Why the Feds won’t be able to block a Comcast-Time Warner merger
FORTUNE — It doesn’t take a genius to figure out that Internet service providers in the U.S. are far too powerful and sheltered from competition. Americans pay far more for Internet access — which runs at laughably slow speeds — than denizens of pretty much any other developed country.
So, how is that Comcast (CMCSA), the nation’s largest broadband Internet provider, and Time Warner Cable (TWC), the nation’s second-largest provider, think they can get around U.S. antitrust laws and merge? Doesn’t the industry need more competition, not less?
Indeed, the usual rule of thumb the Department of Justice uses to determine whether it should allow a merger to go through is something called the Herfindahl-Hirschman Index. Here’s how the department explains it:
The term “HHI” means the Herfindahl-Hirschman Index, a commonly accepted measure of market concentration. The HHI is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. For example, for a market consisting of four firms with shares of 30, 30, 20, and 20%, the HHI is 2,600 (302 + 302 + 202 + 202 = 2,600).
The HHI takes into account the relative size distribution of the firms in a market. It approaches zero when a market is occupied by a large number of firms of relatively equal size and reaches its maximum of 10,000 points when a market is controlled by a single firm. The HHI increases both as the number of firms in the market decreases and as the disparity in size between those firms increases.
The agencies generally consider markets in which the HHI is between 1,500 and 2,500 points to be moderately concentrated, and consider markets in which the HHI is in excess of 2,500 points to be highly concentrated.
By this measure, the market for broadband across the entire U.S. has an HHI of 896. The merger of TWC and Comcast would nearly double the HHI for broadband Internet to 1591, an increase far above the 200-point-increase the DOJ says is “likely to enhance market power” and set off antitrust warning bells. (Comcast and Time Warner Cable are, of course, also in the pay TV business, but that market is more subject to competition, as consumers have the option of satellite and streaming services if they are unhappy with their TV provider.)
The problem is that the Feds don’t look at national markets when determining whether to bring an antitrust action. They look at the many local markets across the country in which companies compete. And as Comcast executive vice president David Cohen said on a conference call announcing the merger, “Time Warner and Comcast do not compete in any relevant market” when it comes to broadband Internet access.
In other words, there already is almost no competition in the broadband Internet market, and the Feds can’t come in and create competition where there isn’t any to begin with. Meanwhile, because more competition exists in the cable TV market, the two companies will likely need to make concessions on that front.
According to Susan Crawford, visiting professor at Harvard University and author of Captive Audience, The Telecom Industry and Monopoly Power in the Gilded Age, efforts to create more competition in the broadband market are going to have to come from the FCC or Congress, rather than the Justice Department. Either body could come forward and declare Internet an essential utility service like electricity or water and create regulations that would either force more competition or at least bar companies from charging monopolistic prices for poor service. Says Crawford, “The FCC needs to step in and act like a cop on the beat.”