The biggest regulatory hurdle Charter Communications likely will face in its mega-bid for Time Warner Cable is the question of control over the U.S.’ broadband pipes — the issue that prompted Comcast to abandon its own bid for TW Cable.
The Charter’s $78.7 billion takeover of TW Cable, together with its acquisition of Bright House Networks, would yield an entity with about 20 million broadband subscribers. That’s still less than Comcast, which had 22.4 million at the end of Q1.
Charter-TWC-Bright House would own about a 30% share of broadband as defined by the Federal Communications Commission as providing 25 megabits per second of bandwidth downstream. By comparison, Comcast-TW Cable would have controlled roughly 57%.
Still, there’s regulatory risk. Simply being smaller than Comcast may not be a guarantee that Charter’s tie-up with TW Cable and Bright House will be approved, analyst Craig Moffett wrote in a research note Tuesday.
“Ultimately, the DOJ and FCC will focus on ‘New Charter’s’ share of broadband-over-25 Mbps downstream,” Moffett said. “Measured on this basis, New Charter’s scale would be daunting.”
Charter CEO Tom Rutledge (pictured above), in a call with investors, claimed to be “confident” the transaction would pass regulatory muster and close by the end of 2015.
In a statement, FCC Chairman Tom Wheeler said the agency will review Charter’s proposed deal for TW Cable in the same way it evaluates every transaction — whether it is in the public interest. “In applying the public interest test, an absence of harm is not sufficient,” Wheeler said. “The commission will look to see how American consumers would benefit if the deal were to be approved.”
Comcast nixed its proposed deal for TW Cable last month, after the FCC was prepared to refer approval of the merger to an administrative law judge — a sign regulators were prepared to block it. The key issue: The Department of Justice concluded that the new Comcast would have had both means and motive to inhibit competition from over-the-top video rivals like Netflix, given its outsize market share, according to Moffett.
“We can presume that, in the eyes of the FCC and DOJ, any operator with interests in video distribution would have the incentive to” engage in anti-competitive activity against OTT competitors, Moffett said. The analyst gave the Charter-TW Cable an 80% chance of approval — noting that’s what he initially assigned to Comcast-TWC more than a year ago.
Netflix, for one, specifically opposed Comcast’s takeover of Time Warner Cable because the company felt it would give one company too much power over the Internet-video market. Netflix declined to comment on Charter’s bid for TW Cable.
“Comcast is already dominant enough to be able to capture unprecedented fees from transit providers and services such as Netflix,” CEO Reed Hastings and CFO David Wells said in a letter to shareholders last year. “The combined company would possess even more anticompetitive leverage to charge arbitrary interconnection tolls for access to their customers.”
But there are enough differences between Comcast’s bid for TW Cable and a Charter acquisition of the cable operator that there should be much less risk of regulators throwing red flags, according to independent research firm New Street Research in a note published last week.
Charter doesn’t have content holdings, whereas Comcast owns NBCUniveral, the firm noted. The Charter-TW Cable deal also wouldn’t give the combined company as big a hold on top U.S. markets (whereas Comcast would have had 19 of the 20 largest cities in the United States), according to New Street Research analysts Jonathan Chaplin, Spencer Kurn, Zach Monsma and Vivek Stalam.
And Comcast certainly didn’t do itself any favors in engaging in a standoff and ongoing public debate with Netflix over bandwidth-access terms.
“There is no doubt that Comcast’s dispute with Netflix was a big mistake in terms of maintaining a benign policy environment… as it highlighted how, in the (online video distributor) world to come, an ISP could use its power at the interconnection point,” New Street Research analysts wrote. “Charter has no such history of disputes, which is both helpful with the analysis and the politics of the deal review.”