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Consumers, Hollywood Wait for Answers on the Comcast-TWC Merger

Many people have chimed in on the plans by Comcast, the nation’s top cable and Internet provider, to merge with Time Warner Cable, the No. 2 cable operator and No. 3 ISP. But perhaps no one was so public as a man who confronted Comcast CEO Brian Roberts during a Q&A session in May.

“Comcast is the most hated company in America, according to one recent poll,” the man said to Roberts. “What are your incentives in a place like New York to actually compete?”

After waiting for audience laughter to subside, the Comcast topper addressed the question. “Give us a few years,” he said. “The incentives are because of competition.”

Competition is the question at the heart of the matter, and consumers are not alone in asking it. Hollywood creatives fear a Comcast-TW Cable combo will lead to a cascade of consolidation. Content providers worry that the deal will give outsized leverage to a distributor.

FCC chairman Tom Wheeler, along with the Dept. of Justice tasked with reviewing the proposal, laments the lack of competition in the market for high-speed Internet service.

Yet on Wall Street and among many in Hollywood, the consensus still seems to be that the combination will happen, that the recent history of media mergers points to approval with conditions that try to limit the scope of the combined company’s reach. The sentiment is slightly less certain in Washington, where the battle is being played out in public and private.

“If you were a betting person, I would guess that you would say that there is a good chance they will approve the merger with conditions,” says former FCC commissioner Michael Copps, who was the sole vote against Comcast’s merger with NBCUniversal in 2011. “But I would like to think that with the outpouring of comments on this and with the Open Internet order, that maybe there is more thinking that hey, ‘Maybe this is far enough and time to say no.’”

The FCC’s next deadline for comments on the merger is Sept. 23, when Comcast is expected to answer to dozens if not hundreds of critical comments from an array of groups and companies including Netflix, the Tennis Channel and Discovery Communications.

Relatively few major media companies have chimed in publicly on the merger. Discovery executives met with FCC officials earlier this month, characterizing their worries as “critical issues.” According to sources who have been contacted, the FCC and the Justice Dept. are reaching out to studio executives and other industry leaders to get their take on the merger in private, reflecting the concern that to air criticisms in public would risk future negotiations with Comcast.

Some media companies have inked carriage agreements that have seemingly turned their past criticism of the deal to tacit acceptance. In April, Univision CEO Randy Falco said that the merger was bad for competition. Earlier this month, Univision announced a long-term pact for Comcast to carry its Spanish-language sports network, and stayed silent when it came to filing official public comment to the FCC..

Comcast feels it already has addressed many of the critical comments, with company exec VP David L. Cohen citing that “the number of video, broadband and phone providers in every local market in the country will remain the same post-transaction as today.”

Nationally, Comcast says the combined entity still will have less than 30% of the pay-TV market and not quite 36% of the wired broadband market — not enough to raise serious competitive concerns, it maintains.

Yet privately, industry investors and studio executives express the fear that the merger marks a turning point that will tilt leverage clearly in Comcast’s favor, with greater power to set pricing and carriage terms. With dominant positions in New York and Los Angeles, Comcast will hold the cards when it comes to reaching the viewers advertisers crave.

That prospect will force others to play the combination game. Lined up on the runway behind Comcast-TW Cable are AT&T and DirecTV, and the belief is that further consolidation on the distribution side will lead to mergers on the content side. A potential merger of 21st Century Fox with Time Warner never got off the ground, but that may be the shape of things to come for content players.

“Although there has been a lot of activity in the media merger industry, we haven’t seen much around the six major studios for some period of time, and (Comcast-TW Cable) has reignited that interest,” says Lindsay Conner, co-chair of the entertainment and media practice at Manatt, Phelps & Phillips. “Whether or not it is ultimately approved, people’s appetites have been whetted.”

Will the government have the gumption to say no? Here are the scenarios:

A “yes” to the merger:
To satisfy the Dept. of Justice, Comcast will have to pass muster on issues of antitrust; to win approval from the FCC, it will have to prove the deal to be in the public interest. Comcast argues that the combined company’s greater scale won’t be so great as to give it unfair advantage, yet maintains that scale will be great enough to allow it to better roll out new technologies to its customers — as it is doing with the interactive X1 operating platform. With Comcast’s upgrades in technology, cable operators, satellite providers and startups like Google Fiber will have to respond with their own competitive investments. That’s what makes the merger “pro-competitive,” Comcast maintains.

But to expect the DOJ and FCC would sign off on the deal as it stands now ignores the politics of the situation. From day one, scrutiny of the merger has focused on Comcast’s ties in Washington, particularly to the Obama administration. Comcast is the No. 1 media company when it comes to lobbying spending and campaign contributions, according to the Center for Responsive Politics. A rubber-stamp approval would likely raise a furor.

A “no” to the merger:
An outright rejection of the deal would send shockwaves through the cable and telco industries (although it wouldn’t necessarily spell doom for AT&T’s proposed purchase of DirecTV). Wheeler and William Baer, chief of the DOJ’s Antitrust Division, publicly frowned on the possibility of Sprint and T-Mobile merging, and the two wireless firms ultimately decided against it. In 2011, the FCC and the Antitrust Division blocked the proposed merger of AT&T and T-Mobile.

Comcast correctly argues that unlike those examples, its merger with Time Warner Cable doesn’t remove consumer choice from the table, putting the onus on federal officials to come up with a legal rationale to reject the deal. Helpfully, Netflix has provided one, citing the 14-year-old case of AT&T and MediaOne. Like Comcast and TW Cable, they were then the two largest cable companies that didn’t directly compete in any market. Nevertheless, the combined company would have controlled almost 40% of Internet service. The Justice Dept. forced AT&T to sell off MediaOne’s interest in broadband on the grounds that the company would have too much leverage over content trying to go through its pipes.

If the government bases its decision on those grounds, it wouldn’t necessarily put the brakes on consolidation, and the effect would be greater on TW Cable than on Comcast, according to Craig Moffett of research firm MoffettNathanson. “Comcast shares dropped when the (merger) was first announced,” he says. “The market has warmed to it since then, but I still don’t think it would have an outsized impact on Comcast shares.”

A “maybe” to the merger:
At the same time the FCC is considering the Comcast-TW Cable merger, it is jumping back into the minefield of net neutrality, the rules of the road for the Internet that, in essence, force ISPs to treat all traffic equally. According to the staunchest adherents of net neutrality, the rules are what keep the Internet from devolving into the tiered system of cable TV.

The challenge the FCC faces is devising rules that can prevent the cable-ization of the Internet, yet survive a legal challenge. Advocates urge Wheeler that the only way to do so is to reclassify the Internet as a utility; the broadband industry sees such an approach as regulatory overreach.

Instead of relying on a set of controversial rules, the merger could allow Wheeler to instead make them a condition of the Comcast-TW Cable deal, at least for a time, and perhaps long enough for market realities to change. Comcast already has to abide by the previous net neutrality rules through 2018 as a condition of its merger with NBCUniversal, and it says it will offer those conditions to TW Cable customers.

Wheeler and the FCC could extend such demands beyond 2018, or even address other simmering issues the FCC faces. Netflix is urging the FCC to do something about the fees Comcast and Verizon are charging to connect video traffic to their networks. Consumer groups fear Comcast eventually will impose widespread usage-based pricing and data caps on consumers, as are common in the mobile world, stifling the growth of video online.

The onus also will be on the FCC and DOJ to establish conditions that prohibit Comcast from withholding NBCUniversal content from other distributors, or from preventing competing channels from landing valuable placement on its cable systems. And more than likely, there will be some scrutiny of how Comcast treats regional sports networks. Wheeler already has stepped into the fray over TW Cable’s impasse in Los Angeles with other distributors over pricing of its Dodgers baseball channel — an impasse that has left most consumers in the market unable to watch games. The problem with conditions is that they can be difficult to enforce; the advantage is that they allow the government to walk away with claims of victory.

One thing is certain, with the fate of a deal that has far-reaching consequences in the balance, nothing seems to get in the cross-hairs of both parties in Congress more than screwing with a winning hometown sports team.

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