Episode 219 - Neutral Merger
Published November 3, 2015
SPECIAL GUEST: Sally Hubbard (The Capitol Forum). We're joined by Sally Hubbard from the Capitol Forum to talk mergers, anti-trust, communications policy, net neutrality, regulatory capture, and the future of the Internet. From the failed Comcast-TimeWarner merger to the previously successful NBC-Universal/Comcast merger, from the FCC's amazing reclassification of broadband as Title II to safeguard net neutrality, we take a look athe impacts that communications policy and service providers are having on our democracy. Recorded 10/28/2015.
Mike & Matt's Recommended Reading:
The Capitol Forum site
Sally on Twitter
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Alpha: Welcome to another episode of Robot Overlordz, episode #219. On the show we take a look at how society is changing, everything from pop culture reviews to political commentary, technology trends to social norms, all in about thirty minutes or less, every Tuesday and Thursday.
Mike Johnston: Greetings cyborgs, robots, and natural humans. I’m Mike Johnston.
Matt Bolton: And I’m Matt Bolton.
MJ: And joining us on this episode is Sally Hubbard. Sally, thanks for joining us.
Sally Hubbard: Thanks for having me.
MJ: To start off, could you tell our listeners a little bit about your background?
SH: Sure. Well, currently I’m an antitrust writer for a publication called The Capitol Forum, and we’re an in-depth news and analysis service. Before I joined The Capitol Forum, I was actually an assistant attorney general at the New York Attorney General’s Office. I was in the antitrust bureau, and I was hired by Eliot Spitzer, and then I worked there during the Cuomo and Schneiderman administration. Since I joined The Capitol Forum a few years ago, I’ve been writing about mergers mostly in the cable and media space, and it’s been an interesting transition from being an attorney to a journalist, but it’s been fun.
MJ: Oh, I’m sure. Well, you mentioned a couple of Matt’s and my own kind of hot button issues. We’ve talked a lot, the last couple years, about some of the communications mergers, the big one kind of being the Comcast/Time Warner, which we were happy to see kind of die. What was your thought on that merger and how it fit, maybe the public interest, and what happened with it?
SH: Sure. I actually covered that merger in pretty extreme detail from the moment it was announced until the day that it fell apart, so I have a lot to say about that one. I am very proud, because the day after the deal was announced, I wrote a report that said, “Don’t pay attention to the fact that they have no geographic overlap, there’s going to be a lot of antitrust issues here.” Literally for about a year, everyone in the antitrust community was telling me that I was crazy and didn’t see an antitrust case there, because people tended to look at it in terms of the traditional structure that people used for doing an antitrust case to block a merger is that you have to define a geographic product market and show that the merger increases concentration in the market and it’s likely to lead to higher prices or reduced innovation. Everyone just kept buying Comcast’s argument that they don’t overlap geographically and therefore there’s no antitrust case. So, for about a year everyone was telling me I was crazy until people started understanding that you can make an antitrust case on the other side of the market, which was the side of content companies, internet companies, edge providers that needed to get through those broadband types to American broadband users, and the tremendous market power that Comcast would’ve had post-merger by controlling about 50% of high-speed broadband in the country, being able to set the prices and the rates and the terms for content companies and internet applications to reach critical markets like L.A. and New York. So, I was very concerned about that merger from the beginning, and that’s one of my things that I’m very proud of, that I predicted how that was going to play out.
MJ: What did you think about sort of the grassroots internet-based groups that kind of rose up against that? Do you think those really had a significant impact on that attempted merger failing?
SH: I do think they had a significant impact. You know, I thought there was real straightforward antitrust harm, looking at the potential competitive effects of the merger is what the DOJ would’ve been doing in analyzing the merger, and I thought there was a real case to be had there. However, it was definitely going to be an unconventional antitrust theory in terms of looking at the other side of the market and defining broadband nationally, which hadn’t been done previously, instead of looking at the local geographic markets in the antitrust analysis. So, I think the fact that there was such political momentum against a deal certainly emboldened DOJ and FCC to oppose the deal; I think it was kind of a thumb on the scale, or maybe a very big, heavy thumb on the scale that was caused by all the political opposition against the deal.
MB: I know this has already taken place and it’s over and done with, but what are your thoughts on the fact that NBC is owned by Comcast? The fact that you have a content provider that has the content itself, what are your thoughts on that?
SH: Right. I definitely think the fact that there has already been a previous merger of Comcast acquiring NBC Universal made the Comcast/Time Warner Cable deal much more problematic, and the risk of anti-competitive effects much higher. Because, you know, the risk with one company controlling such a huge share of high-speed broadband and them being able to kind of pick the winners and losers of internet online video, the big competitors too, NBCUniversal would be kind of at Comcast’s mercy. So, I think the fact that it had the extra incentives to kind of discriminate against competitors as competitors try to reach America’s households through the broadband pipe made the deal definitely more problematic than if it had never bought NBCUniversal. I think even apart from—a lot of people were focused on that and we’re forgetting that also, as a cable provider, Comcast would’ve had the incentive to kind of discriminate against online video providers, like Netflix, just because those are a threat to the cable business model. So, it already has that incentive, to kind of prefer the cable business model and to try to raise the cost of online video by charging higher internet connection fees, things like that. So they already had those perverse incentives, and then if you add in the fact that it owns so many media properties, it just adds that extra incentive to discriminate against competitors to its NBC properties. So, I think that definitely played a very large role in the regulators opposing the deal. The other thing about the Comcast/NBCUniversal deal was that it had a very complicated web of merger conditions. There were largely what we call behavioral conditions, where they require ongoing monitoring of the company to make sure that they’re complying with the conditions. Ideally in antitrust, we like to do structural conditions, like you have to sell part of the company, things that are permanent and don’t require ongoing monitoring, because it’s very difficult to monitor companies moving forward. In the NBC merger, there was a very elaborate set of merger conditions. What had happened is that in the subsequent years since that deal had happened, Comcast had really kind of violated, if not the letter of those conditions, definitely the spirit of those conditions. So, I think that was also a kind of a nail in the coffin of the Comcast/Time Warner Cable deal, because DOJ and FCC are saying to themselves, “We can’t trust Comcast to actually follow through with these conditions. If we’re just going to try to heavily condition the deal, we can’t trust that it’s going to really adhere to those conditions, or is it going to just exploit some loophole or find an end run around it as it did with some of the NBCUniversal conditions?”
MJ: Sally, since we’re talking about NBCUniversal for a second, Matt and I just did an episode where we talked a little bit about the whole revolving door between lobbyists and the people on, for example, the FCC. One of our favorite examples actually came up in the NBCUniversal/Comcast merger, it was that Meredith Atwell Baker. You report on this stuff, you’ve worked in an attorney general’s office. The way that these connections happen, do you kind of see evidence that that’s a problem? I mean, certainly the view from out here, for Matt and I as watchers of this stuff, it seems problematic. What’s your thought on that?
SH: Oh, I definitely think the revolving door is problematic. I mean, I wouldn’t say I have any great solutions on how to deal with it. I don’t know if I have any concrete examples to point to, but if you just think about it from a regular perspective, what their career track—if I’m high up at the FDA, for instance, and my career track that I’m thinking of is I’m going to go work for a big corporation after the fact, what kind of incentive does that create for the regulator to really be aggressive? I think it’s a big conflict of interest, I do think it’s problematic. I’m not sure I have any solutions on how to fix it though, honestly. I do know that once people get their expertise in that area, the different career options for them are to be lobbyists or be a regulator, and sometimes being a regulator doesn’t always provide the most comfortable lifestyle forever, financially. But yeah, I definitely think it’s something that needs to be evaluated and studied, and there needs to be some checks on it.
MJ: What are some of the current mergers that are sort of on your horizon that you think people really need to be aware of and looking closely at?
SH: Well, I’ve been following the Charter/Time Warner Cable deal closely, and I’ve been pretty surprised at how different the tone has been with that merger compared to the Comcast merger. Obviously the market share on a nationwide basis is much smaller than it was going to be with Comcast acquiring Time Warner Cable, but it’s still pretty large, I think it’s about 32% nationwide if you’re looking at high-speed broadband. Honestly, a lot of the same concerns that people had about Comcast having too much gatekeeper control and being able to pick winners and losers and discriminate against different content properties, they still exist in the Charter/Time Warner Cable deal. So, it’s kind of confusing why it’s been so quiet in terms of opposition. I do think it’s a harder antitrust case to bring, the market share being lower and it having, as I said before, to be kind of a novel antitrust theory compared to how these types of markets have traditionally been analyzed. So, I could see that DOJ would perhaps be less emboldened. But I have been surprised that it’s been so quiet in terms of that grassroots opposition that we saw in the Comcast deal. Another thing that people aren’t really thinking about is John Malone, who’s a significant shareholder at Charter, and kind of his history in the US is quite troubling… I guess it was the ‘80s. it was definitely before my time of being attentive to the cable industry. I believe Al Gore called him the “Darth Vader of cable.” [laughs] So, he’s going to be coming back into a pretty powerful position. He’s not a controlling investor, but I do think it’s a foot in the door and something that I’m also surprised hasn’t caused more of a reaction amongst those who are active in the area, activists in the area. So, that’s not surprising, it seems like it’s on its way, on the path to clearance. There has been some aggressive conditions demanded by the New York Public Service Commission on the charter deal, where they’ve asked for really significant build-outs and promises about low-price broadband. So, it’ll be interesting to see how strong the merger conditions are going to be, both from the FCC and the New York Public Service Commission, and potentially also California. Otherwise, it’s been pretty surprising how quiet that’s been compared to Comcast. The other deal that I think is quite interesting right now in the same space is Altice purchasing Cablevision in New York. Now, it doesn’t really actually have any antitrust issues, but if you read anything about the head of Altice, this guy named Patrick Drahi, he’s got a pretty negative legacy in Europe, where Altice has been buying up other cable properties. The kind of M.O. of the company has been to be very aggressive on slashing costs, which largely has been in the form of layoffs, firing people, as well as simply just refusing to pay vendors—literally taking over a company and then just refusing to pay vendors and then re-negotiating those contracts. So, Altice has gotten itself in quite a bit of trouble in Europe, and then other antitrust issues as well that it’s had in Europe. So, it’s going to be interesting to see how that deal plays out politically in New York, where most of Cablevision’s properties are—in New York, Connecticut, New Jersey, actually. New York being a very strong union state, I’ve already seen that the Communications Workers of America unionize parts of Cablevision, and Cablevision’s workforce just in Brooklyn are basically using the merger as an opportunity to get more of Cablevision’s employees to unionize. There’s just certainly a tremendous amount of fear amongst Cablevision employees about losing their job when Mr. Drahi, known as “The Slasher,” comes in and takes over. So, that’s going to be interesting to watch, to just see politically what type of grassroots operation there is to that deal in New York.
MB: When you were talking about the Charter merger, you said that there wasn’t as much opposition. Do you think part of that has to do with the fact that—the original Comcast/Time Warner merger—that people just hate Comcast so much that it got regular people who normally wouldn’t care up-in-arms, and that’s kind of what killed the deal?
SH: I definitely think that was part of it. I mean, Comcast is just so hated that it was easier to kind of demonize them, right? Demonize the company in terms of…it had already demonized itself, I guess. But it was an easier target for the grassroots movement than Charter. But the interesting thing is that Charter really hasn’t behaved nearly as badly as Comcast largely because it hasn’t been as big as Comcast and hasn’t had the incentives that come along with that big-ness. So, it’ll be interesting to see what Charter turns into after the merger. They’ve been smaller, they haven’t really been able to get to do some of the things that Comcast was able to do, because they didn’t have the size and the scale to be able to kind of throw around that power in anticompetitive ways. So, that’s going to be interesting to see if Charter is able to keep its better reputation once it gets some of those same incentives that Comcast has always had.
MJ: Sally, do you think that very big-ness, if we’re talking Comcast—I mean, so far we’ve mostly been talking about cable, but to pull in, for a minute, AT&T and Verizon and all of them that sort of exist in the TV service/home phone/and internet, sort of those service bundles… Matt and I talk a lot about those industries. I used to work for AT&T. One of my frustrations with watching this industry, I don’t know if it’s something you’ve seen as well, but I guess I’m just curious, I know AT&T runs their entire business on this concept of ARPU (Average Revenue Per User), I think that’s fairly consistent with the cable business. It seems like as they get bigger and as they get more concentrated, they start focusing on that number, that, from an ordinary consumer standpoint, it seems like they all ride pretty closely that sort of 60% threshold of customer satisfaction, just barely above 50% really, that that seems to be their sweet spot for, “Okay, this is as much as we can get away with before there’ll be a public outcry that might break us up again.” Do you think that’s deliberate, in kind of covering these companies?
SH: Well, I think that as long as companies don’t have robust competition, they don’t have an incentive to provide quality customer service, or to satisfy their customers, or to even be creating great products. You know, I think it’s competition that spurs the incentives to innovate, to put a great product forward. As long as there’s not enough competition, there’s no downside to cutting corners when it comes to satisfying your customers in favoring of getting larger profits that satisfy the shareholders. So, I think that’s the crux of it: you need the competition in order to motivate corporations to create good products and to keep your customers happy. They need to be afraid that they could potentially lose those customers.
MB: Yeah, definitely. How do you open up that competition, especially like cable, where you have one cable line coming to the house, Comcast put it in or whoever put it in. My thought has always been, open it up kind of like phone lines, where anybody can use those lines. Do you think that’s probably the best solution, or is there some other…maybe I’m missing some kind of solution. Because most customers have a choice: if you want TV, you get your local cable or you get satellite, and if you want internet, you pretty much have one choice, maybe two if you have DSL.
SH: Right. You know, I’ve been thinking a lot about how to promote broadband competition. There’s no real easy answer to it. I hear occasionally about a new innovative technology that I get excited about and then other people tell me, “No, that’s not really going to work on any kind of large scale.” Like, there’s some interesting things happening in New York City, for instance, with mesh networks and point-to-point transmission, and expanding the Wi-Fi networks all over the city so that you’re basically covering the city in Wi-Fi. Some of these new technology I’m hoping can be more promising. But in terms of actually creating broadband competition, it’s just very difficult to obviously require cable companies to over-build on each other’s territories. What you described as what they did with the phone companies is the local-loop unbundling or requiring the broadband companies to basically give wholesale access to competitors to sell the broadband and making it at rates that are regulated, and this is done in Europe. In the US, there is extreme opposition obviously from the ISPs to this notion, and they argue adamantly that this is going to decrease their incentive to invest. When this current FCC was doing the new net neutrality rules and reclassifying broadband as a utility, they kind of made promises that they weren’t seeking to regulate rates, they were seeking to do local-loop unbundling. So, we haven’t seen kind of the political will to do that in the US yet, but that’s certainly what most consumer advocates argue is the only real solution, at least in the short-term, for creating broadband competition.
MJ: Well, and that brings up, since we haven’t really touched on it a whole lot, net neutrality, that seemed like it was a pretty big step for the FCC to actually officially declare things as Title II, that for a long time it seemed like everybody thought, with Tom Wheeler, with his background as a cable lobbyist basically, that that would be pretty much a foregone conclusion that that would go the way that the cable companies and phone companies wanted. Certainly we were surprised, although certainly I’m not complaining, I think it was a good decision. But what were your thoughts on the surprise level of that decision by the FCC?
SH: Yeah, I definitely think that was surprising. It didn’t seem that that was the initial track that Tom Wheeler was going to take, it seemed like he was leaning towards using Section 706 to try to re-draft the Open Internet Order. I think it was, again, the grassroots opposition was really strong; there were things like the millions of comments that came from even things like John Oliver and his skit about net neutrality that actually got a lot of attention. And then there was Obama coming out and saying that broadband should be reclassified, that I think did have a large impact in the ultimate decision. And, you know, I see that kind of as Obama, coming to the end of his term, having had two terms of Republicans who’ve largely been fighting him on pretty much anything he proposes in Congress, looking around and seeing, “What authority do I have left and what can I accomplish to give myself a legacy?” and this was one way for him to sure up a legacy, something that he could actually impact, as he was having such a hard time getting Congress to do anything. So, I think that Obama stepping in definitely played a role as well. You know, we are not totally in the clear on the net neutrality order since just today they announced who the judges are going to be for the court challenge in the D.C. Circuit, and the oral argument is going to be on December 4th with the ISPs that are challenging the new 2015 Open Internet Order, and they just announced the judges are going to be Judge Tatel, Judge Williams, and another judge whose name I’m not sure I’m pronouncing correctly, Srinivasan. I don’t know the last judge, but Judge Tatel is the one who actually wrote the first two decisions striking down the first two attempts at the Open Internet Order. The ISPs are feeling pretty confident that they’re going to prevail since they got Judge Tatel again, as well as this Judge Williams, who is a Republican appointee who has repeatedly ruled that regulators lack authority to regulate in many different cases. However, I will say that I actually worked at the D.C. Circuit as a staff attorney, and I view Judge Tatel as a very progressive judge. So even though he did author the first two decisions, I wouldn’t consider it a foregone conclusion that he’s again going to strike down this order. I think the fact that the FCC reclassified broadband as a Title II service is going to increase the odds of them prevailing on this court challenge.
MJ: Well, in his decision it seemed like he basically opened the door for Title II, even, from what I remember about the coverage I read of it.
SH: Right, he said, “You’re basically treating them as common carriers, so therefore you have to do that if you’re going to try to have a presumption against paid prioritization.” So, it seems the FCC should be a pretty strong case, and there’s a lot of kind of intricacies of telecommunications law and FCC law that I can’t pretend to be an expert on. If this was an antitrust case, I’d have a better feeling on how it’s going to turn out, but I just want to make the point that we’re not completely said and done on the net neutrality front.
MJ: Yeah. One of my frustrations with watching the way the industries talk about this stuff—I mean, I worked at AT&T and I kind of got interested in telecommunications history—a lot of their right to have built their network in the first place seems to have been carved out by kind of a government granted monopoly to run their lines in the first place, and I think Matt alluded to this earlier with the one cable line to your house thing. I guess the frustrating thing for me as a bystander, or even when I was an employee of AT&T, was that the companies will always talk about their network, but they never seem to acknowledge the fact that those networks wouldn’t exist if it weren’t for the government and society kind of stepping up and granting them the right to create those networks. Do you think there’s enough consciousness within those industries of kind of their role as communications services and kind of the place that fits in our lives, especially in, really, the 21st century? I mean, it seems to me that it should be pretty obvious to people that live in the 21st century that the internet is, at this point, for a lot of people it’s a utility. I mean, it’s very difficult to live life without it.
SH: Right, I think that’s a very important point, I think that’s what has driven a lot of the recent decisions. Obviously it drove the net neutrality decision from the FCC and drove I think also the decision to block the Comcast/Time Warner Cable deal, is this recognition that this is a critical infrastructure of the modern economy, and you can’t participate in the economy if you don’t have access to it. And it’s not just about the economy, it’s also about speech and democracy and communications. I mean, it’s completely essential, to participate in the modern democracy, to have access to internet. I think there needs to be a real evaluation from the regulators about what role should the government be playing in making sure that we bridge the digital divide that we have, which that’s definitely been a big issue that I know Obama has promoted, and I know it’s been an issue for a lot of New York-based politicians to try to bridge the digital divide so that everyone has access no matter what their economic situation, everybody has access to broadband. But I also think that the US government needs to think about the fact that having an infrastructure that is not high-speed and the best and the fastest and the most efficient in the world is going to put the US at a disadvantage globally. When you have countries like…I believe it’s South Korea actually that the government actually owns the pipes and on the edges you have some private companies, but they’ve built a really high-speed system. And this is critical for competing on a global basis, for the US economy to be strong. I think there needs to be an understanding not just from the companies but from the government that this is something that’s worth the government investing in to make sure that the US is competitive globally. I don’t think the corporations view their role, in terms of the citizenry…I don’t think they’re focused on the importance of their infrastructure for democracy and everyday people participating in the economy. I think they’re much more focused on their bottom line, profits, and satisfying the shareholders.
SH: There’s one other big picture point that I would like to make, which is that you have to look at competition and net neutrality as kind of two sides of the same coin, that actually you wouldn’t need that much government regulation in the form of net neutrality rules or utility regulation if you had robust competition. But because it’s so difficult to get that robust broadband competition, that’s why we need to have much more regulation, just like in any given utility, than we would otherwise need to have. And the very last point I would like to make is I think the regulators are very focused on recognizing that the broadband companies do have, in some cases monopoly power, in some cases duopoly power, and making sure that they’re not able to leverage that market power into all the other verticals and all the other kind of markets that come together with broadband so that they don’t use their broadband monopoly as a way to then take over online video, or to use the set-top box market as a way to become the main conduit into consumers’ homes by virtue of their cable monopoly. So, I think that’s another important issue to look at, is just making sure that the fact that there is kind of a natural monopoly with broadband due to the cost of the infrastructure, that doesn’t necessarily mean that all the other markets that touch up against broadband should also be monopolized.
MJ: Oh, definitely. So, Sally, where can people find your writing on The Capitol Forum, or I guess anywhere else that you’re writing about these kinds of issues?
SH: So, The Capitol Forum has a website called TheCapitolForum.com, and sometimes we post our articles onto the website or onto the vlog. We’re largely subscription-based, so you could reach out to me if you’re interested in a subscription. And then otherwise, I’m always on Twitter and always interested in having conversations with anybody who’s looking at these issues.
MJ: Okay, well, thanks so much for joining us tonight Sally.
SH: Thanks for having me.
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