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The problem with the Comcast-Time Warner Cable merger

Joe Raedle

America's largest cable company, Comcast, has signed a deal to buy Time Warner Cable, the second largest. The deal requires approval from the Federal Communications Commission, which is currently soliciting public comments on the transaction. The deadline for comments is on Monday.

At first blush, it seems like the transaction shouldn't have much effect on consumers. The service areas of traditional cable companies don't overlap, so combining Comcast and Time Warner won't reduce the number of options customers have for cable or internet service.

But cable companies don't only operate in the consumer market. They also negotiate with network owners and content providers on the "back end" of their networks. And here size has a huge — and problematic — impact on the competitiveness of the market.

A good example of this is Comcast's dispute earlier this year with Netflix. Netflix says Comcast strong-armed it into paying unfair tolls to deliver content to Comcast's own customers. Comcast says it was just an ordinary commercial dispute.

The dispute puts the FCC in an awkward position, because it's hard to draw a clear line between legitimate business practices and monopolistic ones. The FCC probably doesn't want to get bogged down with policing the terms of each of the hundreds of peering agreements made between cable companies and ISPs. Yet Netflix, as well as ISPs such as Level 3 and Cogent, have raised some legitimate concerns about Comcast's business practices; ignoring them entirely isn't a good option either.

This is a problem created by Comcast's vast size. Small ISPs don't have the leverage to make the kinds of demands Comcast (and Verizon, another massive ISP) have made of companies such as Netflix. In a more decentralized broadband market, the FCC could leave these kinds of peering negotiations to the free market. But as the broadband market gets more concentrated, the danger of broadband companies abusing their power becomes correspondingly larger.

The merger will make Comcast even bigger, giving it even more leverage in negotiations with Netflix and others. That will increase the need for regulatory oversight to ensure Comcast doesn't abuse its market power.

And the same point applies to the cable television market. Comcast negotiates with big content companies like Fox and Disney for access to their content. Right now, some of these media conglomerates have a pretty strong bargaining position. That allows market forces to keep cable companies in check.

Adding Time Warner Cable's heft to Comcast's will produce a cable behemoth whose business practices will require closer watch from regulators. It's hard to predict exactly what kinds of problems might crop up. But allowing one of America's least competitive industries to become even more concentrated is likely to make things worse, not better.

The FCC is interested in hearing from the public. To submit your own thoughts, click here and enter proceeding number 14-57. Comments are open until Monday at 7 PM Eastern Time.

Disclosure: Comcast Ventures is an investor in Vox Media, the parent company of Vox.com.