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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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FINALLY, a lawsuit I can support! LOL
By kickoff on 8/26/2014 9:28:30 PM , Rating: 5
I usually hate to see any lawsuits because they're so damn misused in America. Hey, I don't like the way you talked to me...I'm going to sue you. Hey, you fired me for exposing myself to the intern...I'm going to sue you. Hey, I'm an intern and some guy in the parking lot exposed himself...I'm going to sue you. LOL

But this one, THIS ONE...I'll donate money to Netflix' legal fund! F*CK Comcast AND TimeWarner.

By Bobhacks on 8/26/2014 10:23:17 PM , Rating: 2
i second that!

RE: FINALLY, a lawsuit I can support! LOL
By inperfectdarkness on 8/27/2014 4:02:19 AM , Rating: 5
I have said it before and it bears repeating:

Companies of this type should not be allowed to be vertically integrated. Period.

As far as I'm concerned, TW & Comcast can merge--with the following stipulation. Instead of hamstringing what the new company can do, the media ownership/providing aspects of said company must be entirely spun-off into a 3rd party that is completely unaffiliated with TW/Comcast. The new 3rd party content owner/provider has to compete on the same level playing field as Netflix/Hulu/Amazon/Youtube/etc. The new ISP behemoth can only exist as a "dumb pipeline", and if it chooses to use "caps/thresholds/etc", then ALL streaming services will suffer the yoke equally.

I pose this as a solution to retroactively fix something that should never have been allowed to happen in the first place: vertical integration of ISP and content owners/providers. If TW/Comcast are allowed to merge--in this manner--the end-result will be substantially BETTER for consumers than it is now.

And this is the ONLY method via which this merger will be better for consumers.

By kamk44 on 8/27/2014 9:16:37 AM , Rating: 2
That would be a good solution and on top of that having true net neutrality would help. Realistically, what will probably happen is these two will merge and cause more damage then what they do already. Then, like what happened to Microsoft, lawsuits and fines will need to be used to limit them from using their ISP monopoly to be anticompetitive in other areas.

By PaFromFL on 8/27/2014 11:13:40 AM , Rating: 2
Lawsuits only slow down the damage to society from powerful, greedy corporations that provide essential services. A more permanent solution for out-of-control cable companies, health care industries, insurance industries, banks, etc. is to regulate them as public utilities. Similar patterns of abuse led to the tight regulation of water, sewer, electric, and telephone industries almost a century ago. Public utilities serve the interests of both investors and customers by preventing the excesses of communist-style government control and rapacious capitalism.

By lexluthermiester on 8/29/2014 10:25:14 AM , Rating: 2
Right? Comcast and TimeWarner are too big as they are, this merger would be an absolute disaster for North America.

RE: FINALLY, a lawsuit I can support! LOL
By Signothorn on 8/29/2014 11:20:08 AM , Rating: 2
My guess is republicans will take the senate this year, then the white house in 2016. Because the ISP's are so cozy with republicans, the republicans will bribe the ISP's to build out infrastructure (again). The isp's will comply because congress won't understand the threat of municipal broadband and the media will sit on their hands instead of telling the story of the millions and millions of dollars in tax payer money the ISP's were already paid to do this.

RE: FINALLY, a lawsuit I can support! LOL
By just4U on 8/31/2014 3:44:22 PM , Rating: 2
I take it your a democrat? If so... be aware this is happening while the politicians "YOU" support are in power.

By Piiman on 9/6/2014 12:07:11 PM , Rating: 2
Be aware BOTH parties cater to the $$$$

But at least they don't have data caps!
By nafhan on 8/26/2014 6:52:25 PM , Rating: 3
...because their data caps are no longer called data caps. Comcast calls them data thresholds, now. No, that's not a joke. They actually said this in a filing to the FCC recently to explain how they don't have data caps.

By JasonMick on 8/26/2014 7:04:39 PM , Rating: 4
...because their data caps are no longer called data caps. Comcast calls them data thresholds, now. No, that's not a joke. They actually said this in a filing to the FCC recently to explain how they don't have data caps.
Sounds like the Obama administration's kind of company....

"Let me be clear. I have only authorized the NSA to acquire data from Americans. In no way is the NSA touching your data or spying on you."

By GulWestfale on 8/26/2014 8:11:58 PM , Rating: 3
that last picture made me think "OMG LITTLE RICHARD PUT ON TOO MUCH MAKEUP"
i think need more sleep

RE: But at least they don't have data caps!
By tommyrobinson18 on 8/27/2014 12:28:18 AM , Rating: 2
The new Data usage policy is hitting more areas, 300GB a month then $10 for every 50GB over that.
They know that streaming HD content can result in hitting this data limit easily.
They could easily shift to a tiered structure where the more expensive plan you have the higher the limit.
I think even the 25Mb/s plan should be 500GB before charges but I doubt they will be that generous.

They no longer use the word "unlimited" when selling or describing internet service anymore, but DO when talking about long distance calling which is less and less used by the day.

By FITCamaro on 8/27/2014 8:29:54 AM , Rating: 3
I entered a comment to the FCC for this merger because I'm afraid that TWC and Comcast merging will result in widespread data caps across the country which will only hurt the roll out of more digital services. Video streaming, game streaming, digital downloads, etc. All will be harmed. Plus then one company will effectively own the vast majority of internet service which is mandated to them by legacy government monopolies granted to them. Until anyone and everyone who wants to create an ISP in an area can do so if they want to is a reality, this merger will harm consumers.

By tamalero on 8/28/2014 1:30:14 PM , Rating: 2
Wasnt Miss Mignon already in trouble for accepting huge paychecks for "Donors"(aka Comcast and other communication companies) to allow monopolies?
So no surprise she seems to keen in letting the merge happen.

Hilarity is: Mexico had one of the worst internet services thanks to the gigantic monopoly of Telmex. After the opening of the market.. and the 7 big companies doing their best to attract customers.. We finally have decent broadband over here (up to 200Mbps fiber, and 100Mbps Cable lines that REALLY transfer such speeds).
Now Americans due of corruption are going to be suffering a similar fate.

By freemynet on 9/15/2014 12:00:43 AM , Rating: 2
We need to start looking for alternatives to Comcast and these other providers. We pay for internet, not for specific sites that comcast doesn't view as competition.

By Shadowmaster625 on 8/27/14, Rating: -1
RE: Vultures
By seamonkey79 on 8/27/2014 9:22:24 AM , Rating: 5
Netflix doesn't consume the traffic, the users using Netflix consume the traffic. Meanwhile, the user is paying the ISP to be able to consume the traffic and Netflix is paying the ISP to be able to provide the traffic.

If I pay for a service, then I should have the service I'm paying for, not a hamstrung service because the ISP decides that they're not willing to spend some of the money that both sides are paying them to make it a non-issue. Seriously, how many billions does the company need in the bank?

RE: Vultures
By rountad on 8/27/2014 11:35:47 AM , Rating: 4
Those yachts don't buy themselves, you know.

RE: Vultures
By Schrag4 on 8/27/2014 1:33:50 PM , Rating: 1
Seriously, how many billions does the company need in the bank?

I agree with your post except that last statement. It's juvenile and it reeks of class warfare. All things being equal, I'd rather be a customer for a financially secure ISP than for one that might go out of business at any time.

Again, otherwise I agree with your post and others. There are several legitimate, substantial reasons to be against this merger.

RE: Vultures
By TheDoc9 on 8/27/2014 4:56:20 PM , Rating: 1
What's funny about this statement is that bandwidth usage is exactly what the internet was designed for. Multiple companies and governments have built the internet and it's ability to handle massive amounts of data. Comcast has basically deemed itself a toll road - going completely against the original design, simply for profit.

The only way to fix this is to subscribe to comcasts competitors services, even if the competitors only provide a mediocre product in comparison. This may be the case in some areas, I suspect though that most people have options and they should exercise them - or else they will be paying far more for their complacency within 10 years.

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