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Why Comcast will Vehemently Fight a DOJ Investigation

Leonard Grace

If your company becomes a huge dominate market player in both broadband and content delivery, scrutiny will come your way, like it or not. Comcast (NASDAQ: CMCSA) has been so successful in building both a content and delivery system to such a mass audience; it's beginning to look like former monopolies which grew unwanted investigations and break-ups in the 1980's. Remember AT&T and the DOJ anti-trust decision to split the monopoly into smaller regional companies?

Protecting a Legacy System

Clearly Comcast wants to protect its legacy cash-cow, Cable TV. By far it is the most profitable unit of its portfolio even though growth has stagnated and is in decline. A continued strong customer base, due to a significant market reach, solidifies strong revenues and cash flow which drive the engine that produces top profits. This will not be given up easily, and Cable companies will skirt the rules, if necessary, to protect those revenues. That is why Comcast has implemented barriers around that legacy system to ensure customer loyalty, making it harder for customers to disconnect or downgrade services even though they would welcome alternatives like OTT competitors to the high cost of Cable TV service.

It is a fine-line Comcast and other cable companies must walk to protect a huge investment in legacy content delivery especially with public sentiment favoring strong competition in alternatives to current Cable TV pricing. The impending fight will likely be bloody and nasty with company lobbyists, employees, and lawyers, pitted against big government.

DOJ Looks for Answers

A DOJ with a goal of looking into current Data Cap plans initiated by Comcast and Time Warner Cable (NYSE: TWC) investigating possible anti-competitive practices draws a clear distinction to companies which favor their own customers by treating them differently than competitors. Comcast implies its unlimited data plan for the Xbox 360, which favors only its customers and not competitors like Netflix, does not violate anti-trust laws since it does not use the public Internet to deliver content. A private network is being used, says Comcast. "The Xbox 360 "essentially acts as an additional cable box for your existing cable service," and that it sends the content on a managed network that's separate from its traditional cable delivery service.

The Free Press issued a statement saying, "The Justice Department investigation is great news for consumers and cable's competitors alike. For too long, cable operators have used their dominate positions in both the television and Internet service provider markets to kill off innovation, cut-off customer choice and keep prices high."

That theory is being challenged explicitly by the DOJ who draws a clear distinction on this particular type of Data Cap use and the implied discrimination it conveys. The distinction centers on anti-trust pricing or giving preference to existing customers over non-customers who want to view content from Comcast Internet applications. It both rewards and penalizes Comcast customers who may want to look at alternative content sources, since they must have an existing Cable Service account to receive a discount, while creating an obvious disadvantage to OTT competitors like Netflix (NASDAQ: NFLX), since non-Comcast customers are limited by the Data Cap. That policy could be construed as price-fixing, and anti-competitive behavior.

Favored Nations Clause

Additionally, the DOJ is investigating the Favored Nations Clause in existing contracts Cable companies have with cable networks. Programmers must sign agreements with Service Providers for distribution of network programming like HBO, TNT, etc. Those contracts extract a favored discount to companies like Comcast due to their size and reach. This according to the Wall Street Journal will deter programmers from looking to alternative carriers to deliver their products.

Anti-Competitive or Good Business Practices

With big money at stake the vehement part of this fight will be legendary. The implications of anti-competitive practices, market protectionism, and most favored deals will resonate across media outlets. But the bottom-line remains centered on deciding if this DOJ probe is big business, anti-competitive behavior or just good business practices. Being a large dominant player in an exploding content driven market across multiple platforms draws close scrutiny, and being both a content and distribution owner is even more risky.

By Leonard Grace, Founder & Editor - Broadband Convergent

Related topics: Broadband, IPTV, Policy & Regulation, Telecom

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Comments

If Comcast wants to distinguish services it Phil Howard  –  Jun 17, 2012 8:26 AM PDT

If Comcast wants to distinguish services it offers on a totally vertical basis (creates the content and delivers it) from other kinds of services (connectivity to something we call the internet), then I say it should do so fully.  That means make each service separate.  A completely separate internet-only service, with fair and reasonable rates like they would offer if there was genuine competition, will allow them to see exactly how many people prefer that.  It's not a free market if the providers are forcing the market to bend its own way.

I'd rather have a free market than a government regulated market.  But there isn't a free market without competition.  In too many places the competition is absent to too thin to be effective.  I estimate that no fewer than six providers are needed for effective competition that avoid market gouging and manipulation.  We just don't have anywhere near that due to the high costs of infrastructure.  The incumbents got to have such an infrastructure through, in most communities, an originally granted monopoly.  But a government subsidy to overbuild new infrastructure is a waste.  The better answer is to split the businesses of delivering content and providing the infrastructure.  And this model is already successful in the electricity business where electricity generators and resellers operate apart from to-the-home and to-the-office delivery service are separate in many markets, such as Texas.  We should do so in the data realm as well, with one well regulated business tasked to provide the physical infrastructure at a fair cost in exchange for a stable business model that provides solid financing, and all others providing various forms of data based content in a competition based free market model.

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