The Comcast/NBCU Merger Conditions: Hedges Against an Uncertain Future

On January 18, 2011, the Federal Communications Commission granted its approval to the acquisition by Comcast, the nation’s largest cable service operator and cable modem Internet access provider, of NBC Universal, Inc. (NBCU), the owner of the broadcast television network, several cable networks, Internet websites, and a leading Hollywood studio. The merger should fundamentally affect the businesses of programming, production and distribution across many platforms, including broadcast television, cable, online, and film. With significant control over both content and its distribution, the Comcast/NBCU merger created a potential incentive for the combined firm to raise prices and limit access to its programming to the disadvantage of its broadcast and online rivals. Working in coordination with the Department of Justice’s Antitrust Division, the FCC imposed a number of “targeted” conditions aimed at ameliorating the merger’s potential harms and quashing impending antitrust suits from states such as California. The Commission highlighted four key conditions to the government’s approval:

      1.     Ensuring Online Competitor Access to Comcast/NBCU Programming

The FCC imposed a number of provisions designed to ensure that bona fide online content distributors have the ability to acquire Comcast/NBCU programming at fair market prices and conditions. These protections extend to “online video distributors” (OVDs) such as Netflix, Hulu, Amazon and iTunes to prevent Comcast/NBCU from refusing to distribute their content to or intentionally impairing Internet access of the OVDs’ websites. The OVD conditions follow the Commission’s earlier order designed to implement firm net neutrality policies for fixed broadband service providers. Comcast/NBCU agreed to abide by the fundamental net neutrality principles even if they are overturned by a federal court. Comcast/NBCU further agreed to relinquish managerial control over Hulu, in which it is a significant investor, and provide standalone broadband Internet access services at “reasonable” prices. These provisions represented a blow to Comcast, which unsuccessfully argued that their company held no incentive to compete against OVDs because they lacked the capacity to deliver programming on a large scale. The Commission disagreed, citing the Department of Justice’s assessment of Comcast internal communications which indicated the company had taken steps to eliminate Internet video service competitors. The FCC marked the nascent OVD’s services for special protection by compelling Comcast/NBCU to share content as soon as an OVD establishes a distribution arrangement with one of Comcast/NBCU’s peers like ABC or CBS. This low threshold for sharing extends a lifeline to OVDs who feared they would be shut out of some of the most popular programming available.

      2.     Preventing Comcast/NBCU from Enacting a Discriminatory Distribution System

Numerous critics of the merger warned that Comcast/NBCU would stifle competition by withholding carriage of outside programming or imposing prohibitive carriage fees. To assuage these concerns, the FCC emphasized three stipulations in the merger approval to foster nondiscrimination in distribution. First, Comcast/NBCU must not discriminate against third-party programming on the basis of its non-affiliation with the merged firm. As a consequence, the cable set top boxes which enable customers to access both cable and online programming must direct incoming data on a neutral basis. Second, if Comcast carries news programming in a “neighborhood” of adjacent channels, it must carry all independent news in that same neighborhood. This provision arose after sustained complaints by networks like Bloomberg which charged Comcast with exiling their station to premium tiers away from other news content. Third, Comcast voluntarily committed to add a minimum of ten new independent channels to its digital lineup over the next eight years. Unlike the conditions involving OVDs, these conditions signified a major victory for the merged firm, as competitors originally asked the FCC to order Comcast/NBCU to divest itself of any NBCU stations in areas where Comcast held substantial market power.

      3.     Safeguarding Public Interest Concerns

The FCC enumerated some conditions and voluntary commitments related to the ethical concerns raised by the large media consolidation. Comcast/NBCU committed to expanding its local-interest, educational, Spanish-language, and children’s programming, although the FCC stopped short of mandating specific percentages for independent and minority-produced programming. The import of these policy commitments varied among the Commissioners. Commissioner Clyburn emphasized Comcast/NBCU’s willingness to enter into voluntary commitments as credible evidence of the merger’s public benefits. In contrast, Commissioners McDowell and Baker criticized the FCC for effectively forcing Comcast/NBCU to adopt costly policy programs which may hamper the merged firm over time.

       4.    Improving Arbitration Process for Licensing Comcast/NBCU Programming

Drawing upon conditions imposed in past large-scale mergers, the FCC announced an improved commercial arbitration process to facilitate disputes involving prices, terms, and conditions for licensing Comcast-NBCU programming. The arbitration procedures will apply to all of Comcast/NBCU’s affiliated programs, including video-on-demand and pay-per-view content, with the arbitrator considering the “last best offers” submitted by both sides before choosing the arrangement which best reflects the fair market value of the programming. Smaller distributors will hold the option to band together, in “baseball-style” arbitration, during their complaints against Comcast/NBCU. However, the Commission emphasized that the level of discovery available in these proceedings will be limited.

While few observers doubt that the Comcast/NBCU merger will significantly alter the media landscape, critical questions remain regarding what further effects the decision will have on content providers and distributors. Within Comcast, the company has already folded some of its flagship channels into their NBC counterparts to reduce redundancy and will reportedly invest heavily in reviving NBC’s primetime lineup. Meanwhile, Comcast/NBCU’s competitors may become more aggressive to avoid losing any additional market share to the new merged firm. In the interim, the unprecedented size of the merger will initially complicate any analysis of its effect on the national market. Even Chairman Genachowski conceded that the alleged benefits of the merger “are inherently difficult to quantify.” As demonstrated by Viacom and AOL Time Warner, vertical mergers can fail to produce their expected benefits, resulting in subsequent break-ups of the merged companies. Prior to the merger’s approval, Comcast submitted a report concluding the merged firm would have no incentive to deny NBCU programming to competitors and would not greatly disrupt the current market. However, one study commissioned by the American Cable Association placed the potential harms of the merger to consumers at $2.4 billion over the next nine years, nearly ten times the size of the expected public benefit of $204 million. Other critics of the merger questioned the efficacy of the imposed conditions, stating the disproportionate market power held by Comcast/NBCU post-merger will make the merged firm nearly uncontrollable. This gap between corporate and public benefit led Commissioner Copps to issue the sole dissent against the merger, finding multiple instances where the new entity will be able to wield unchecked market power post-merger. For example, nothing under the FCC agreement prevents Comcast/NBCU from bundling less popular programming with marquee content into “bloated” packages, potentially driving up prices for consumers. As Comcast faces no significant competition in many operating areas, the bloated packages will remain unconstrained by market forces. The merger threatens to exacerbate this situation by potentially weakening the few remaining Comcast/NBCU competitors in smaller markets.

On the issue of localism and diversity, supporters of independent media criticized the FCC for sustaining the status quo in the industry instead of increasing protections for smaller media providers. These critics cautioned that the merger would put NBC newsrooms under heightened corporate pressure to cut investments in local journalism and place one in every five television viewing hours under the control of a single company. Even if increasing numbers of online-only media sources rise up to take on the bulk of local investigative journalism, they will nevertheless fail to have the dominant market penetration that Comcast/NBCU will wield.

Most troubling for the merger’s critics, many of the commitments taken on by Comcast/NBCU will expire in seven years, potentially allowing the company to renege upon its pledges of content neutrality. Whether those concerns are valid remains to be seen, but what does seem likely is that future media consolidations will need to survive a protracted FCC review. Although lawmakers from both parties expressed their displeasure with the length of the FCC’s consideration of the merger, the number of interested stakeholders in these issues shows no signs of dwindling. However, the exacting investigation process is unlikely to deter other companies from developing their own large-scale merger proposals in order to stay competitive with the new FCC-approved Comcast/NBCU media giant.

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