A merger of Time Warner Cable and Comcast -- the two top high-speed ISPs -- would kill internet video, it claims

Netflix, Inc. (NFLX) has stepped up its war against the pending $45.2B USD takeover of Time Warner Cable Inc. (TWC) by top internet service provider (ISP) Comcast Corp. (CMCSA). Netflix has formally lodged a complaint against the merger with the U.S. Federal Communications Commission (FCC) -- one of two agencies tasked with reviewing the deal.

I. A Deathblow to Internet Innovation

With Comcast lobbying FCC commissioners hard and donating deeply to Congresspeople who might put pressure on sitting commissioners to approve the deal, the deck certainly seems stacked in Comcast's favor from a payola perspective.  But with the case sitting in the FCC docket, and the Commission currently soliciting public comments, Netflix is aiming to ensure that if special interest money does push the deal through, that the FCC faces proper public backlash over such an anticompetitive allowance.

Netflix's formal complaint against the deal with the FCC is called a "Petition to Deny" and is 256 pages in length, including the cover letter and references.  In this filing, Netflix paints quite a compelling case of how the merger would not only raise prices for the U.S. consumer, but would also be a catastrophic blow so-called "edge provider content" -- cutting-edge internet services like streaming content from online video distributors (OVD) which use a lot of bandwidth.
Comcast Public Knowledge
[Image Source: Public Knowledge]

Netflix summarizes in one passage of the filing:

[These threats] to the OVD industry [are] significant and a fundamental public interest harm too heavy to balanced against the speculative benefits of this transaction... Nor is this threat limited to OVDs.  The combined entity's control over its interconnection arrangements, coupled with such an increase in size, would allow it to insert itself into the heart of all Internet commerce, disrupting innovation, reducing financing for edge providers, and foreclosing compelling services from ever reaching the light of day.  While this threat remains, the proposed merger cannot be justified under the FCC's public interest standard.

Netflix also breaks down and debunks some of Comcast's claims, as well as relates anecdotal stories about how Comcast has seemingly exploited its customers and tried to stifle a competitive internet market.

Comcast Getty Images
Merge at your own risk: fines were unable to prevent Comcast from breaching some of its regulatory promises following its NBC Universal purchase. [Image Source: Getty Images]

It elsewhere summarizes...

The combined entity would have the incentive and ability -- through access fees charged at interconnection points and by other means -- to harm Internet companies, such as online video distributors ("OVDs"), which Applicants view as competitors.  The transaction would give Applicants control of a dominant share of the nation's residential high-speed broadband applications that require high-speed broadband to work properly, such as Internet-delivered video.

The business models employed by several OVDs necessarily depend of having access to a "critical mass" of consumers to operate profitably... Particularly for fixed-cost [subscription] OVDs the sudden loss of access to a significant number of customers could immediately throw the OVD into financial peril.

Netflix's argument is simple.  High-definition internet video is already very expensive for OVDs in terms of content licensing fees and server hardware -- even for subscription services such as its own. Make it too unreliable for most and you essentially killed the ability to have a profitable business legally stream video -- unless you happen to be Comcast who owns the connection.

II. Comcast Accused of Ripping Off Customers

Such fears might ring hollow, but Netflix points out that Comcast has already abused its dominant position to hold it ransom for fees under the threat of otherwise making the service unusable for millions of U.S. customers who use Comcast as an ISP and subscribe to Netflix.  Netflix bowed to these fees, but it fears that the merger will only make an already bad situation worse, giving Comcast even more power to squeeze money out of consumers and internet businesses alike.

Netflix fears Comcast could use its increased dominance to push even high fees for streaming video, making it impossible to have a profitable subscription service. [SOURCE: Mashable]

One interesting tidbit is that it makes the claim that Comcast encouraged users whose Netflix became throttled to the point of being unusable to upgrade to more expensive bundles.  It writes:

At the same time Comcast engaged in strategies to degrade its own customers' ability to watch Netflix's video, Comcast sold customers who wanted access to high-quality Netflix video a more expensive broadband package even as it knew that a higher-speed broadband plan would do nothing to address the quality of Netflix's video.

So basically Netflix is accusing Comcast of ripping off consumers, acting like they'll enjoy more reliable access to Netflix if they paid more, when in reality guaranteeing no matter how much they paid the connection would be unusable thanks to throttling.  The claim is interesting, but not exactly surprising given to Comcast's lengthy history of alleged abusive behavior towards customers.

Comcast doesn't care
Comcast has hardly shied away from controversial, allegedly abusive behavior in the past.
[Image Source: Silence Breakers]

One key complaint Netflix raises is that due to the lack of ISP competitors and lower quality of some alternative-style ISPs (e.g. DSL) customers likely will feel trapped and decline to blame the true culprit -- the ISP.  Rather they have a tendency to blame the streaming company, whose content is being throttled by the ISP.

III. All Your Base Are Belong to Comcast

By Comcast's reckoning the deal will give it control of "only" around a third of U.S. broadband internet and cable TV connections.  In its "Petitition to Deny" -- Netflix points out that's only true if you're not interested in viewing high-quality online video.  Netflix asserts that the true market control is closer to half the market, when it comes to truly high-speed internet -- perhaps more when you count interconnections to smaller local ISPs.

South Park -- Comcast
Many Americans could soon be forced to use Comcast. [Image Source: Viacom's Comedy Central]

It says that an individual typically needs around 10 Mbps (Megabits-per-second) to consume 1080p video content via subscription services such as its own (of that 7 Mbps would be used up directly by a single 1080p stream).  Netflix points out it's not alone in this estimate.  Apple, Inc. (AAPL) actually suggests 8 Mbps be dedicated to a 1080p stream -- meaning that 10 Mbps connection might start to feel a little cramped.  Netflix says a household typically needs to deal with peak bandwidth of 25 Mbps, if it has multiple users who might simultaneously access a high-definition video service.

With those requirements in mind, it states that Comcast's U.S. market control will be far greater than it's claiming, once you rule out the slow connections that are incapable of keeping up with modern internet activities.  It writes:

Applicants identify six distinct relevant markets for this Transaction, but they fail to identify arguably the most important one: the national market for high-speed broadband distribution of edge provider content.

By one calculation, the combined entity would control broadband access to nearly half of the country's true high-speed, high capacity broadband households when slower connection such as traditional DSL, mobile wireless, and satellite broadband are excluded from the calculation, and the combined entity would pass two-thirds of U.S. households, or about 81 million homes.

Netflix video
[Image Source: The New York Post]

With this dominant positon, Comcast could easily both directly and indirectly stifle high bandwidth content, according to Netflix -- moreso than it can already, at least.  It further argues that Comcast's inclusion of mobile internet is a deliberate attempt to mislead, as most mobile connections are too capped and throttled to make for usable feature-length HD streaming video over cellular data networks

IV. Fighting Windmills?

Netflix likens the deal several times to the 1999 merger of AT&T, Inc.'s (T) Excite@Home and MediaOne's RoadRunner, two early high-speed internet services.  MediaOne was a familiar face in terms of questions of competition, having been formed in the breakup of the American Telephone and Telegraph monopoly.

FCC intervention prevented AT&T from abusing its MediaOne, but ultimately delivered it into Comcast's waiting, gaping maw. [Image Source: Denver Post]

In the case of the AT&T and MediaOne merger the deal was not fully blocked by regulators, but nonetheless enough restrictions were put on the deal to prevent AT&T from abusing its dominant position.  The irony not really mentioned in the Netflix filing is that the unintended consequence of this was to make the unit unattractive to AT&T, which eventually sold its high-speed cable broadband business to Comcast.

The example perhaps raises an unintended point Netflix doesn't even mention.  While Netflix would surely live with tough restrictions on the deal to try to prevent abuse, in the end history tells us that it might simply be a better idea to block the deal altogether. After all, if the FCC agrees to a restricted purchase, that may eventually only lead to more severe market consolidation in the long run.

At least one FCC Commissioner -- Democratic Commissioner Mignon L. Clyburn -- has hinted at support of the merger's approval.  

Mignon Clyburne
FCC Commission Mignon L. Clyburn argues sometimes monopolies are just too "natural" to resist, and are actually a good thing for consumers. [Image Source: AP Photo]
In a recent interview, when asked about the similarities between the merger that created the Sirius XM Holdings Inc. (SIRI) satellite radio monopoly, Commissioner Clyburn stated:
Well from a regulatory standpoint you have to look at the marketplace. Sometimes there's natural monopolies or oligopolies.... It is quite natural. You don't want ten companies digging up the ground at different times.  So it is natural in some instances for their to be a monopoly.

Netflix may be playing Don Quixote given the sound of that statement, but it's not willing to go down without making some noise about the slow death of competition in America's internet market.

Source: Netflix

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