Recent actions by the Federal Communications Commission display a fundamental misunderstanding of the benefits of vertical integration in the telecommunications industry, according to market analysts observing the FCC’s handling of the proposed merger between Comcast and NBC Universal.
While tentatively granting his consent for the $30 billion merger to continue in a late December announcement, FCC Chairman Julius Genachowski also seeks to impose rules requiring NBC to license content to additional online providers other than its current preferred online partner Hulu.
By attaching such network neutrality mandates to online broadcast of network material, Genachowski proposes to alleviate charges made by some advocacy groups that the merger would create a monopoly of NBCU content and Comcast broadcast abilities.
The mandate is unnecessary and counterproductive, says James Gattuso, a senior research fellow in regulatory policy at the Heritage Foundation.
“There is a lot of competition for content creation and distribution,” Gattuso said. “The concern that has been expressed is that Comcast would prohibit other systems from using its content, or Comcast would prevent other content providers from getting favored spots on its system, or that NBC Universal would not allow content to other systems. But without a true monopoly, the customer is king.”
‘Lots of Competition’
The FCC is expected to approve the merger provided NBCU and Comcast agree to Genachowski’s proposed changes. The merger must then be approved by the Department of Justice.
Gattuso says vertical integration by a car company or a cable company owning a content creator is “basically the same thing: two parts of a single production process,” he said.
“And the two parts need to be integrated,” Gattuso continued. “They can be integrated through common ownership or through contracts between different companies. It’s not a case of one being always better than the other; it depends on the business and the situation at hand,” he said.
Jim Johnston, a senior fellow and policy advisor for The Heartland Institute, which also publishes Infotech & Telecom News, noted, “The distortion in the allocation of resources associated with monopolies is that they restrict output so that price is pushed higher than marginal cost. Clearly, this is not what the large Internet suppliers are doing.
“Indeed they are doing the opposite,” he added. “They are trying to increase output at a rapid rate, thereby reducing prices, not raising prices. All this in addition to the new products that they are supplying.”
Stanford University Senior Fellow and Public Policy Program director Bruce Owen observed consumers lose when government determines what amount of vertical integration is best, in a paper delivered to a panel of technology policy experts attending a forum hosted last October by the Washington, DC-based Technology Policy Institute.
Owen said: “There is no difference in principle between General Motors buying a parts maker and Comcast buying a program supplier. In each, there is a very strong presumption that the purchase will be good for consumers, and a small chance that it won’t.”
A necessary condition for a bad outcome is monopoly power, said Owen. “If there is competition in car manufacturing or in video distribution, the chances of a bad outcome are very remote,” said Owen. “That tells me that the FCC’s suspicions about vertical integration are not well-grounded. Acting on those suspicions by banning or penalizing vertical integration is the wrong policy.”
Owen notes one point of contention in the debate over network neutrality is the need for ex ante regulation, or prior restraint. Owen says, “If there is only a small chance of a bad outcome from a given transaction, than banning the transaction in advance obviously makes no sense.”attuso agrees, adding: “What we’ve learned over the years is that policymakers have a horrible record at picking what kind of arrangements would be developed in the future and even more so at picking which ones would be efficient and which ones aren’t.”
Recalling the Verizon-Alltel, Sirius-XM Satellite, and Comcast-NBCU reviews, Bartlett Cleland, director of the Center for Technology Freedom at the Institute for Policy Innovation, sees a pattern of unnecessary government intrusion.
“There is this tendency to lather on regulations, special rules for this newly created entity that now regulates this entity in a way different than it regulates all of the competitors on the playing field,” Cleland said
‘Shift Burden of Proof’
“Vertical integration is a hedge against supply or demand volatility,” Johnston notes. “In some regulations, like electricity, the attempt is to create an incentive to have extra capacity such that the system can accommodate surges.”
Regulations like the ones proposed by the FCC do not create extra supply capacity, says Johnston. “They reduce capacity and therefore make the net more, not less, vulnerable to extreme volatility. Vertical integration is a substitute for this kind of regulation. Therefore vertical integration is efficient, while regulation here is inefficient.”
Owen’s paper supports Johnston’s conclusions:, “We need to shift the burden of proof in justifying regulatory interventions, from market participants to the agencies seeking to regulate,” he said..
“But when companies cannot structure their own production methods so as to compete in the market, for example, by varying the number of production stages that are in-house versus contracted out, without prior permission from a regulator, it is almost inevitable that consumer interests will be harmed by higher costs and higher prices.”
Loren Heal ([email protected]) writes from Neoga, Illinois.