Over the past several days I’ve seen a number of post-mortems on the decision by Comcast to drop its bid to acquire Time Warner Cable after it became clear regulators weren’t going to approve the deal. Two items in particular caught my attention over the weekend: a piece by Eric Lipton in the New York Times discussing Comcast’s not-so-successful lobbying effort in Congress, and an interview with Comcast Chairman and CEO Brian Roberts on Squawk Box, a program carried on CNBC, a cable network owned by Comcast since it acquired NBCUniversal roughly two years ago.
One of the things that struck me about the CNBC interview is that it clearly illustrates one perspective on the deal and Comcast’s impressive growth, and on the net value of regulation. I’d call this the “investor” perspective. From this perspective, the key metrics for evaluating Comcast, its actions and external factors impacting the company (e.g., regulation) are tied directly to the company’s ability to “maximize shareholder value,” something Brian Roberts and his team have been very good at over the years.
In contrast, the focus of the Times piece was concerns about the merger’s likely impact on the public interest rather than on shareholder value.
Market power skews shareholder value away from public interest
While some (perhaps some libertarian-leaning economists and CNBC commentators) might equate these two values, I suspect most people (experts and non-experts alike) would agree they are not the same, nor always positively correlated.
In fact, I’d argue that shareholder value and the public interest are likely to be inversely correlated when the company in question wields extensive market (and political) power and has a history of using it aggressively to gain competitive advantage and additional market power. All the more so when First Amendment issues are part of the equation, as is very much the case with regard to Comcast.
In a market with healthy competition and low barriers to entry, companies can only succeed if they satisfy their customers. In such markets I wouldn’t be surprised to find a meaningful correlation between shareholder value and the provision of high-quality service.
But, as FCC data (see graph on pg. 12) makes clear, many customers seeking high-speed Internet connections lack an attractive (or any) competitive option to cable-delivered broadband service. And the cost of market entry into this very capital-intensive sector remains very high.
And, as someone who has been both a Comcast and AT&T Internet customer, and has visited many an online user forum, my view is that, even when there is a choice between these two industry giants (or their peers), switching from one to the other is akin to jumping from the frying pan into the fire. And even if you’re eager to make that jump, the transition may involve a series of frustrating interactions with the CSRs, IVRs, techs, wait-times, billing mistakes and equipment returns/pickups of not one, but two companies. For an extreme—and hopefully rare—example of this type of experience, spend a few minutes listening to this recording of a Comcast customer attempting to drop his service.
This lack of attractive options and reluctance to jump through the hoops needed to switch between them may help explain why providers of Internet and bundled services often offer big rebates and steep short-term discounts to get customers to switch. Perhaps they’re hoping that, this time, a customer will stick around after the discount expires, since they’ll know that their only option at that point would be to jump back into the same frying pan they left a short while ago. Switching back and forth may be a game some consumers are willing to continue playing, but I suspect it’s too time-consuming and frustrating for most (at least it would be for me). Most, I suspect, simply want fast and reliable speeds, and responsive customer service and tech support. Unfortunately, providing that may cost a bit more than offering switching rebates and discounts (or so it seems based on companies’ actions).
An admirable focus on the public interest
To their credit, the FCC and Justice Department took seriously their responsibilities related to determining the competitive and public interest impacts of the proposed deal. And though Congress had no direct say in these decisions, it seems that many of its members also remained unconvinced that “what’s good for Comcast is good for the country,” even after months of heavy lobbying. As Lipton reports in the Times.
Despite the distribution of $5.9 million in campaign contributions by the two companies during the 2014 election cycle, and the expenditure of an extraordinary $25 million on lobbying last year, no more than a handful of lawmakers signed letters endorsing the deal…Congress has no direct power to approve or disapprove any merger, but endorsements, particularly if they come from black and Hispanic leaders, can send a subtle but important message to regulators that the deal is in the public interest and should be cleared…
Lawmakers cited a variety of reasons as to why Comcast’s elaborate pitch failed to gain traction this time: The miserable customer service ratings the company earns, for instance, made politicians leery of helping it out. In addition, there were much more substantial antitrust concerns associated with this deal, and some members of Congress said they thought Comcast had failed to live up to its promises in the NBCUniversal deal, and so could not be trusted this time.
Other lawmakers and staff members on Capitol Hill, in interviews Friday, cited Comcast’s swagger in trying to promote this deal. They said they felt that Comcast was so convinced in the early stages that the deal would be approved that it was dismissing concerns about the transaction, or simply taking the conversation in a different direction when asked about them…
“They talked a lot about the benefits, and how much they were going to invest in Time Warner Cable and improve the service it provided,” said one senior Senate staff aide…“But every time you talked about industry consolidation and the incentive they would have to leverage their market power to hurt competition, they gave us unsatisfactory answers.”
Together, the CNBC interview and NYT article highlight the difference between a thoughtful and holistic perspective on communication policy and public policy in general, and what I’d call the CNBC/libertarian/Wall Street perspective (for an extreme example of the latter, see Rick Santelli’s infamous trading floor rant attacking “losers” seeking mortgage modifications while ignoring trillion dollar bank bailouts and Wall Street criminality)
Having observed Brian Roberts’ career since its early days, my sense is that he is an extremely capable strategist, manager and dealmaker, and also a person of integrity. And he has plenty of reason to be proud of the company his father and he have built. It’s been impressive to watch.
But I also believe that he sees his primary role as maximizing shareholder value, and his primary constituency as being Wall Street analysts and investors, not Comcast’s customers. This perspective might not trigger regulatory problems if his company didn’t enjoy high levels of market power in key bottlenecks sectors of the communications industry. But, as the FCC and DOJ rightly concluded, Comcast does wield such market power and was seeking to augment it significantly with the TWC deal.
Customer satisfaction as a key indicator
As one longstanding piece of evidence to support my view of Comcast’s priorities, I’d point to its history of being consistently among the lowest-ranked companies in its industry (and among all U.S. companies) in terms of customer satisfaction.
Though I can understand Squawkbox hosts choosing not to confront their “boss” with tough questions, I would have liked to see one of them ask him about why this prolonged history of poor customer service has not yet been remedied, and how much Comcast planned to spend to address this issue in the future. Instead, we see the discussion about what’s next for the company leading to Roberts’ comment that:
The deal was going to slightly increase our leverage. That is now not happening. So that opens up room for further stock buybacks. And I think that’s an area that certainly we’re open to thinking about and talking about with the board.
I would have liked to see Roberts instead (or at least also) say that investing heavily to improve customer service was something he was going to discuss with the board, and that he was seriously committed to turning his company into a leader rather than a laggard in satisfying its customers, as measured by independent surveys.
But, just as the hiker only had to outrun his fellow hiker, not the bear, Comcast, to augment its shareholder value, need only leverage the fact that its local access pipe is much faster than most of its telco competitors, and invest just enough to ensure that the poor quality of its customer service doesn’t outweigh its speed advantage for too many customers.
And even if Roberts actually did announce a seriously-funded customer service initiative (or a large scale commitment to all-fiber networks), Wall Street analysts would most likely respond with downgrades of its stock, and pressure to direct cash flow to buybacks and dividends rather than to improved customer service and investments that could yield positive externalities with great social value but uncertain prospects for monetization by the company.
This speaks to the difference between what Marjorie Kelly calls “generative” and “extractive” business and ownership models, which I wrote about in relation to Internet access here and here (and may write about on the Quello Center blog in the future).