Intellectual Property Law

Vertical integration

By Susan Crawford

On Thursday the House Energy & Commerce Committee is holding a hearing on the Comcast transaction.  Some background:

1.  The transaction would give Comcast, the nation’s largest cable operator, control of one of the five large US content providers and about 30% control of Hulu.com.  If the transaction is approved, Comcast will be behind about one out of every five viewing hours in the U.S.  We are a nation of living-room watchers, and Comcast will be there.

2.  Comcast is smart to be using control over content to guarantee dominance in broadband.  There are fewer competitors in broadband - usually two in any locality, a cable company and a telco - than there are in video.  Cable is already doing better than VZ/AT&T, and prices for high-speed Internet access are staying high and bundled.  NCTA says that cable modem service is “available” to 92% of homes.  We won’t be seeing VZ or AT&T fiber reaching more than 40% of households over the next few years.  Cable has a bright future.

3.  Comcast says that this is a vertical transaction that should not trigger competition concerns.  They point out that both the Comcast and NBCU cable networks together will add up to just 12% of national cable advertising and affiliate revenue.  (Comcast wants the NBCU cable networks (CNBC, Bravo, Oxygen), which generate 60% of NBCU’s earnings.)  They also say that online video content is so wildly competitive that this deal will have no impact.

Here are questions that may come up tomorrow:

• What power will Comcast have to shape the future of online video (or “Internet TV”)?  This transaction may make it less likely that people will cut the cord and disintermediate their cable provider, moving their online video-watching from their PCs to their large living room screens.  Comcast will have no incentive to make its content available online to non-subscribers.
• Online video/Internet TV is a new market.  Right now, it’s relatively small and confined to PC-viewing.  Comcast says we shouldn’t consider potential harms to a future market.  Is that right?
• What effect will this transaction have on the prices consumers pay for cable subscriptions and high speed Internet access?

Although Comcast asserts that the media market should be considered separately from the conduit market, the interdependencies of these sectors will shape the evolution of online video.  Comcast is right that the questions being raised aren’t the traditional “media consolidation” issues.  In the old days, we were worried about separate single-purpose media distribution networks (newspapers, broadcast, cable) being jointly owned.  Now we’re in an era in which gentle broadband duopoly competition doesn’t appear to constrain what the providers want to do and broadband is the essential gateway conduit.  Comcast may want to use exclusive access to highly-valued content to ensure its place in the twosome.

We’ll find out more on Thursday.

Full post as published by Susan Crawford Blog on February 02, 2010 (boomark / email).