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The case for allowing the Comcast-TWC merger..and then breaking up Comcast

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The regulatory review process for the proposed Comcast merger with Time Warner Cable begins this week in earnest and Comcast has now officially weighed in with its stance on the $45.2 billion deal.

On Tuesday, the media giant filed what is known as a Joint Application and Public Interest statement with the Federal Communications Commission (FCC). That filing starts the 180-day deadline for the FCC to make its decision on whether to approve the merger.

Based on the filing and other statements made by Comcast executives, from their perspective the argument comes down to a couple of points. The merger would make it easier for Comcast to offer faster and more economical broadband and would increase the pace of innovation. And since Comcast and Time Warner cable don't overlap in terms of broadband or video services they offer in any market, then there shouldn't be any antitrust concerns.

But that argument glosses over the most important consequence of the merger, in much the same way that the argument over allowing Comcast to acquire NBC Universal tended to focus on cable channel diversity. Yes, the combined company is going to control about 30 percent of the U.S. broadband market and that's a big public interest issue. But it's also not one easily addressed in the scope of this proposed merger.

What really matters in this merger - and what Comcast doesn't want to talk about - is that the combined company won't just be the biggest single supplier of broadband in the U.S. It also owns a healthy portfolio of broadcast and cable channels. It's that combination of assets that threaten the public good and make it likely that Comcast will be able to get its way in nearly any negotiation with rival media companies.

There are a lot of dire consequences to the merger, but here is the simplest to understand. Allowing a large company to own substantial assets in both the content and distribution worlds makes it almost a given that the combined company will be able to set the terms for the industry. No cable channel or rival media company will be able to stand up against a broadband behemoth that controls 30 percent of the U.S. market and that includes some of nation's biggest markets. NBCU can use its relationship with Comcast to push up retransmission and subscription costs far beyond what is economically justified. And since virtually every contract has a "favored nations" clause, NBCU can claim in any retransmission or subscription fee negotiation that they are unable to offer a smaller rate increase than the one "negotiated" with Comcast.

Despite what Comcast executives claim, when it comes to television you don't have to have a pure monopoly to run things. You just have to control a big enough slice that your rivals can't afford to fight you.

When you examine that problem and how to solve it, there are really only two scenarios that make any sense. First, you could just block the merger. But that's a tougher public interest call, since there hasn't been any real inclination before now to stand in the way of broadband consolidation. There should have been and it's an issue that will have to be addressed at some point. But that battle isn't going to happen now.

The second scenario is one that probably has very little real chance of happening in the current political climate. But it's also the solution that makes the best market sense and offers the best way to serve the public interest.

Force Comcast to shed itself of its television assets.

When Comcast announced its intent to acquire a majority stake in NBC Universal in 2009, one of the chief worries from opponents of the deal was the danger of excessive "vertical integration." The worry was that the combined company would control both television and content distribution sides of the business, which would limit innovation and competition. At the time, Comcast made the argument that while the resulting company would be big, its scale wasn't sufficient to stifle competition in the industry.

As Comcast executives have pointed out, much has changed in the television industry since then. But many of the changes have made the company's ownership of significant broadband and content parts of the business more of a problem for consumers and the industry at large.

The landscape that made the Comcast acquisition of NBCU possible in 2009 has changed and it's difficult to see the public interest in allowing one company to own a significant stake in both distribution and content.

While forcing Comcast to shed itself of a substantial part of its TV portfolio sounds unlikely, there is a precedent for the move.

In 1948, the Supreme Court issued a decision in U.S. vs Paramount Pictures, et al., that forced Paramount Pictures and seven other major Hollywood movie studios to shed their control of the nation's motion picture theaters. At the time, the studios controlled nearly every major theater screen in the United States. Some of the theater chains were owned outright, but many independent chains had been forced to sign deals with the studios that guaranteed a certain amount of screentime for each studio's films. Known as "block booking," those deals made it nearly impossible for smaller studios to book their movies.

The battle between Hollywood and the U.S. government had been going on since 1928 and the Supreme Court ruling finally settled the matter. The practice of block booking ended, the studios sold off their movie theater interests and it was the beginning of the end of the Hollywood studio system. It was a disruptive and sometimes painful time for the industry. But it made possible the explosion of studios and alternative production companies that began in the late 1950s.

Forcing Comcast to spin-off its cable TV assets isn't an idea to be taken lightly. But it would solve a couple of problems that threaten the industry. Decoupling the channels from Comcast would even out the advantage Comcast currently has with its competitors and would make it more likely that the broadband industry would continue to innovate. Having the NBCU channels as an independent company would also make it more competitive and would force increased innovation in the content side of the business.

So what should Comcast be forced to spin-off?

Broadly speaking, any TV asset with a national reach (say 51 percent of U.S. households). That would allow Comcast to retain its regional sports networks and any regional news channels. Setting a percentage ceiling for ownership in any individual channel (say, 35 percent) would allow Comcast to retain its equity in channels such as the MLB Network, the NHL Network and Fearnet.

And what about the fate of the NBC and the NBC owned-and-operated networks? There's a good argument to be made to allow Comcast to retain them and that decision might make the resulting spin-ff more palatable to both Comcast and other industry media competitors. But including NBC and its O&O's as part of the NBCU stand-alone company would give it more value and make it much likely to be a successful venture.

The cable channels than would fall under this proposal include:

Syfy
Chiller
Cloo
E!
USA Network
Universal HD
Bravo Media
Esquire Network (50 percent ownership)
Oxygen Media
Sprout
TVOne (joint venture with Radio One)

Unfortunately, the FCC and critics of the Comcast-TWC merger are unlikely to support this idea. There is not the slightest chance Comcast would willingly agree to this divestiture, and would likely try and restructure the merger in a way to make it more palatable to critics. And Comcast is a very well-connected company in Washington. It's not a coincidence that Meredith Attwell Baker, the FCC commissioner who helped approved the Comcast/NBCU deal joined the company as a lobbyist four months later.

There would also be a lot of details to work out. I would assume that non-TV assets such as Universal Television or Universal Cable Productions would stay with the spun-off cable channels as they are essentially part of the content creation part of Comcast. But there are a lot of small details to be worked out and it would be messy.

However, this is a deal that would ultimately benefit Comcast (though they might not see it that way). And it would also benefit the industry and consumers, making it a real win-win for everyone.

Which pretty much ensures it will never happen.

Follow Rick Ellis on Twitter @aysrick. He can reached by email at Rick@allyourscreens.com.

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