Exhibit Redacted -For Public Inspection
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EXHIBIT REDACTED -FOR PUBLIC INSPECTION Statement of Dr. Fiona Scott Morton re the Merger of Charter, TWC,and BHN November 2, 2015 REDACTED —FOR PUBLIC INSPECTION I. Qualifications, Assignment, and Summary of Opinion .........................................................................4 II. Comments and Responses ....................................................................................................................5 A. Comments with General Concerns not Related to the Merger ........................................................5 1. Substitutes for Cable Broadband ..................................................................................................5 2. Bundling Discount .........................................................................................................................5 3. Local Bargaining Power .................................................................................................................6 4. The Economics of Incentives to Support or Foreclose OVDs ........................................................6 B. Comments with Merger-Specific Concerns.......................................................................................7 1. Increased Concentration in a National Broadband Market ..........................................................7 2. Reduced Future Competition in N Anywhere .............................................................................8 3. Potential Foreclosure of Sling N ..................................................................................................9 4. Debt Concerns ...............................................................................................................................9 III. New Charter will benefit OVDs ...........................................................................................................10 A . OVD Partnering Choices ..................................................................................................................12 1 . New Charter ................................................................................................................................13 2. Comcast.......................................................................................................................................18 3. TWC .............................................................................................................................................21 4. AT&T/DN....................................................................................................................................22 5. Verizon ........................................................................................................................................23 IV. Merger-specific Technology Benefit ...................................................................................................24 V . OVDs Benefit New Charter..................................................................................................................25 B. OVD services are differentiated from MVPD services ....................................................................27 1. Many subscribers combine MVPD and OVD services .................................................................30 2. Cord Cutters and Cord Nevers ....................................................................................................32 3. OVDs and Charter have common goals ......................................................................................32 VI. New Charter's financial incentive to support OVDs............................................................................34 A. New Charter would lose revenue if it disadvantaged OVDs...........................................................44 VII. New Charter's Commitments..............................................................................................................47 VIII. Analysis of Facilitating Factors for Coordinated Foreclosure of OVDs................................................53 B. The Basic Economics of Collusion ...................................................................................................53 C . Hypothetical theory of harm ...........................................................................................................56 D . No Collusive Mechanism .................................................................................................................58 E . No Shared Goals ..............................................................................................................................58 2 REDACTED —FOR PUBLIC INSPECTION F . OVDs benefit MVPDs.......................................................................................................................58 G. Past History Makes Collusion to Disadvantage OVDs Unlikely .......................................................59 H. Other Factors that Make Collusion between New Charter and Comcast Unlikely .........................60 1. Structural Factors ........................................................................................................................60 2. Demand Factors ..........................................................................................................................63 3. Supply Factors .............................................................................................................................64 I. Enforcement and Punishment ........................................................................................................66 IX . Economies of Scale ..............................................................................................................................67 A . Increased scale ................................................................................................................................67 B. Economies of scale will increase the incentives to make fixed cost investments ..........................68 C. Increased geographic scope ............................................................................................................71 D . Lower marginal costs ......................................................................................................................73 E. Increased speed as a consequence of scale ....................................................................................74 X . Conclusion ...........................................................................................................................................76 3 REDACTED —FOR PUBLIC INSPECTION I am the Theodore Nierenberg Professor of Economics at the Yale School of Management, a Visiting Professor in the Economics Deparhnent of the University of Edinburgh, and a Senior Consultant at Charles River Associates. I was the Deputy Assistant Attorney General for Economic Analysis with the Antitrust Division of the US Department of Justice in 2011 and 2012. I have taught at the business schools of Stanford and the University of Chicago and served as Associate Dean for Faculty Development at Yale School of Management. I received a PhD in Economics from MIT in 1994. 2. At Yale University, I teach courses in the area of competitive strategy and competition economics and policy. My research is in the area of empirical Industrial Organization, the sub-field of microeconomics that includes competition economics and the study of firm behavior. I have authored or co-authored more than 20 articles in a variety of areas of economics. Those articles have been published in leading scholarly and professional journals, including the American Economic Review, the RAND Journal ofEconomics, the Journal ofIndustrial Economics, and the Quarterly Journal ofEconomics. 3. I filed a previous statement regarding the merger of Charter Communications ("Charter"), Bright House Networks("BHN"), and Time Warner Cable("TWC") as part of the parties' June 25, 2015 Public Interest Statement. I included my complete curriculum vita as an attachment to that statement. In what follows below, I update and supplement findings from my previous statement. 4. In particular, counsel for the parties have asked me to further consider whether or not the post-merger firm ("New Charter") will have an incentive to foreclose or otherwise disadvantage Online Video Distributors or other edge providers ("OVDs"), either unilaterally or in concert with Comcast. Below, I reaffirm my previous finding that New Charter will not have an incentive to foreclose or otherwise disadvantage OVDs, either unilaterally or in concert with Comcast. To the contrary — I find that Charter's past technology choices, along with the margins New Charter will likely earn from the various services it sells, will give New Charter a strong economic incentive to support OVDs. I address these and other issues in more detail below. 5. In preparing this statement, I have reviewed documents and interviewed executives from Charter and TWC. I rely on information from those documents and interviews below. As the merger review process continues, more information will become available, and I may update my findings. 4 REDACTED —FOR PUBLIC INSPECTION II. Comments and Responses 6. I have reviewed the statements and concerns of the various commenters in this proceeding. This report in its entirety addresses many of these concerns. However, in this section, I consider certain specific comments about the transaction. 7. Not all of the concerns reflected in the comments were merger-specific.