Ignore the Pundits, Time Warner/Comcast Merger Is a Good Thing
Google "Comcast Time Warner." I did it yesterday morning and got 57.7 million results under News. A quick scan of the first page of results shows approximately half the headlines were a version of the factual summary "Comcast and Time Warner to Merge." The other half introduced a decidedly negative view of the proposed deal. The first three headlines are good examples: "Comcast's $45 Billion Purchase Of Time Warner Cable Is Trouble..." from Business Insider; "Many fear Comcast-Time Warner Cable merger spells monopoly" from the Arizona Daily Star; and "Comcast's Time Warner buyout is bad for America" from the Dallas Morning News. Not a single headline on that first page of Google search results painted the merger in a positive light.
Maybe these were just summary articles put together by staff writers with titles picked by editors in an attempt to titillate rather than inform. I was sure analyses that are more thoughtful were to come. Maybe they will. Yet, it was particularly distressing to read a tweet from Bloomberg Surveillance's Tom Keene the morning after the deal's announcement. "good HHI morning @kevinroose nails it ... $CMCSA," he wrote.
The HHI in Mr. Keene's tweet refers to the Herfindahl-Hirschman Index. According to Wikipedia, the HHI "is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them." The "nailing it" refers to a New York Magazine piece whose title does not mince words, "This Math Formula Shows Why the Comcast-Time Warner Cable Deal Should Be Blocked."
Why is Mr. Keene's tweet distressing? He is a terrific journalist. He is fun to listen to, has a self-deprecating, dry sense of humor, attracts great guests with differing economic and political views and does a thorough job interviewing them. He frequently points out that he does not want to introduce his opinion into the conversation; and when he does, he tries to point that out too. In other words, he is not a junior staff writer. He should be a bit more skeptical and inquisitive. Yet instead, he essentially parrots a regulatory bogeyman and a scientific sounding "analytic tool" as evidence of the regulatory bogeyman's validity.
Twitter is a challenging medium - only 140 characters to convey a thought. Perhaps that is the explanation. Nevertheless, I am afraid this is an indication of how ingrained an idea it has become that a few bureaucrats with the help of experts and highfalutin calculations can plan an economy of 300 million+ people and $16 trillion in gross domestic product better than the free market.
Seriously? Newspaper editor after newspaper editor and one of the best financial journalists in the game today take it as a given that the mandarins in Washington, DC should be able to decide (relying heavily on a one-dimensional math formula) whether or not the owners of two private businesses can choose to merge?
The Herfindahl-Hirschman Index sounds authoritative. It sounds like a physics formula, but it is not. Force = mass x acceleration is a physics formula that describes how the real world works. It is a fact. It can be verified in controlled laboratory experiments and every time a plane takes off there is proof it works in the real world. The HHI is pseudoscience. Sure, it spits out a single aggregate number based on inputting the estimated market share of the top fifty companies in an industry. But, what does that really mean?
What industry is Comcast in exactly? Content distribution, content aggregation, content creation, or Internet access? Or, more broadly, is Comcast in the entertainment business? Their market share is different in each. The competitive issues for each are different as well. More importantly, the competitive issues are changing on almost a daily basis. No one at the FCC has a clue what any of these industries will look like in five years. Innovators and entrepreneurs are driving change and providing consumers with more options at a rapid pace. The examples would take up pages, but I will offer a few. Google's YouTube competes with Comcast's content offerings. Netflix, Amazon, and Apple compete with Comcast's content aggregation business. T-Mobile's aggressive pricing is threatening everyone who provides content distribution and Internet access. Even Verizon and the satellite TV companies are a threat to Comcast's "traditional" bundling and distribution business. Competition - in the form of new business models, new technologies, new offerings - protects the consumer far better than any attempt by the federal government to limit consolidation of the old way of doing business.
Further, does market concentration always and everywhere lead to monopolistic power? Does monopoly always lead to consumer price gouging? Conventional wisdom would have you believe so. And, it is in the best interest of bureaucrats, lobbyists, many lawyers, and many academics to work hard to perpetuate this storyline. They make very good livings serving as the high priests of regulation. Conventional wisdom says that they are ordained, so they must know something we do not. In reality, they purposely complicate and obfuscate by creating specialized knowledge that is sophistry. If we do not defer to their authority, we are admonished. Yet, history tells a different story.
As Alex Epstein wrote in "Vindicating Standard Oil, 100 years later," "Standard Oil has served as the textbook example of why we need antitrust law." Yet, according to Epstein, "In 1865, when Rockefeller's [Standard Oil's] market share was minuscule, a gallon of kerosene cost 58 cents. ... By 1880, when Standard's market share had skyrocketed to 90%, a gallon cost only 9 cents - and a decade later, with Standard's market share still at 90%, the price was 7 cents."
Microsoft presents a modern example. In 2000, a federal judge ordered the breakup of Microsoft as a remedy to the court's findings that Microsoft was a monopoly. After appeal, the two parties reached a settlement allowing Microsoft to remain intact. Fast-forward fourteen years. Despite being branded a "monopolist," Microsoft struggles today to compete with Apple and Google in the market for mobile devices (smart phones and tablets). Google is the primary portal to the World Wide Web. Again, the list could go on. In the case of Comcast, it has been an industry consolidation story from the moment Ralph Roberts purchased the 1,200 subscriber American Cable Systems in 1963. The history of the consolidation is one of spectacular shareholder returns combined with broader service to a broader audience and cheaper and cheaper prices. In other words, all this consolidation has been a boon for the consumer of entertainment and information.
Over the past thirty years, from the end of 1983 through the end of 2013, Comcast provided shareholders with a 16% annual return. The S&P 500 returned 11% over that same period. $1000 invested in Comcast became $86,000. $1000 invested in the S&P 500 became $23,000. This is a tremendous difference in wealth creation. It could only happen if Comcast's management team consistently made smart decisions when allocating their shareholders' capital. Critically, this could only happen if Comcast's management used that capital to build products that customers want at prices customers deemed reasonable.
Today, cable subscribers pay only 23 cents per viewing hour for digital video service according to the National Cable & Telecommunications Association. Even the Federal Communications Commission (FCC) admits on their website that the history of cable television is a history of expanded access to expanded content. In 1950, only 70 communities in the United States had access to cable. Today there are systems in 34,000 communities. In 1950, cable television was a way for communities unable to receive broadcast signals to access a few broadcast channels. Today cable subscribers have access to well over 100 channels, as well as broadband internet access, telephony, and home monitoring. Speaking of broadband internet access, this is a story of massive price deflation. According to research by Shane Greenstein at Northwestern, in 2004 the median contract price for a cable modem was $45 per month ($56 in 2013 dollars) for 3000 bits per second upload speed. Today, I pay Comcast $64 per month for 10,000 bits per second upload speed. In other words, I pay almost 65% less for my internet access today than the median customer paid ten years ago.
The best way to win an argument is to be the one who frames it in the first place. The federal government has framed the "merger argument" as an issue of concentration. By using a scientific sounding formula (HHI) to assess concentration they create an air of legitimacy where one does not belong. It is the role of journalists to challenge the status quo. Rather than simply applying the given analytic tool, journalists need to ask if the premise itself even makes sense. History shows that the assessment of concentration is always ambiguous and fears of its harmful effects, mostly erroneous. There are substitutes for every product far beyond a bureaucrat's imagination. If Comcast charges too much, the consumers' entertainment dollar will go elsewhere and they will access the Internet for research purposes using an alternative mechanism such as a cellular telephone service.
If the government wants to do something to expand consumer choice and increase societal wealth, it can allow innovators and entrepreneurs to flourish. It can refrain from meddling in what should be transactions between private citizens and entities. If journalists truly wish to add value, they will start by asking more questions and challenging even their own presumptions.
Jeff Erber is Managing Director at Grey Owl Capital Management.
Disclosure: The Opinions ("Opinions") contained within this commentary are the personal views of Jeff Erber, a principal at Grey Owl Capital Management, LLC ("GOCM"). These Opinions consist of market information and general market commentary only. It is provided for informational purposes only and is not intended as a recommendation for the purchase or sale of any securities named. At the time of this commentary, GOCM held Comcast equity in a client account; however, it is not part of GOCM's managed strategy.
