World Economic Forum

Why the feds should block Comcast's merger with Time Warner Cable

April 22, 2014: 10:27 AM ET

A merger may not raise prices in the short term but could hamper future competition.

By Sanjay Sanghoee

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FORTUNE -- As the Supreme Court this week looks into the legality of Internet-television service Aereo, it's a good time to delve into another development that could forever reshape the future of television: the possible merger between two of the nation's biggest cable companies, Comcast (CMCSA) and Time Warner Cable (TWC).

In February, Comcast agreed to buy Time Warner Cable for $45 billion. If federal regulators approve the deal, the combined group will be the country's dominant provider of television channels and Internet connections, reaching roughly one in three American homes. Understandably, the prospects of such a deal conjure up images of powerful media conglomerates controlling everything we see on TV and the Internet, but disturbing as this possibility may be, there are bigger reasons to block the deal.

MORE: Why Supreme Court might pull plug on Aereo

A merger between these giants would threaten an open and fair market for cable television as well as Internet access. To understand this, consider that Comcast could gain 11 million subscribers if it buys Time Warner Cable. Even if it winds up divesting 3 million subscribers to Charter Communications (CHTR) to gain approval from the Federal Trade Commission, the combined company will still have 30 million subscribers nationwide.

Some would say the companies don't directly compete -- Comcast has its own markets, such as in Philadelphia and Washington, D.C., and Time Warner Cable has its own, such as in New York and North Carolina. The lack of overlap may temper antitrust concerns, but even geographically divergent markets can create an anticompetitive environment.

Consumers may not see prices rise in the near term, since the markets don't overlap. However, consumers are also unlikely to see prices fall, which is what could happen if the two biggest cable companies did indeed compete with each other in the same arena.

Another factor to consider is how the scarcity of a necessary resource like broadband will inevitably increase the power of monopolistic distributors while hurting content providers and consumers. On Monday, the same day Netflix (NFLX), announced it would raise prices for new customers to help pay for investments in original programs, CEO Reed Hastings said he opposed the Comcast-Time Warner Cable deal.

"I don't know that we want anybody to control half of the U.S. Internet," Reed told analysts on a video conference call.

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Consumers ultimately lose as content providers are increasingly forced to pay for a share of limited broadband "shelf space" by cable, telephone, and satellite companies. In addition, by simply acquiring Time Warner Cable's subscribers, Comcast is sidestepping the need to build new infrastructure of its own. That's a great deal for Comcast but not for the U.S., which ranks 35th in the world in broadband capacity according to the World Economic Forum, and whose future needs will demand considerable investments from the private sector in more infrastructure.

Insufficient broadband capacity impacts the ability of Americans to access both television as well as the Internet in an increasingly media-driven age, which can slow down communications, access to information, commercial activity, and blunt our competitiveness in global markets. And while a study from the Pew Center shows that 70% of Americans have high-speed broadband, some experts question whether the Federal Communications Commission's definition of broadband itself is flawed and paints a rosy picture of a grim reality.

MORE: Airbnb setback: Bad for the sharing economy?

So while the merger may not be anti-competitive in terms of eliminating existing competition, it does obviate the need for both Comcast and Time Warner Cable to expand their services and aggressively compete with each other on price, quality of service, and capacity, which amounts to the same thing. The Federal Trade Commission should consider all this before approving a deal and recognize the long-term ramifications of allowing cable juggernauts to expand their footprint artificially instead of through investment and competition.

Sanjay Sanghoee is a political and business commentator. He has worked at investment banks Lazard Freres and Dresdner Kleinwort Wasserstein, as well as at hedge fund Ramius. Sanghoee sits on the board of Davidson Media Group, a mid-market radio station operator. He has an MBA from Columbia Business School and is also the author of two thriller novels. Follow him @sanghoee.

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