Measuring monopsony: using the antitrust toolbox to protect market competition and help the television consumer.

• Author: Derr, Jacob M.

TABLE OF CONTENTS INTRODUCTION I. CABLE'S REGULATORY TRADITION: MEASURING COMPETITION MARKET-TO-MARKET A. Cable as a Natural Monopoly 1. Efficiency: The Cheapest Good for the Greatest Number 2. Equity: Providing the Local Voice B. History of Cable Regulation and Deregulation 1. Cable Regulation 2. Antitrust Oversight of Cable C. Comcast-Time Warner Cable and Future Mergers II. THE FAILURE OF CURRENT GOVERNMENT MEASURES A. In Search of a Limiting Principle B. Tales from the Other Side C. Programmers Are Limited by Antitrust Law 1. Legal Limitations 2. Two Sets of Losers, Two Doctrines Lost III. THE DO J MUST MEASURE BOTH CABLE MONOPOLY AND MONOPSONY WHEN CALCULATING THE HHI (AND REJECT A MERGER EXCEEDING EITHER THRESHOLD) A. The Legal Authority B. Enter Monopsony 1. Background 2. DOJ/FTC Framework C. Balancing Efficiency and Equity D. The Time Is Now, Not the Future 1. Cable Companies Will Lose Ground 2. Line-Drawing Problems 3. "Would it be so bad?" Counterarguments CONCLUSION INTRODUCTION

After a long day at the office, Carl Chicago comes home to spend a few minutes catching up on world events courtesy of CNN. Settling into the couch cushion, he turns on the TV, only to find the network blacked out. A message from his cable provider, Comcast, tells him that it is currently disputing its agreement with the station, and gives him a number to call to register his complaint. Carl is undeterred, and decides that he would rather just kick back with Finn and Jake on Adventure Time instead. But as he turns to Cartoon Network for some much-needed entertainment, he runs into a similar message from his cable provider. Carl, growing increasingly frustrated, decides to call his sister in Virginia, Wendy Williamsburg, who can see both of the stations fine. Carl begins complaining to her about the amount he pays for stations he cannot even access. "Well how much do you pay?" she asks. Carl tells her he pays about $75 per month for the standard expanded cable. Wendy checks her own bill. Up until about a year ago, she had been paying roughly the same amount, around $76.50 or so. However, for the same package of channels, she notices she is now paying almost $84. "How can this be?" she asks Carl, wondering why his enormous cable conglomerate can offer such lower prices than hers. "Don't ask me," Carl retorts, "I didn't pick them."

Carl, as well as most of his neighbors and friends throughout the country, did not choose his cable company. That is because most localities have only one cable provider, and although there were previously hundreds, if not thousands, of different cable companies nationwide, most people today are served by one of only a few national conglomerates. More concerning than this lack of competition is that federal regulators at the Department of Justice (DOJ) and the Federal Trade Commission (FTC) have sanctioned this situation by choosing to measure a cable company's growth only in individual markets, potentially ignoring nationwide gains.

The merger between Comcast and Time Warner Cable would have been the largest merger of two cable providers in history. (1) Before Comcast abandoned its plans after the tepid reaction of both the DOJ and the Federal Communications Comminsion (FCC), (2) the merger garnered substantial consumer opposition (3) and concerned policy analysts and economists over the power such a large company would have. (4) The cable industry began as a collection of small conglomerates serving one or a few localities, (5) until providers began to combine. (6) There are now only about seven companies serving most of the cable-using public nationwide, of which the four largest are Comcast, Time Warner Cable, Cox Communications, and Charter Communications. (7)

When companies merge, they must submit notice of the merger to the federal government. (8) Either the DOJ Antitrust Division or the FTC Bureau of Competition investigates the merger, (9) and then either approves it or sues to block it. (10) Regulators determine the potential anticompetitive effects of mergers by turning to ratios of companies' market shares (11) to predict the effect a merger will have on all other sellers in that market. (12) If the analysis shows the companies' merger would have anticompetitive effects, regulators generally sue to block the merger. (13) The argument between the merging companies and regulators is always over which market regulators measure. (14) Unlike most industries, in which the merger effects are measured nationally, the DOJ/FTC measures a cable merger for its local impacts, looking at whether it will decrease competition in Richmond, Virginia, as opposed to competition on a national scale. (15) Most markets have only one cable provider, (16) so Comcast and Time Warner Cable, for instance, do not compete in any market nationwide. (17) In fact, very few cable companies share territory nationwide. (18) Theoretically, the DOJ should have approved the Comcast-Time Warner Cable merger on the grounds that it would not have decreased competition in any localities. (19) Where there is no competition to begin with, (20) a merger cannot make competition worse. (21)

While this may be the case on a theoretical level, the problem is that a cable company's national power does matter. The cable market is two-sided: a cable company negotiates nationally with programming companies to buy their content, and then sells it to consumers in localities. (22) A cable company with sufficient power nationwide could decide that it is tired of paying $5.54 per month per customer for ESPN (23) and, because of its size, have a substantial ability to extract lower prices from ESPN. (24) ESPN would then have to either decrease operations or, to the extent it can, use its own power over smaller cable companies to extract higher fees from customers.

Programming companies' ordinary response in this situation would be to merge. (25) However, they cannot do so without raising significant antitrust concerns of their own, because regulators measure them--as they do companies in most industries--on a national level. (26) Programming companies are thus roughly stuck in place while a sufficiently large cable company, which is unfettered by the current enforcement scheme, can theoretically obtain unprecedented power to dictate prices to programmers, leaving the programmers to pass costs on to other cable companies' customers, like Wendy Williamsburg. This may have seemed unlikely until the proposed Comcast-Time Warner Cable merger, which would have made the two largest cable companies one. Even though that merger was scuttled, the immediate presence of another buyer for Time Warner Cable--Charter, the fourth-largest company--indicates that this merger activity will likely continue. (27)

Government regulators, however, have a little-used tool in their antitrust toolbox to measure buyer power in the market. This Note proposes that government regulators measure potential mergers for monopsony power--the ability of a single buyer to impact a would-be seller in a market--to ensure that they consider all economic effects of any future cable mergers. (28) Although monopsony has never been applied to the cable industry, the economic realities support dusting off this doctrine and putting it to work. This Note analyzes the abandoned Comcast-Time Warner Cable merger, which, as a proposed merger between the two largest cable providers in the country, put these issues front and center for regulators for the first time. Although the parties abandoned that merger, Charter Communications' proposed merger with Time Warner Cable would enlarge the merged company to almost the same size as Comcast. (29) These issues remain prevalent, as the future of cable seems to promise more of such activity.

Part I of this Note discusses the history and goals of cable regulation, including why conglomerates are traditionally allowed, and how programming companies are measured differently than cable companies. Part II examines the problems with measuring cable market-to-market. It begins by explaining how and why this structure does not check the size of cable providers, and how courts have eliminated prior rules. The only reasonable market solution to cable power is programming power, and if their mergers are blocked under standard antitrust doctrine, regulators may have inadvertently enshrined cable dominance over programming and consumers. This Part also discusses the potential losers in a large-scale cable merger.

Finally, Part III argues that, although other regulators have failed to stop cable's unchecked growth, antitrust laws should have more success. This Note proposes that the DOJ Antitrust Division and FTC (30) be required to measure both sides of the cable market--the influence of cable both market-to-market via consumer delivery, and the nationwide effects on programming purchasing via monopsony power. If either of these raises the concentration of the market beyond the established antitrust thresholds, the DOJ should sue to block the merger. This proposal will allow more robust consumer protection, uphold a free market, and keep cable companies from shifting economic equity towards themselves and away from their customers and competitors. The proposal also squares with the purpose of the antitrust laws, which should vest the authority to change their market analysis within the DOJ and FTC without their rules being struck down by the courts. This Part will also address alternatives, explaining why this proposal is more sustainable than others.

1. CABLE'S REGULATORY TRADITION: MEASURING COMPETITION MARKET-TO-MARKET

   1. Cable as a Natural Monopoly

      Two concepts in economics, efficiency (31) and equity, (32) are usually in tension with one another in regulators' calculations of economic policy. In the case of cable franchises, both of these actually work in tandem to establish cable as a "natural monopoly," where the best solution is a single provider...