Analysis: CNBCU Conditions Will Stimulate Growth, Not Restrict It

The Federal Communications Commission’s recent approval of Comcast’s merger with NBCU has come with some major conditions that will limit any potential discriminatory policies the new firm might have engaged in.

The new entity, CNBCU, will become one of the nation’s largest content creation and distribution companies. CNBCU will be in a unique position in that they will not only control the creation of content but also the method in which it is distributed. Unchecked, this vertical integration could lead to monopolistic actions.

In his dissent to the merger, Commissioner Michael Copps said, “[this merger] confers too much power in one company’s hands.” However, with the conditions imposed by the commission, CNBCU, while powerful, will be unable to act in a monopolistic manner.

While some critics have called the FCC’s conditions restrictive, they are directed at potential areas where the new firm could do direct consumer harm.  The main goal of these policies is to protect consumer welfare once CNBCU becomes a major market force in all of the cable, broadband, and online video markets.  The FCC worked with the Department of Justice to include provisions that will ensure that the new firm will not violate anti-trust regulations.

The conditions placed upon the merger will guarantee the consumer welfare is protected while also supporting a vibrant marketplace.

The most prominent anti-discriminatory directives – compliance with the Open Internet Order –  is a major factor in ensuring broadband competitiveness. CNBCU will become one of the nation’s largest internet service providers offering access in over 30 states. The merger agreement mandates that the firm must follow all the provisions of the FCC’s Open Internet Order. Even if the Order is modified or struck down in court, CNBCU must adhere to the rules and regulations within the Order.

Compliance with the Open Internet Order by such a large player in the market will not only affect CNBCU but also its competitors.  To remain competitive with CNBCU’s open network, market pressure will mount for rival ISPs to follow the Open Internet Order as well. Given a choice between the open CNBCU network and a potentially closed or limiting internet service, consumers will likely pick the open network.

Verizon and MetroPCS have already filed suit against the FCC over the Open Internet Order; however, regardless of the outcome it will presumably be adopted by all major ISPs. The market power that CNBCU holds will ensure that its competitors will also follow the same rules to offer a competitive product.

CNBCU will be in a unique position of being a content provider and content maker. It will also be the largest player in the emerging online video distribution market. CNBCU will control nearly 5 percent of the online video distribution market including Hulu, Daily Candy, and NBC.com. Additionally CNBCU has signed a lucrative deal with Netflix to offer a large back catalog of content.

The online video market is growing faster than ever as more consumers “cut the cord” and drop traditional cable in favor of online video. The research firm SNL Kagan,  estimates that 741,000 customers dropped their cable subscriptions.

CNBCU will presumably earn more revenue from advertising on its traditional cable properties than its online video properties.  The Commission, recognizing the financial incentive for CNBCU to force consumers to watch their programming over cable versus online video distributors, explicitly forbids the blocking or degrading of online video content.  This anticipation shows that the FCC believes this emerging market will soon take off and become a major way in which consumers will access content.

The most prominent of these online video distributers is the popular free website Hulu, in which CNBCU – along with ABC and News Corp. – holds a major stake. The website is a limited alternative to traditional cable access. Since CNBCU competes with Hulu in the cable market, however, the FCC is justified that CNBCU may try to limit Hulu. In fact, the 2010 Comcast v. FCC case sprung from accusations that in 2007, then standing alone, Comcast degraded service to services such as Hulu and Skype, which provided free alternatives to their cable and telephone products.  The merger conditions restrict CNBCU from exercising any operational power over Hulu, but it will be allowed to keep its financial stake in the firm. To ensure that Hulu continues to get content from CNBCU at a fair price the FCC has mandated that CNBCU must maintain its current contract with Hulu and continue to provide the same level of content that its partners provide. By maintaining its financial stake in Hulu CNBCU will presumably want the company to do well and provide it with quality programming.

To prevent any exclusionary deals that would prevent other cable providers from access to its online video, the Commission has mandated that CNBCU must offer its online content to others at a reasonable market rate.

Additionally CNBCU is prohibited from offering to its broadband subscribers specialized online video content that includes only NBC programming. In order to offer an online video service the firm must include programming from outside sources as well. However, with its stake in Hulu it seems unlikely that the firm will launch a new online video service.

The online video conditions may seem unnecessary due to the relative size of the market in comparison to that of cable, but online video is continuously growing. The concern by the FCC over the market indicates that the Commission anticipates it becoming a prominent method of watching television and movies in the near future. If CNBCU blocks access to its content, it will severely hinder the growth of the online video market.

While some may claim that the conditions imposed by the FCC on the merger is strong handed government overreaching by the commission, these conditions actually promise to create new markets while protecting consumers and preventing years of anti-trust litigation.