Comcast and NBC Universal: The Implications of Big Media Mergers in an Increasingly Smaller World

by Yuejiao Hou December 3 2009, 05:18

I. Introduction
      Comcast's proposed takeover of NBC Universal is expected to completely restructure the entertainment industry's landscape. Analysts, investors, and public interest groups alike have responded strongly to the anticipated agreement, which is expected to be finalized imminently. The merger of the largest American cable company with one of the largest entertainment enterprises in the world would give the combined entity control over approximately one out of every five viewing hours in the United States. [1] Not surprisingly, the deal will be heavily scrutinized and raise considerable questions of antitrust law, media diversity, and the future of internet usage. This article will explore the implications of big media mergers in light of the Comcast-NBC proposal.

II. Facts
      Comcast Corporation (Comcast) is not only the largest cable company in the United States, but also the largest internet service provider and the third largest home phone provider. [2] Comcast has 25 million television subscribers, 15 million internet service costumers, and 6.4 million household telephone service accounts. [3] Its current assembly of cable networks includes E!, Style, Golf Channel, and G4. [4]
      NBC Universal, Inc. (NBCU) is a media and entertainment company created by the merger of General Electric's (GE) NBC and French Media Group's Vivendi Universal Entertainment (Vivendi). The two companies own 80% and 20% of NBCU respectively. [5] NBCU owns and operates 26 television stations, the Spanish language network Telemundo, and a dozen cable networks including USA, Barvo, Syfy, and CNBC. [6] It also has a 27% stake in the internet venture Hulu. [7]
      Vivendi has an annual option to sell its stake in NBC to GE between November 15th and December 10th of each year. Vivendi has been negotiating to get the best value for its investment, as the Comcast-GE agreement hedges on Vivendi's decision to exercise this option. GE has recently reached a tentative agreement with Vivendi to buy its stake in NBCU for $5.8 billion. [8] Following a successful Vivendi buy out, GE would then sell 51% of its total ownership of NBCU to Comcast, who would merge its cable-TV channels and contribute $4 to $6 billion to the joint venture. Comcast is expected to buy the remaining 49% of NBCU from GE over the next seven years. [9]
      The companies have agreed to value NBCU at about $30 billion dollars, and the Comcast-NBCU union is estimated to have an annual revenue of about $42 billion. [10] The combination of these two entities would be, according to the public interest group The Center for Digital Democracy, "the equivalent of Godzilla swallowing the Rockefeller Center." [11]
      Given the union's size, significant opposition stands in the way of the merger. The deal must pass review by the Federal Communications Commission (FCC) as well as review of its antitrust connotations by the Justice Department or the Federal Trade Commission (FTC). [12] NBC's affiliates and competitors hold considerable sway over the federal agency approval of the deal and may chose to stand in the way of the union. [13] Additionally, public interest groups are pressuring the Obama administration to oppose the deal, citing that it would both stifle media diversity and have a negative impact on the availability of free internet information. [14] Even without the external pressures, regulatory review of the merger could take more than a year. [15]

III. The Case against Consolidation
      United States antitrust law aims to eliminate transactions that threaten the competitive process. Mergers and acquisitions are regulated under the Clayton Act, which states:

"No person shall acquire, directly or indirectly, the whole or any part of the stock or any other share capital... of the assets of one or more persons engaged in commerce or in any activity affecting commerce, where... the effect of such acquisition, of such stocks or assets, or of the use of suck stock by the voting or granting of proxies or otherwise, may be substantially to lessen competition, or to tend to create a monopoly." [16]

      The merger would be a vertical integration, in which one company seeks to control several different steps of the production and distribution of a product or service. By controlling both production and distribution of programs, Comcast could retain an unfair advantage. There are several ways in which the Comcast-NBC merger could substantially lessen competition.
      The anti-competitive measures could include, but would not be limited to, Comcast blocking its competitors' access to NBC prime-time shows and local newscasts [17] or raising the distribution costs for other pay-TV providers to access NBCU networks. [18] The new Comcast-NBCU may also be dominant enough to refuse to carry cable channels owned by rivals and force its rival channels to offer lower fees. [19] Expanding beyond television, the new entity may even produce big-screen movies and then control the release dates of the movies to give itself an advantage over movie-rental businesses like Netflix. [20] Additionally, the Comcast-NBCU deal could lead to a wave of similar media mergers that would further decrease competition as Comcast's competitors struggle not to be left behind. [21]
      The internet and "network neutrality" are further issues in contention. Comcast-NBCU could use its control in violation of the tenet that broadband providers should treat all internet traffic equally by favoring its own media content. [22] It could also "remove a competitive rivalry" by eliminating the availability of free television programs on the internet through its stake in Hulu. [23]
      Many public interest groups are calling for a return to smaller, local media channels and opposing the media oligopoly. They argue that a few, large media corporations would undermine the diversity of offerings and consumer choice in the industry. [24] Antitrust law, they state, is not solely about price; it is about choice, and this includes the choice of quality and editorial viewpoint that a media oligopoly lacks. [25] Since media products inevitably bear the perspective of their corporate parent, the number of firms required to ensure media diversity is larger than that required to preserve price competition. [26]
      These organizations also assert that a lack of media diversity not only limits consumer choice, it harms democratic discourse and stifles minority voice as well as affects how women and people of color are portrayed in the media. Due to media giants crowding out local businesses, women and minority ownership of television stations is unacceptably low and the proportion is continually decreasing. Women, who comprise 51% of the population, own 4.97% of television stations, and minorities, who comprise of 33% of the population, own 3.26% of all stations. [27] In addition, media diversity is believed to be an important check on government power. [28]

IV. The Case for Consolidation
      Despite widespread concern, antitrust experts find little proof that the merger would substantially lessen media competition due to people increasingly distributing leisure hours across a variety of diversions aside from television viewing [29]. Additionally, regulations are already in place to prevent Comcast from refusing to sell its programming to its competitors. [30] The merger may even increase competition in some areas, such as sports, where Comcast could become a potent rival to Disney's ESPN. [31]
      The merger comes at a difficult but convenient time for both companies. Comcast has been losing hundreds of thousands of subscribers each year to its competitors, such as satellite television providers who are able to offer their channel packages at lower prices. [32] Additionally, suppliers like NBCU and Walt Disney have been charging higher prices as broadcasters like FOX and CBS have declared an intention to start charging for their programs. [33] Comcast is losing business rapidly to selective, cheaper programs on the internet. [34] NBC, too, has seen a slow and steady decline since the 1990s. [35] Ratings have steadily decreased with the number of quality, "must-see" programs [36], which are replaced by cheaper-to-produce reality television. Good television programs with intelligent, well-written scripts and capable actors are becoming progressively more costly to produce while the station's revenue are decreasing due to an increasingly lower demand in television advertising [37], the sole means by which broadcast stations bring in revenue. [38]
      Comcast's move may be just what both companies need in order to bounce back. Having control of a significant amount of the content being produced would give Comcast the freedom and power to experiment with how to best deliver its programs. [39] The union would also allow for Comcast's enhanced utilization of the internet and allow both companies to benefit from Comcast's efforts to reach additional platforms. [40] The combination of the leading and third largest online video sites, Hulu and Comcast's Fancast, could boost the availability of media content on the internet. [41] The flow of money back to the studio would allow the continued and increased production of more quality television shows, benefiting the viewers. [42]
      The new company would likely speed the development of new and innovative forms of advertisement, such as interactive television ads. [43] The merge also has the potential to revive the video on demand industry and accelerate its availability and acceptance. [44] Additionally, Comcast-NBCU can serve as a major boost for the cable industry, as big public companies tend to drive big public industries. [45]

V. Analysis
      The Obama administration has vowed to encourage media diversity and to play tough on the enforcement of antitrust regulations. [46] The merger will almost indubitably pass considering the significant players' substantial size and considerable clout. While such a large-scale merger inevitably has risks, the mandated FCC and Justice Department or FTC approval serve as powerful checks on Comcast. Comcast will have to make many concessions in order to attain such approval.
      Regulators will work to ensure that competitive rivalry is maintained. The government may forbid Comcast from denying access to content to its competitors and from discriminating against cable channels that it does not own. [47] The government may mandate binding arbitration in any disputes that arise. [48] It may go as far as to force Comcast to dissociate from local stations in fear that it will hold too much clout in negotiations. [49] It will reiterate its mandate of net neutrality. Comcast may also have to compromise on its exclusivity over its regional sports programs by granting its competitors access. [50] Additionally, Comcast may have to divest some of NBCU's assets to please the regulators. [51]
      Two similar mergers in the past were America Online's (AOL) purchase of Time Warner Inc. (Time Warner) in 2001 and News Corporation's (News Corp.) acquisition of The DirecTV Group (DirecTV) in 2003. In both instances, the FCC imposed additional regulations as a check against the media giants' control. It required Time Warner to offer services additional to AOL on its cable internet network, and it prohibited News Corp.-DirecTV from discriminating against its competitors' television channels and called for mandatory arbitration for dispute resolution. [52] The FCC will likely analyze and look to these past cases while deliberating the Comcast-NBCU deal.
      In both cases, the consolidations spawned similar outrage and alarm to the current Comcast-NBCU deal. Opponents of those mergers predicted rising programming prices, significant impairment to competition, decrease in media diversity, and a restructuring of the entire media landscape. [53] In both instances, the consolidated entity proved harder to maintain than expected. Whether through poor management, ill-advised business decisions, or unfortunate circumstances, both companies suffered significant losses and the apocalyptic predictions fell short. [54] Time Warner currently plans to completely divorce itself from AOL, while News Corp. successfully sold its stake in DirecTV to Liberty Media in 2008. [55]
      The alarm toward the Comcast-NBCU merge may be similarly overstated. Comcast may become the most powerful player in the entertainment industry and lead its competitors by example, or it may follow in the footsteps of its predecessors and regret its sizeable decision. What the future holds for Comcast and for the entertainment industry is unclear, but we should not fear to move forward and let the future play out.

VI. Conclusion
      While the panic toward the Comcast-NBCU entity may be overstated, the significance of the merger should not be overlooked. Comcast-NBCU would not only be influenced by past mergers, it will give insight into the requirements and regulations to be imposed on furture deals. The government is not likely to treat such a merger lightly, and the resulting entity will not be an easy one to manage. The merger may very well be a large asset for Comcast, but the concessions and compromises that Comcast will be forced to make will also benefit its competitors. If Comcast manages the new entity well, the union can serve to boost the economy. Viewers can benefit in receiving more quality programming through a wider array of platforms. Technology is relentlessly changing, and business principles and administration will inevitably evolve with it. With the increasing availability of alternate platforms for media communication, Comcast may lead the entertainment industry into a more modernized future.

 

___________________________________ 

End Notes

[1] Yinka Adegoke & Jui Chakravorty, FCC conditions on Comcast-NBC could hurt synergy, Reuters, Nov. 11, 2009, available at http://www.reuters.com/article/industryNews/idUSN1133772320091112?pageNumber=2&virtualBrandChannel=10522.

[2] Id.

[3] Malcomn Berko, Malcomn Berko: Taking Stock, The State Journal Register, Oct. 7, 2009, available at http://www.sj-r.com/business/x1992007274/Malcom-Berko-Taking-stock.

[4] Mike Farrell, 3 Reasons Why Cable Should Cheer the Marriage, Multichannel News, Nov. 16, 2009, available at http://www.multichannel.com/article/389090-Cover_Story_3_Reasons_Why_Cable_Should_Cheer_the_Marriage.php.

[5] Max Colchester & Sam Schechner, Vivendi, GE Dig In Heels at Talks Over Price for NBC Universal Stake, The Wall Street Journal, Nov. 23, 2009, available at http://online.wsj.com/article/SB10001424052748703819904574552221903159800.html?mod=googlenews_wsj.

[6] Farrell, supra note 4.

[7] Id.

[8] Tim Araingo & Bill Carter, With Deal, G.E. Clears Path to Sale of NBC, The New York Times, Nov. 30, 2009, available at http://www.nytimes.com/2009/12/01/business/media/01deal.html.

[9] Bob Fernandez, A preemptive strike against Comcast-NBC deal, Philadelphia Inquirer, Nov. 14, 2009, available at http://www.philly.com/philly/business/20091114_A_preemptive_strike_against_Comcast-NBC_deal.html.

[10] Farrell, supra note 4.

[11] Id.

[12] Vivendi to Decide on Selling NBC Stake: Reports, RTT News, Nov. 15, 2009, available at http://www.rttnews.com/ArticleView.aspx?Id=1129775&SMap=1 [hereinafter "RTT"].

[13] Wayne Friedman, Malone: NBC/Comcast Merger Would Juice Broadcast Ops, Media Daily News, Nov. 23, 2009, available at http://www.mediapost.com/publications/?fa=Articles.showArticle&art_aid=117900.

[14] RTT, supra note 12.

[15] Meg James, Comcast aspires to be major global communications player, Los Angeles Times, Nov. 16, 2009, available at http://www.latimes.com/business/la-fi-ct-comcast16-2009nov16,0,6145451.story.

[16] 15 U.S.C. §18 (2009).

[17] Fernandez, supra note 9.

[18] Brian Stelter, Intense review is Expected for NBC Deal, The New York Times, Nov. 8, 2009, available at http://www.nytimes.com/2009/11/09/business/media/09comcast.html.

[19] Shira Ovide & Amy Schatz, Comcast-NBC Deal Would Draw Lengthy Scrutiny in Washington, The Wall Street Journal, Nov. 16, 2009, available at http://online.wsj.com/article/SB10001424052748704538404574537882263399324.html.

[20] Fernandez, supra note 9.

[21] Robert Lande, Antitrust and the Media - II, The Nation, May 22, 2000, available at http://www.antitrustinstitute.org/Archives/70.ashx.

[22] Joelle Tessler, Comcast, NBC deal will face tough antitrust review, Associated Press, Dec. 2, 2009, available at http://www.google.com/hostednews/ap/article/ALeqM5icvi8L5K4PM31D5eF-DdXTJLfdzAD9CBH1781.

[23] Fernandez, supra note 9.

[24] Lande, supra note 21.

[25] Id.

[26] Id.

[27] S. Derek Turner & Mark Cooper, Out of the Picture 2007: Minority and Female TV Station Ownership in the United States (2007), available at http://www.freepress.net/files/otp2007.pdf.

[28] Lande, supra note 21.

[29] Ovide et al., supra note 19.

[30] Id.

[31] James, supra note 15.

[32] Id.

[33] Id.

[34] Id.

[35] David Bauder, Broadcast pioneer NBC prepares for cable takeover, Associated Press, Nov. 14, 2009, available at http://www.google.com/hostednews/ap/article/ALeqM5hyXgQiRJXlVqt_vyzJYxH2xWpM5AD9BVPTSG0.

[36] Id.

[37] Tim Arango & Bill Carter, An Unsteady Future for Broadcast, The New York Times, Nov. 21, 2009, available at http://www.nytimes.com/2009/11/21/business/media/21network.html.

[38] Ken Auletta, Why Oprah Needs Cable, The New Yorker, Nov. 20, 2009, available at http://www.newyorker.com/online/blogs/newsdesk/2009/11/oprah-cable.html.

[39] James, supra note 15.

[40] Id.

[41] Mark Guarino, Three ways the Comcast-NBC merger could change television, The Christian Science Monitor, Dec. 2, 2009, available at http://features.csmonitor.com/economyrebuild/2009/12/02/three-ways-the-comcast-nbc-merger-could-change-television.

[42] Nicolas Carr, The Price of Free, The New York Times, Nov. 13, 2009, available at http://www.nytimes.com/2009/11/15/magazine/15FOB-Phenomenon-t.html.

[43] Suzanne Vranica & Sam Schechner, Two-Way Communications, NBC Could Push Comcast Toward Interactive Ads, The Wall Street Journal, Nov. 16, 2009, available at http://online.wsj.com/article/SB10001424052748703811604574534272928283340.html?mod=googlenews_wsj.

[44] Farrell, supra note 4.

[45] Id.

[46] Tessler, supra note 22.

[47] Id.

[48] Id.

[49] Id.

[50] Id.

[51] Alan Albarran, Lots of Layers in Potential GE-Comcast Deal, GLG News, Dec. 2, 2009, available at http://www.glgroup.com/News/Lots-of-Layers-in-Potential-GE-Comcast-Deal-45145.html.

[52] Tessler, supra note 22.

[53] Adam Thierer, A Brief History of Media Merger Hysteria: From AOL-Time Warner to Comcast-NBC, The Technology Liberation Front, Dec. 2, 2009, available at http://techliberation.com/2009/12/02/a-brief-history-of-media-merger-hysteria-from-aol-time-warner-to-comcast-nbc.

[54] Id.

[55] Id.

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