I say let’s don’t screw this up for everybody by using incomplete and out-of-date mental models of internet markets and let companies create their own monopolies made of sand that will eventually (sooner than you think) get swept away by the tide of new tech.

Donald Pretari February 15, 2014 at 6:59 pm

I share the concern that Chris and…Turkey Vulture…have expressed. As for your point about Pricing, let’s at least agree to see what actually happens.

Steve Sailer February 15, 2014 at 7:30 pm

When I was an economics major in college, I learned that anti-trust concerns were wildly overblown.

When I got my MBA, I learned that the essence of business strategy is acquiring a defensible bit of monopoly power.

When I worked in corporate strategy, I learned that cartelization is much better than competition, if the government lets you get away with it.

Alexei Sadeski February 16, 2014 at 12:33 am

Your observations in business school and the business world in no way contradict what you learned in economics class:

1. Economic theory assumes already that businesses will attempt to cartelize and price fix.

2. The issue is whether or not cartels work well:

2a. The incentive to cheat your cartel partners is extremely high.

2b. Cartels which have no cheating invite outside competition.

2c. The more effective the cartel is at reaching it’s stated goal (raising prices), the greater the incentive for competitors to enter the market.

Bill February 16, 2014 at 12:39 am

The monopoly is in the last mile…tell me if you have more than one fibre coming into your house.

The only other alternative is over the air, and spectrum is far more expensive.

Don’t mistake competition between media producers for competition among fibre owners.

You have only one strand of fibre coming into your house, and there are no alternatives for that last mile.

Chris Hansen February 16, 2014 at 4:30 am

+ a billion.

Emil February 16, 2014 at 8:25 am

except that cable operators use coaxial cables and not fibre.

Bob February 17, 2014 at 1:21 pm

The coax turns into fibre not so far from your house. Not that many competitors in that arena either.

Jonathan February 16, 2014 at 9:34 am

I have one fiber and one coax coming to my house, as well as a satellite dish bringing me signals from several geosychronous satellites. I also have a (currently dormant) telephone line connection. Oh, and electric lines coming into the house as well which, if the economics were right (ie if cable ISP prices went too high), might be able to support internet over power Oh, and there’s 4G access floating around in the air as well from yet another company. And a Redbox about a mile from my house. That about covers what occurs to me at the moment, but I’m not very imaginative.

Mark Thorson February 16, 2014 at 10:35 am

Data over power lines will never give you high bandwidth. Those are unshielded wires, and they will be subject to interference from external sources of radio frequency energy, as well as itself being a source that would interfere with some types of radios. Also, the signal won’t go very far over those wires, certainly not through the transformer on the pole, so you’d have to place the head end for the data network pretty close to the subscriber. In other words, you’ll never get your Internet over the power lines into the house.

Jonathan February 17, 2014 at 10:01 pm

Wikipedia agrees with you on the issues, but not on whether the problems are soluble. http://en.wikipedia.org/wiki/Broadband_over_power_lines

Shane M February 16, 2014 at 7:41 pm

Fiber running into your house? Nice setup.

Enrique Armijo February 16, 2014 at 11:55 am

I think there is much more to be learned from the specific fact that Comcast has never sua sponte lowered its rates across the board so far as I can tell, despite significant growth in both market share and profits, than from the general principle that “monopolists facing lower marginal costs tend to lower price.” The notion that ComWarner might be able to bid ESPN down from $5 per subscriber to $4, and then would return a quarter of that back to the customer in the form of reduced rates rather than pocket the full dollar, strikes me as fanciful.

collin February 16, 2014 at 12:13 pm

Your reaction sounds like listening to “Don’t Fear The Reaper” and really if it only were cable TV the deal is combining two parties of declining industry. However, the internet access is much more important and I know you have complained about US internet service over the years. How does this deal make that better?

hank February 16, 2014 at 1:10 pm

So prices should be going down soon too right?

Kevin February 16, 2014 at 2:11 pm

Limiting a discussion of the Comcast-TWC merger to direct horizontal competition within the cable TV market is puerile. A larger company has more power within the broader market and for vertical bargaining.

http://www.washingtonpost.com/blogs/the-switch/wp/2014/02/13/comcast-the-soon-to-be-gazillion-pound-technology-gorilla/

Pushing what otherwise would be 3G traffic onto Comcast’s fixed broadband gives Comcast a significant boost in bargaining power. The company will also be at an even greater advantage in talks with content providers, said Bergmayer. Eliminating TWC makes it harder for those who create shows and films to play one company off the other for more favorable contract terms.

The Comcast-TWC merger could also affect the fate of streaming services like Netflix. Netflix has a complicated relationship with cable companies; the video service reaches many Comcast subscribers now over broadband but is seeking to be put on set-top boxes. Some say Netflix will have trouble meeting its aggressive growth targets without the help of pay-TV customers. By adding TWC’s customers to its own, Comcast may soon have much more to offer Netflix, which would put Netflix at a greater bargaining disadvantage.

All of this is taking place against the backdrop of the recent net neutrality court decision that made it legal for Internet providers to block or throttle Web traffic. While there’s no concrete evidence yet that this is occurring, the ruling inherently gives ISPs such as Comcast greater control over how consumers experience the Internet. As a result of the merger, Comcast will be taking on 8 million TWC subscribers, all of whom will be newly subject to Comcast’s bandwidth policies.

That the cable industry is consolidating isn’t really a surprise. But a merger of this magnitude is going to have major downstream effects.

Herb February 16, 2014 at 2:17 pm

“What I am seeing in various comments on Twitter is people with objections to cable monopolies, some of them valid objections, then objecting to possible changes in the market out of basic mood.”

Yeah, well….that’s what you get for expecting cogent, well-formed thoughts on Twitter.

Also, this seems to be true:

“No five year period has so increased the contestability of the cable sector than the last five years in the United States.”

But what’s strange is that you seem to consider the Comcast-TW merger as a continuation of this trend rather than an attempt to slow it down or stop it entirely.

Bill February 16, 2014 at 5:25 pm

Cable companies are very infrequently competitors in the sale of bandwidth to consumers, so unless TWarner is in a nonexclusive territory with Comcast on the distribution end, there is no horizontal overlap.

Timothy February 16, 2014 at 6:14 pm

Jesus Christ this shit is obsolete. I have Amazon AWS torrent everything for me, it’s fast enough that when I get around to it I’m just going to stream things off Pirate Bay. Cable’s barely finished switching from analog…

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Mike February 18, 2014 at 10:42 am

To think that this merger is going to help consumers is just naive. The infection of Comcast’s poor customer service will spread to a greater geographic area. Sure, there is little horizontal overlap, but the monopsony power is already problematic and will become worse, further consolidating the hold that content providers have over what is available for viewing and through which delivery mechanisms.

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