Should we worry that Netflix is buying transit rights from Comcast?

I say no (for background read here, and Dan Rayburn has very useful coverage, dispelling a variety of myths).  To be sure, one may believe there are monopoly problems at the retail level in the cable sector.  We could alleviate those with local loop unbundling and/or deregulation, as I discussed yesterday.  But within that setting, Netflix paying Comcast won’t make that monopoly worse.

In support of this conclusion, I would cite two literatures.  The first is Ronald Coase’s analysis of payola.  If a gatekeeper can extract payments from input suppliers, the end result of that process need not be bad for consumer welfare and very often is positively good for consumers.  In a nutshell, the gatekeeper won’t want to exclude the programs which consumers really want.  Those programs contribute to the profits of the gatekeeper.

The second literature is that on double marginalization.  This literature considers settings where you have a retailer with market power and an input supplier with market power, and the input supplier needs the retailer for access to consumers.  In those cases either integration or Coasean bargaining is usually in the interests of consumers, as it minimizes the double mark-up and thus lowers the costs of the market power.  To put this more concretely, the two parties will deal so that the marginal cost of the input to the monopolist is lowered, the monopolist expands output (and profit), and those gains are shared between the two institutions with market power.

When you put those two theories together, Netflix buying transit rights from Comcast is likely fine.  Don’t translate your opposition to cable monopoly into opposition to this agreement.  Seton Motley asks a good question:

Should we worry Amazon (Prime) buys transit rights from UPS & USPS?

So, if someone criticizes this new deal, but cannot put the argument in Coasean language, they probably have not thought it through carefully enough.

Moving beyond that, can we think of reasons why the basic Coasean results may not hold?

1. Expected joint profit doesn’t map perfectly well into consumer surplus.

2. The status quo ex ante was based on some amount of queuing of Netflix access, rather than a dollar-based marginal cost for selling the input, as in basic Coasean models.

3. None of these transactions are purely Coasean when regulatory threats beckon and thus a wider range of outcomes is possible.

4. Comcast has read Doug Bernheim and can now construct a scheme to preempt Netflix from this market altogether,

I’ve pondered those long and hard, but the standard Coasean results still seem reasonably likely.  And if they are not, it would be for reasons so convoluted it is unlikely to represent anyone’s actual worry.  From that list only #4 seems to have any bite, but I don’t see that #4 applies empirically.  Netflix has risen greatly in value over the last year, this new development is hardly a surprise, and the fees to Comcast, while secret, have been described as “de minimis.”  There is quite a good chance that Netflix benefits from this deal and this is more of a “we are here for good” statement than Netflix falling off a cliff.

You also could try this argument:

5. By agreeing to pay a price for transit rights, Netflix imposes a negative pecuniary externality on smaller streaming services and content providers, which in the longer run will mean a negative non-pecuniary externality for variety-seeking consumers.

Maybe, maybe so.  I do take that argument seriously.  But it’s also unconfirmed, Coase on payola implies it won’t be so bad, and furthermore the Netflix transaction, in stand-alone terms, still would seem to be welfare-improving.  Besides, what happens if Netflix expands by 5x or 10x, should the company never have to pay anything?  Is it so terrible if tomorrow’s necessary equilibrium shows up today?

Addendum: Timothy Lee offers a different perspective.  Perhaps I am failing to understand his argument, but I don’t see why having a cluster of mid-level intermediaries should make the market as a whole more competitive.

Or you may be tempted to write a screed about the dangers of moving away from net neutrality, and associate this development with that movement.  I say you would do better to stick to the specific economics of this particular issue and explain, in terms related to the Coasean model, exactly what will go wrong.

Further addendum: Joshua Gans offers comment.


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