The Airlines: What Free Market?

Did you know that a mega-acquisition in the airline industry was just announced last week? It’s a transaction that will create the fifth largest passenger carrier in the United States.

Under normal circumstances, such an announcement would blast across the headlines. The federal government would launch a massive anti-trust review. And business pundits would rush to opine on the extent to which the transaction would impede market competition.

So why didn’t any of these events occur? Perhaps it is because we aren’t experiencing a normal competitive environment in today’s airline industry. After all, there are now only four mega-carriers left in the market. And according to the Associated Press:

“At 40 of the 100 largest U.S. airports, a single airline controls a majority of the market … (and) at 93 of the top 100, one or two airlines control a majority of the seats,”

Thus, even though last week’s announced acquisition of Virgin America by Alaska Airlines would create America’s fifth largest carrier, the post-acquisition entity would be so much smaller than the Big Four that the transaction would wield very little impact on the market.

In fact, there is so little competition that even the recent collapse in fuel prices has done little or nothing to encourage start-up airlines to begin serving smaller cities. When the major carriers pulled out of numerous mid-sized communities several years ago, they blamed soaring fuel prices for making small airplanes (with their limited ticket selling potential) uneconomical.

One would thus presume that the recent fuel price decline would result in a return to these smaller markets. But given the hammer-lock that the Big Four airlines possess over the flying public, there has been little or no such activity.

So the next time you hear an airline executive praise the virtues of a deregulated economy, you might choose to absorb such comments with a grain of salt. After all, in order to experience the benefits of a free market, one much first establish and maintain a condition of competitive balance. In today’s airline industry, though, competition appears to be in very short supply.

Comcast, Time Warner, And Antitrust Law

Last week, America’s largest cable television provider Comcast announced that it is acquiring its biggest rival Time Warner Cable. The resulting merger of the nation’s two greatest cable television customer networks will establish Comcast as a dominant firm in nineteen of America’s twenty largest markets. It will also bequeath Comcast with 30 million customers, 50% more than the 20 million customers served by its closest competitor DirecTV.

You would think that a merger of the top two organizations in an industry, a transaction that leaves the surviving firm with a dominant market position over its remaining rivals, would be scrutinized carefully by antitrust regulators … wouldn’t you?

Well … think again! The transaction is expected to receive relatively little government scrutiny because cable television firms negotiate exclusive franchise arrangements for their customer markets. According to Comcast’s acquisition announcement, “Importantly, the proposed transaction will not reduce competition in any relevant market. Comcast and Time Warner Cable do not currently compete to serve customers in any zip code in America.”

So although Comcast competes against telephone companies that offer television services (like Verizon’s Fios and AT&T’s U-verse), as well as satellite communication companies that do the same (like DirecTV and Dish Network), Comcast does not directly compete against Time Warner Cable (or Cox Cable, or Cablevision) in its established service areas.

Because of its non-competitive franchise agreements, Comcast can benefit from the manner in which American antitrust laws have been written and enforced during the past century. Indeed, it has been that long since President Theodore Roosevelt first signed and then wielded antitrust legislation to “bust up” the great trusts of the late 1800s and early 1900s.

The laws tend to prohibit corporate acquisitions that would eliminate direct competition between firms in the short run. However, they tend to permit acquisitions that would help organizations build dominant market positions in the long run.

That’s why Comcast isn’t even bothering to suggest that the economies of scale to be achieved through industry consolidation may result in lower customer prices. Comcast’s Executive V.P. told reporters “We’re certainly not promising that customer bills are going to go down or even that they’re going to increase less rapidly.”

It is undoubtedly reasonable to argue that, under certain circumstances, the two largest organizations in an industry sector should be permitted to merge with each other. But if antitrust law in the United States is written and applied in a manner that precludes significant scrutiny of such mergers, how will American society be able to maintain the competitiveness of its markets?

If you were Edith Ramirez, the Commissioner of the Federal Trade Commission, would you petition the United States Congress to pass antitrust legislation that revises the criteria for regulatory reviews of proposed acquisitions? 

Apple’s Watergate?

Over forty years ago, on October 20, 1973, embattled President Richard Nixon responded to a subpoena for information by his own Special Prosecutor Archibald Cox by refusing to comply with the order. He then fired Cox, and accepted the “in protest” resignations of his Attorney General Elliot Richardson and Deputy Attorney General William Ruckelshaus, in what became known as the Saturday Night Massacre.

Nixon’s decision galvanized popular opinion against his use of political power during the Watergate affair. However, because he resigned and was pardoned before he could be tried in a court of impeachment, the American judicial system never addressed and resolved the following question: could a United States President legally avoid complying with his own official’s oversight orders by firing that very official?

A similar question about business corporations is now being adjudicated by the American legal system. Last October, Apple agreed to settle a governmental anti trust case about its e-book pricing practices by accepting a court appointed compliance monitor.

But Michael Bromwich, the compliance officer, has ruffled the feathers of Apple’s executive officers, who accuse him of conducting “adversarial, inquisitorial, and prosecutorial communications and activities.” Recently, the firm won an administrative stay from Bromwich’s oversight, pending further appeals.

But let’s consider Apple’s legal stance for a moment. Adversarial, inquisitorial, and prosecutorial activities? Isn’t that the type of behavior that should be expected from a court appointed compliance monitor?

Nevertheless, Apple believes that such behavior is inappropriate; it is attempting to dismiss its own compliance monitor. Forty years after Watergate, the courts may finally have an opportunity to opine on the legality of such actions.

If you were hearing this case as a member of the judiciary, would you rule in favor of Apple?

Time Warner vs. CBS: An Anti Trust Quagmire

Today is the one month anniversary of the financial dispute that has deprived three million Time Warner cable viewers of access to the CBS television network. And now, with the launch of the NFL football season right around the corner, sports fans are beginning to worry about missing the pleasure of viewing their favorite teams.

Why is it proving so difficult for the two corporations to reach an agreement? Although financial disputes are often contentious in nature, they seldom reach a stage of intractability when the underlying business proposition – in this case, television broadcasts of NFL games – is a highly profitable enterprise.

Indeed, the NFL economic colossus – not to mention all of the other programming that airs on CBS — generates more than enough revenues to satisfy both parties. So why can’t Time Warner and CBS reach an agreement?

Perhaps the parties are struggling because of the challenges of maintaining an implicit business model that skirts the edge of anti-trust law. Time Warner and its fellow cable television companies have always forced their viewers to purchase entire collections of network channels in order to access the ones that they actually wish to buy.

Likewise, the television networks have always forced the cable television companies to purchase their entire rosters of shows, from the least watched re-runs in the early morning hours to the most popular professional sporting events in prime time. And the Disney Corporation, like other conglomerates, has always required the cable firms to purchase access to most or all of its networks, from ABC TV to the Disney Channel to the myriad of ESPN channels.

In theory, such forced bundling terms are called tying arrangements. They have been illegal in the United States as a means for maintaining market power for over a century, having been implicitly banned by anti trust law under the Sherman Act of 1890 and then explicitly banned by the Clayton Act of 1914.

So why do they persist? Firms often argue that each bundle of services should be perceived as a single unified product, and not as a collection of tied-together products. Microsoft famously argued that point when it defeated a challenge from Netscape by embedding its Internet Explorer browser directly into its Windows operating system.

Although of questionable legality, the strategy proved to be a wildly successful one for Microsoft. Internet Explorer remained the #1 browser in market share until Google’s Chrome finally surpassed it last year, while Netscape faded and was then discontinued in 2008.

In the continuing case of Time Warner vs. CBS, however, the Tiffany Network’s channels and programs have been missing from the cable television firm’s roster of offerings for one full month. The fact that Time Warner’s remaining channels and programs have been unaffected by the absence of CBS lends credence to the argument that the cable firm’s full set of offerings (including CBS’s content) do not actually function as a single unified product.

And now legislators are threatening to require cable television firms to sell channels on an individual “a la carte” basis. Furthermore, the television networks are themselves making individual series available on DVD products, as well as independent episodes available for viewing on services like Netflix and Amazon Prime.

In other words, the forces of competition are placing incredible strains on the tradition of tying contracts in the cable television industry. That might indeed explain why Time Warner and CBS are struggling so fecklessly to finalize a contract that preserves this status quo business strategy.