Does Netflix/Comcast Deal Remove Obstacle To TWC Merger?

Feb 24 2014, 7:16am CST | by

Comcast announced a deal that improves the quality of the online streaming that Netflix delivers to its 30 million U.S. subscribers. And that deal could remove one of several obstacles to regulatory approval of its $45 billion proposal to acquire Time Warner Cable.

Unfortunately, the terms of the deal are not clear. Thanks to the popularity of shows like House of Cards, Netflix accounts for roughly 30% of broadband traffic. Prior to cutting the deal with Comcast, Netflix got access to Comcast through so-called content distribution networks (CDNs).

Netflix has three ways to deliver content. According to StreamingMedia, these include “Content delivered inside last mile networks via Netflix’s Open Connect program, third party CDNs like Level 3 and Limelight Networks, and servers Netflix controls outside the last mile.” And according to the Wall Street Journal, these CDNs also include Cogent Communications.

And this arrangement has reduced service quality for Netflix streaming media customers. “In recent months, Netflix had reported that delivery speed of its content to Comcast subscribers had declined by more than 25% — resulting in frequent interruptions and delays for customers trying to stream television shows and movies delivered through Netflix,” according to the New York Times.

The terms of the deal between Comcast and Netflix are not clear. But it appears that Comcast will connect directly with Netflix — which will mean that CDNs like Level 3 and Limelight Networks will no longer be getting the same fees from Netflix.

Simply put, Netflix will pay Comcast to stream its content at a specified level of service — through what is known as a Service Level Agreement (SLA).

Is Netflix paying more and will it pass those higher costs on to consumers? The answer depends on whether the amount it is paying Comcast is greater than what it saves by not paying the CDNs. StreamingMedia said, “While I don’t know the price Comcast is charging Netflix, I can guarantee you it’s at the fair market price for transit in the market today and Comcast is not overcharging Netflix like some have implied.”

Although it is unclear whether they will be enforced in the case of the Comcast/TWC deal, the U.S. still has antitrust laws on its books. One of the key principles of those laws is that competition is good because it leads to ever improving products and services for consumers. And that improvement should take two forms: better quality and lower prices.

And by that measure, market share leader Comcast itself is already failing. After all, as I wrote on February 19, it is the worst when it comes to customer service and its prices are rising several times faster than the rate of inflation. TWC — number two in market share — is nearly as bad when it comes to service quality.

And combining these two will certainly lead to greater economic power when it comes to negotiating with content providers who seek access to Comcast’s platform which will control half the market if the deal goes through.

All that bargaining leverage could force companies like Viacom, CBS, and Disney to pay less to Comcast. But there is nothing from stopping those content providers from demanding that advertisers pay more to access consumers — and for advertisers to pass this higher cost onto consumers by raising prices and/or reducing the size of what it sells to consumers while keeping the price the same.

Moreover, with less competition there is little incentive for a much bigger Comcast to innovate or to tamp down its price increases. I seriously doubt that Comcast will reduce its R&D expenditures and pass the money onto consumers in the form of lower prices. Instead, that money could go back to shareholders in the form of dividends or share buybacks.

But one obstacle to the merger before the deal between Netflix and Comcast was the possibility that Comcast would use its market power to stifle upstarts.

The deal between Netflix and Comcast does not say anything about how Comcast might try to thwart the likes of Hulu Plus, Aereo, and Roku HD. But it does suggest that Comcast will not try to harm Netflix’s efforts to deliver its content to consumers.

However, it does remain to be seen whether Comcast will impose overage fees for all the extra bandwidth consumers use for online streaming. For example, in Tennessee, Georgia, and Mississippi, Comcast is testing overage fees ($10 for every 50 gigabytes (GB) over the allotted 300GB.

The evidence that Comcast’s proposed merger with TWC will hurt consumers seems compelling. There is no reason to think that the merged companies’ service quality would rise from the cellar or that its price increases would reverse. Nor is there any reason to think that the deal will not make it harder for upstarts trying to deliver consumers better quality at a lower price.

But the deal between Netflix and Comcast — if it can deliver on demanding SLAs — does suggest that Comcast is not set on wiping out Netflix./>/>

Nor does it hurt the deal’s prospects that Comcast has given money to Congress. As the New York Times reported, “91 of the 97 members of Congress who signed a letter in 2011 supporting the Comcast NBC merger received contributions during that same election cycle from the company’s political action committee or executives.”

Is Comcast wielding that clout as it seeks approval of the deal to buy TWC? Do antitrust laws still matter?

Source: Forbes Business

 
 

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