in 2014, a MErgEr proposal Was suBMittEd to thE u.s. dEpartMEnt of JusticE By coMcast corporation and tiME WarnEr caBlE. thE proposEd MErgEr has incitEd popular opposi- tion duE to concErns that it Would lEad to thE applicants’ Monopolistic control ovEr thE intErnEt distriBution MarkEt. consEquEntly, appEals havE BEEn MadE in favor of EnforcEMEnt of antitrust laWs in this casE. WhilE it May BE syMptoMatic of a nEEd for thE laWs to changE, thErE is currEntly no lEgal foundation for thE opposition, and it Would BE fully lEgal for thE dEpartMEnt of JusticE to support thE MErgEr. in any casE, EithEr vErdict Will lEad to a profound lEgal prEcEdEnt. PosiTive laW vs. good inTenTions The Legality of the Comcast-Time Warner Cable Merger harrison tunE inTroduCTion In February of 2014, Comcast Corporation publicly an- nounced its intention to acquire Time Warner Cable, Inc.. As per antitrust statutes, this proposed transaction is cur- rently under review by the U.S. Department of Justice, which is responsible for the regulation of mergers that substantially limit competition in a given market.1 The De- partment of Justice considers two primary aspects con- cerning horizontal mergers — the lessening of competi- tion and the over-consolidation of market share that confers a monopoly.2 In the case of the merger submitted by the Applicants (Comcast Corporation and Time Warner Cable, Inc.), the Department of Justice considers the change in competi- tion caused when two companies in the same market merge and the increased market share they will control as both a Multichannel Video Programming Distributor (MVPD) and an Internet Service Provider (ISP). These concerns are mostly addressed in Comcast’s merger pro- posal fact sheet that contains several claims that this paper will analyze.3 Notably, there has been a substantial public outcry against the proposed merger of the Applicants. Opponents of the merger claim that the Applicants are attempting to con- solidate an ISP market share well beyond reason, poten- tially conferring monopolistic powers. Moreover, they be- lieve that the current anti-competitive and anti-consumer tactics of both companies obligate the Department of Jus- tice to deny this merger in order to prevent any further marginalization of consumer interests. hisTory of horizonTal merger regula- Tion 1890-2009 The history of positive antitrust law in the United States began with the Sherman Antitrust Act of 1890.4 Consid- ered to be the founding document of antitrust statutes in the U.S., the Act regulates the sort of anti-competitive business tactics that engendered the Gilded Age.5 The Clayton Antitrust Act and Federal Trade Commission Act of 1914 followed the Sherman Antitrust Act, addressing and amending gaps in antitrust statutes—such as price fix- ing—as well as formally establishing a body to preside over alleged anti-competitive behavior of corporations.6,7 The Department of Justice and the Federal Trade Commis- sion issued the first Horizontal Merger Guidelines in 1992 according to sections of the three aforementioned Acts. These Guidelines were revised in 1997 to “reflect the on- going accumulation of experience at the Agencies.”8 2010-Present The new Horizontal Merger Guidelines, issued August 19, 2010 by the Department of Justice and the Federal Trade Commission, constitute the current guidelines for hori- zontal mergers. These Guidelines are based upon the stat- utes in Section 7 of the Clayton Antitrust Act, Sections 1 and 2 of the Sherman Antitrust Act, and Section 5 of the Federal Trade Commission Act.9 Most pertinent is Section 7 of the Clayton Antitrust Act, “[prohibiting] mergers if in any line of commerce or in any activity affecting com- merce in any section of the country, the effect of such ac- quisition may be substantially to lessen competition or to tend to create a monopoly.”10 For the purpose of this arti- cle, the Guidelines namely state what market share con- centration and market definition are, address how they relate to the prevention of anti-competitive horizontal John shErMan Was thE principal author of thE 1890 shErMan antitrust act. (Courtesy of the Library of Congress) 68 ElEMEnts : : spring 2015 mergers, and establish standards for the extent to which a merger may legally reduce competition. analysis In the case of a merger review, the Department of Justice must decide whether or not the merger is pursuant to its horizontal merger guidelines. That fact depends on wheth- er the lessening of competition or conference of a monop- oly is a reasonable outcome of the proposed merger.11,12 The Applicants would argue the following in support of the merger: • As the Applicants do not compete in any markets directly, their merger does not represent a direct reduction of actual- ized competition in any way.13 • After the divestiture of the Applicants proposed in the merger fact sheet, the merger will result in a net 8 million MVPD (Multichannel Video Programming Distributor) subscriber gain. This divestiture sufficiently addresses the increased market share, as they remain below the 30 percent threshold instituted by the MVPD market definition.14,15 • Any complaint as to the anti-consumer nature of the Appli- cants’ service is unfounded, as the Applicants compete in a market where other options are available to consumers; in such a market, the interests of the Applicants, should they wish to remain competitive, must be aligned with pro-con- sumer policies.16 • The exclusive access that the Applicants maintain with certain parts of the ISP and MVPD markets are a result of the Appli- cants’ maintenance of a natural monopoly that is not per se illegal because no entity can provide the same service with better efficiency in the same circumstances. The market can be best served by only the Applicants in some cases.17 The Applicants respond to concerns regarding over-con- solidation of market share and problems they believe are readily pertinent in the merger review process. They point to divestment statistics that keep their market share below the Department of Justice’s indicated threshold for the MVPD market and maintain that the proposed merger puts the Applicants in a better position to provide im- proved service to its customers in establishing economies of scale, as ISP and MVPD markets can vastly increase op- erating efficiencies given a higher subscriber base.18 Opponents of the merger would focus their arguments on the following: • After the proposed merger, the Applicants will control “ap- proximately… 35.5% of the fixed ISP market.” This data also accounts for Digital Subscriber Line (DSL) providers on the market, a service that is significantly slower to the point where it should be considered an entirely different product from cable and fiber offerings.19 Although the ISP market is not explicitly defined per the Department of Justice’s own classifications and there is therefore no fixed amount of mar- ket share under which the Applicants must remain, the De- partment of Justice has a duty to reject the merger on this ground alone: 35.5% of a market (without account for defla- tion) has the potential to give the Applicants monopolistic power over the ISP market. The opponents would therefore argue that the Applicants have an obligation to divest in order to quell monopolistic concerns.20 • While the poor service which engenders the Applicants’ con- duct in MVPD and ISP markets is not per se illegal, the exclu- sive nature with which they possess both cable and Internet resources as a “natural monopoly” (that is, a market which functions most efficiently with one provider) creates a danger- ous precedent because control over Internet service providing is not actually a natural monopoly. Therefore, the Applicants’ control of the market, considering products and service that are not exceptional in nature and their use of tactics that amount to an attempt to competitively exclude, constitute an illegal monopoly.21 The opponents’ arguments focus on the Applicants’ con- trol of the ISP market, calling the Department of Justice to investigate what constitutes unfair market share in the ISP market. The opponents believe such an investigation would conclude that the Applicants control too large a share of the market. The ISP distribution statistics from 2013, which are deflated as a result of the inclusion of mo- bile and DSL providers, reveal that the Applicants con- trolled a total of 33.7% of the diluted market. Although this statistic may be clouded by the inclusion of information not pertinent to the actualized market, the opponents of the merger claim that its diluted numbers alone and growth over the past year are sufficient reason to worry.22,23 They also point to the fact that the Applicants failed to dis- cuss their ISP market share in their merger fact sheet de- spite the reality that, should the merger be approved, the Applicants would become the single largest ISP in the United States. 69 positivE laW vs. good intEntions The key issue that arises in the analysis of the merger is the extent to which the Department of Justice is allowed to protect consumer interests. The opponents focus on the potential for those interests to be harmed by further con- solidation of a market that they already identify as anti- consumer; however, the Applicants claim that they are act- ing in good faith and are not violating the standards set forth by the current Horizontal Merger Guidelines, and, as the Department of Justice has not brought suit against the Applicants for violation of consumer interests in any way, it is assumed that it does not believe that this market is anti-consumer. While the Department of Justice seeks to protect consumer interest, the concentration of market share in the IDP market that is yet to be defined is hard to address until a proper investigation is held. Before that definition is reached, the Department of Justice has no ob- ligation to block the merger on grounds of consolidation so long as they are not grossly negligent.24 The opponents of the merger would refute the claim that the market should first be defined before attempting regu- lation by analogizing the case to United States v. Microsoft Corp., in which the D.C. Circuit Court ruled against Micro- soft’s assertion that the industry required “direct proof of market power.”25 The opponents would argue that, simi- larly, the Department of Justice doesn’t need direct proof of market power; precedent dictates that they can rely on “cir- cumstantial evidence” alone.26 The Applicants’ defense of this claim would focus on the wording of the case ruling, specifically in the Circuit Court’s reference to the software market in question, as “uniquely dynamic.”27 The Applicants would emphasize that the ISP market is a service market and is neither par- ticularly unique nor dynamic. Furthermore, while the con- cerns of exclusionary behavior on the part of the Appli- cants to protect a hegemony over the ISP market should, in the opinion of the merger’s opponents, force the hand of the Department of Justice in taking an active role to ad- dress the purportedly anti-competitive tactics, that obliga- tion does not extend into the process of a merger review when it falls outside of its jurisdiction. Essentially, the problems that the opponents point out all fall outside of the realm of regulation imposable by the Department of Justice. While they correctly identify that, at some ends, the ISP market lacks competition because of a concentration of resources on the part of the Applicants, that fact alone is insufficient reason for blocking the merg- er. The Applicants claim that this concentration is the re- sult of significant capital expenditure as well as of the na- ture of the ISP market functioning most efficiently when served by one provider in certain cases, but the opponents point out that the Applicants have lobbied to prevent local municipal broadband and fiber networks as the reason for this continued exclusive access in certain markets rather than an existing infrastructure or ideal efficiency.28 According to the opponents, the Applicants’ efforts in de- nying local ISP initiatives constitute competitive exclu- sion. The actual issue, however, isn’t so black and white.29 While local initiatives can serve to increase access and quality of service for individuals as well as stimulate com- petition, there are several reasons, by which the Applicants swear in their defense of lobbying initiatives working to legislate against local broadband and fiber networks, why these efforts should not be considered natural competition that is being excluded.30 Local municipal networks use tax- payer money and, while they have been successful (even highly successful in some cases, regarding ISP service de- cades beyond the FCC’s proposed standard), they have the realized potential to fail and absorb taxpayer money un- necessarily.31 Even in a best-case scenario, successful local broadband initiatives had the tendency to reduce overall competition, since the service for the local initiative far ex- ceeded that of competitors. This shows that, in certain sit- uations, one provider alone can offer the best service.32 In addition to potential concerns for failure, there is the argument against government involvement in private af- “Opponents of the merger claim that the Applicants are attempting to consolidate an ISP market share well beyond reason, potentially conferring monopolistic powers.” 70 ElEMEnts : : spring 2015 fairs. Indeed, although the Internet is viewed by many as a public utility that should not be controlled with such ease by private interests, Internet access is not classified as such. As a result, its access is not free from private inter- ests, in part because it was those private interests that made widespread access to the Internet possible in the first place. While President Barack Obama has urged the Federal Communications Commission to reclassify broad- band service as a “public utility,” no decision has been made. As one telecommunication group has claimed, that “reclassification… will guarantee harm to consumers.” An- other has claimed much the opposite, that the impact of such a move is unclear.33 Despite the consumer interest that the Department of Jus- tice must support, opponents of the merger suggest that the Department of Justice should over-regulate in the case of this merger to protect consumers from companies like the Applicants, whose consolidation of resources in order to produce an economy of scale has made access wide- spread in the first place.34 Moreover, the opponents urge the Department of Justice to address claims that are out- side of its jurisdiction. However, the Department of Justice cannot reclassify broadband service nor regulate munici- pal broadband, as those duties fall on the Federal Commu- nications Commission and Congress, respectively. Even if it did fall under their jurisdiction, over-regulation of a pri- vate sector of business can preemptively have disastrous effects on a market, even if well-intentioned.35 Personal sTaTemenT and ConClusion Opponents of the merger point out flaws in a market that has been long overdue proper market identification by the Department of Justice in order to clarify the extent at which market share consolidation becomes dangerous. However, they offer little in terms of actionable regulation. The pro- posal of the Applicants, notwithstanding a sudden market classification indicating a threshold below 35.5% share count, is within the legal parameters set forth by the Hori- zontal Merger Guidelines. All claims of the opponents are unanimously issues yet to be addressed by their respective bodies and remain irrelevant to this merger. Businesses must have clearly defined rules within which they can op- erate in order to function efficiently, and jeopardizing that relationship for no clear benefit is shortsighted at best. Furthermore, while complete abstinence from public ini- tiatives for broadband may not be the ideal solution for a growing populace where broadband access is becoming ever more important, this merger is not the means by which that solution should be predicated. Instead, the De- partment of Justice and the Federal Communications Commission should undergo an investigation as to how viable these local initiatives and, pending the result of that investigation, should determine the accuracy of claims of the Applicants’ exclusionary business tactics in seeking to support legislation against those initiatives.36 It is also worth noting that extensive and reactionary government involvement in areas such as ISP markets should be ad- vised against because of the dangerous precedent and in- centives that could be established as a result. As it stands, the Applicants are within their rights to merge. Policymak- ers, including administrative and executive agencies, must be careful in considering business incentives in major de- cisions of policy. In the same way that it is important for corporations not to possess a monopoly over the Internet, it is essential that the government does not intervene in a major, potentially financially crippling way that interferes with private interests without mandates to change. coMcast and tiME WarnEr caBlE logos (Courtesy of Wikimedia Commons) 71 positivE laW vs. good intEntions However, it is important to note that while the Applicants are within their rights to merge, this right is extended by the current state of broadband service, a state that neces- sarily needs to be investigated by the proper agencies, if not reclassified and adjusted. Just because no government mandate for change has occurred doesn’t mean it shouldn’t; the Department of Justice and the Federal Trade Commission have themselves admitted that current regu- lation is the result of an “ongoing accumulation of experi- ence,” correctly asserting that regulation is both an itera- tive process and a reflection of what was thought to be correct at its time of issuing rather than concrete fact.37 While the Applicants fall within their legal rights to merge, the opponents correctly point out that the U.S. ISP market has been falling behind other countries, perhaps as a re- sult of exclusivity that has not been infringed upon by the government and corporate scale used to exploit rather than compete.38 Indeed, despite having the second highest number of Internet users as of February 2014 (a total of 194.7 million users), the United States doesn’t even make the top ten list in terms of average Internet speed.39,40 The Federal Communications Commission continues to de- fine an initiative in its “[Goal] for a High Performance America” as “4 Mbps downstream and 1 Mbps upstream,” allowing U.S. ISP providers to advertise speeds on the ab- solute lowest quality of service from previous years as proper broadband.41,42 Upon analysis, it becomes clearer and clearer that the weakly worded guideline presented by the Federal Communications Commission does not hold the ISP market to proper standards in the coming years, and instead allows it to stagnate. Especially if mergers like the one proposed by the Applicants are approved, provid- ing those corporations with the advantage of economies of scale and network effects as a result, companies like those of the Applicants are indeed poised to provide immense “pro-consumer” benefits as touted in their fact sheet.43 However, companies like the Applicants have failed to pro- duce the results that they claim make the proposed merger necessary. They attempt to squeeze out every dollar and maintain the status quo within the market instead of ac- tively competing to provide better service. Action must be taken on the part of the Department of Justice and the Fed- eral Communications Commission in the form of stricter broadband guidelines to ensure that agreements, such as the one proposed by the Applicants, promote both busi- ness interests and innovative interests in the future, rather than ones that may aim only to retain an illegitimate hege- mony over a market. A bigger Comcast isn’t a bad thing per se; it just happens to be in the current state of broadband. endnoTes 1. U.S. Department of Justice and the Federal Trade Commission. 2. Ibid. 3. Comcast and Time Warner Cable (13). 4. Peritz. 5. Ibid. 6. Ibid. 7. Due to time constraints and lack of immediate pertinence, this article will not address the Robinson-Patman Act of 1936 or the Celler-Kefauver Act of 1950. 8. U.S. Department of Justice and the Federal Trade Commission. 9. Ibid. 10. Ibid. 11. Ibid. 12. It is worth noting that the United States legal system uses a four-part test to determine the legality when a monopoly is concerned, but this article will not address that process due to time constraints and the lack of established net of the Applicants as controlling a monopoly in any market. 13. Comcast and Time Warner Cable (13). 14. Ibid. 15. U.S. Department of Justice and the Federal Trade Commission. 16. Comcast and Time Warner Cable (13). 17. Ibid. 18. Ibid. 19. Zachem. 20. Ibid. 21. Blum-Smith, et al. 22. Statista, “U.S. Internet Service Provider Market Share Q4 2013.” 23. Zachem. 24. Twomey and Jennings. 25. Weinstein (273). 26. Ibid. 27. Ibid. 28. Blum-Smith, et al. 29. Engebreston. 30. Blum-Smith, et al. 31. Engebreston. 32. Ibid. 33. Wyatt. 34. Weinstein (273). 35. While network effects in market economies may be important to the analysis of the benefits of the proposed merger, due to time constraints, this article does not address those aspects of the merger. 36. Although worth noting, due to time constraints this article does not address the issue of a business’ use of lobbying a form of free speech. 37. U.S. Department of Justice and the Federal Trade Commission. 38. Blum-Smith, et al. 72 ElEMEnts : : spring 2015 39. Statista, “Number of Intenet Users in Selected Countries.” 40. Statista, “Countries with the highest average Internet connection speed as of 2nd quarter 2014 (in Mbps).” 41. Federal Communications Commission. 42. It is necessary to note that in the Internet Service market, different upload and download speeds have no inherent difference in cost and any difference is simply a directly imposed throttling: i.e. where four megabytes per second download speeds can be found, there is no technical limitation on providing the exact same speed for uploads. 43. Comcast and Time Warner Cable (13). referenCes Blum-Smith, Laura et al. “Joint Petition To Deny Of Future Of Music Coalition And Writers Guild Of America West, Inc.” 25 Aug 2014. “COMCAST AND TIME WARNER CABLE TRANSAC- TION FACT SHEET.” Transaction-Fact-Sheet 2-13-14*n.d.): n. pag. 13 Feb. 14. “Countries with the highest average Internet connection speed as of 2nd quarter 2014 (in Mbps).” Statista. N.p., 2nd Quarter 2014. Engebreston, Joan. “Municipal Broadband Opposition Laws: Pros and Cons – and Legality.”Telecompetitor. Pivot Media, 5 Sept. 2014. “Horizontal Merger Guidelines (08/19/2010).” Horizontal Merger Guidelines. U.S. Department of Justice and the Federal Trade Commission, 19 Aug. 2010. In the Matter of Applications of Comcast Corp. and Time Warner Cable Inc. for Consent to Transfer Control of Li- censes and Authorizations, MB Docket No.14-57, Letter re- garding post-Divestiture data from Kathyrn A. Zachem, Senior Vice President, Regulatory and State Legislative Af- fairs, Comcast Corporation et al. to Marlene H. Dortch, Secretary, FCC, June 27, 2014, p.5. (“Zachem Broadband Divestiture Letter, June 27, 2014) “National Broadband Plan.” Home. Federal Communica- tions Commission, 17 Mar. 2014. “Number of Internet Users in Selected Countries.” Statis- ta. N.p., February 2014. Peritz, Rudolph J. R. Competition Policy in America, 1888- 1992: History, Rhetoric, Law. New York: Oxford UP, 1996. Print. Samuel Noah Weinstein, United States v. Microsoft Corp, 17 Berkeley Tech 273 (2002). Twomey, David P., and Marianne Jennings. “Administra- tive Agencies.” Business Law: Principles for Today’s Commer- cial Environment. Mason, OH: Thomson/South-Western West, 2004. N. pag. “U.S. Internet Service Provider (ISP) Market Share Q4 2013 | Statistic.” Statista. N.p., 2013. Wyatt, Edward. “Obama Asks F.C.C. to Adopt Tough Net Neutrality Rules.” The New York Times. The New York Times, 10 Nov. 2014. 73 positivE laW vs. good intEntions