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Not a typo, monopsony in spotlight in U.S. cable deal

A man walks past the Time Warner Cable headquarters in New York February 13, 2014. REUTERS/Joshua Lott
A man walks past the Time Warner Cable headquarters in New York February 13, 2014. REUTERS/Joshua Lott

By David Ingram

WASHINGTON (Reuters) - If U.S. antitrust enforcers decide to challenge the proposed $45 billion merger of Comcast Corp and Time Warner Cable Inc, it may be because of an idea with a funny-sounding name that has been gaining currency in government offices.

The idea is monopsony power, the mirror image of the better-known monopoly power but a concept that is just as old.

A monopoly is one seller with many buyers, while a monopsony (pronounced muh-NOP-suh-nee) is one buyer with many sellers. A textbook example is a milk processor that is the only option for dairy farmers to sell to, and that then forces farmers to sell for less.

The U.S. Justice Department's Antitrust Division is all but certain to examine the potential monopsony power, or buying power, that a combined Comcast and Time Warner Cable would have over media companies that provide TV programming, according to lawyers with expertise in antitrust law.

The combined company would have a near 30 percent share of the U.S. pay television market, Comcast has said, as well as be a major provider of broadband Internet access.

"It's a potential concern," said Maurice Stucke, a former Justice Department antitrust lawyer who is now a University of Tennessee professor and of counsel at the law firm GeyerGorey.

"It's not as much in the limelight as monopoly, but monopsony has always been part of the antitrust laws," he said.

Monopsony concerns tend to have a lower profile because they may not directly affect consumers. The harm to the market comes if suppliers go out of business, which reduces society's overall output, or if suppliers have less money to invest in new technology, equipment and expansion.

Consumers may even benefit from monopsony if a company cuts its prices, although the savings are not always passed along. In the case of Comcast-Time Warner Cable, it could be argued that a more powerful pay TV operator may be able to lower fees if it can negotiate lower programming costs with the TV studios.

"It's a monopsony problem when it threatens to decrease output. If all it does is reduce cost, it's a good thing," said Herbert Hovenkamp, a University of Iowa law professor.

He added: "Monopsony is one of those things that is frequently claimed and rarely proven."

GETTING BETTER DEALS

Princeton University economist Paul Krugman criticized the proposed Comcast-Time Warner Cable merger in a February 15 post on his New York Times blog titled, "Monopsony Begets Monopoly, And Vice Versa."

Comcast "is able to extract far more favorable deals from content providers than smaller rivals," Krugman wrote. "And if it's allowed to acquire (Time Warner Cable), it will be even more advantaged."

Others say it is hard to see how a media conglomerate like Walt Disney Co, or even smaller content providers, would feel much pain from slightly lower payments or from one fewer way to distribute shows.

"Given the rapidly increasing number of avenues for distributing content, I think that's far-fetched," said Jeffrey Eisenach, an economic consultant who has done work for Comcast in the past but is not working on the merger.

Asked about the possibility of a monopsony challenge, a spokeswoman for Comcast pointed to a 2009 federal appeals court ruling that said there was "overwhelming evidence" that the communications marketplace was competitive. The ruling threw out a regulation designed to limit market share among companies such as Comcast to 30 percent.

"Today there are even more types of video competition than when the court threw out the case," Comcast spokeswoman Sena Fitzmaurice wrote in an email.

She said TV networks can distribute their programs to consumers in many ways, such as DirecTV's satellite service or Verizon's FiOS video service. There are also video streaming sites, such as Netflix and Hulu.

Antitrust experts said Comcast and Time Warner Cable may be able to address some government concerns by extending the terms of a settlement that Comcast signed with the Justice Department in 2011 to secure approval to buy NBC Universal. For instance, Comcast promised to make programming, such as cable news channel CNBC, available to competing pay-TV companies.

ANTITRUST STANDARD

Review of the Comcast-Time Warner Cable deal is expected to take several months. Either the Justice Department or the Federal Trade Commission will examine it for antitrust compliance, while the Federal Communications Commission will rule on whether it is in the public interest.

The antitrust standard is whether the deal would substantially lessen competition. If government lawyers believe it would, they could sue in federal court. Sometimes even the threat of a suit is enough to scuttle a deal.

Monopsony has been getting more attention within the Justice Department. A senior staff economist, Gregory Werden, wrote a paper in 2007 arguing that the original U.S. antitrust law, the Sherman Antitrust Act of 1890, was designed to protect sellers as well as end-user consumers.

In 2010, the department drew attention to monopsony concerns when it released revised guidelines for corporations considering mergers. The guidelines replaced a document from 1997 and included an expanded discussion of monopsony.

When suppliers do not have "numerous attractive outlets for their goods or services," the two agencies "may conclude that the merger of competing buyers is likely to lessen competition in a manner harmful to sellers," the guidelines said.

Wal-Mart Stores Inc has routinely faced criticism that it has monopsony power because of its ability to drive down the prices it pays suppliers. But the retail giant's defenders say there is little evidence that suppliers are hurt, and Wal-Mart's low prices for customers also make it popular.

Monopsony is most often an issue in agriculture.

In 1999, the Justice Department feared that Cargill Inc's plan to acquire part of Continental Grain Co would concentrate the market for buying corn, soybeans and wheat, and it approved the acquisition only after the global commodities trader agreed to sell off grain elevators.

The Justice Department sued in 2008 to block the combination of two of the top four U.S. beef packers, JBS SA and National Beef Packing Co, saying it would have hurt both cattle suppliers and consumers. The companies abandoned the deal four months later.

In the context of the pay TV market, a key question is how a channel would fare if it were not carried by a merged Comcast-Time Warner Cable.

"If you're told you can't reach 30 percent of a potential market, how significant is that for a competitor who wants to produce? That's a technical question," said Peter Carstensen, a University of Wisconsin law professor.

"You've got to put the data together. You've got to come up with a plausible story, with witnesses, with the econometrics, to make that case," he said, "and whether that can be done convincingly, I don't know."

(Additional reporting by Diane Bartz; Editing by Howard Goller and Tiffany Wu)

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