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Charter-Time Warner Cable Deal Clears Justice Department; FCC Chairman Recommends Approval

FCC chairman Tom Wheeler is recommending that the agency approve Charter Communications’ $78 billion deal to acquire Time Warner Cable and Bright House Networks, expanding its footprint into key markets like Los Angeles and New York.

The Department of Justice also gave its greenlight to the deal that will turn Charter into the nation’s second-largest cable operator behind Comcast Corp., with 17.3 million video subscribers and 19.4 million broadband subs. Both the DOJ and the FCC outlined a series of conditions, with a focus on the combined company’s impact on the growing market for over-the-top video services.

“As proposed, the order outlines a number of conditions in place for seven years that will directly benefit consumers by bringing and protecting competition to the video marketplace and increasing broadband deployment,” Wheeler said in a statement on Monday. “If the conditions are approved by my colleagues, an additional two million customer locations will have access to a high-speed connection. At least one million of those connections will be in competition with another high-speed broadband provider in the market served, bringing innovation and new choices for consumers, and demonstrate the viability of one broadband provider overbuilding another.”

The almost certain approval from the FCC comes almost a year after federal regulators rejected Comcast’s effort to acquire Time Warner Cable, a combination of the No. 1 and No. 2 cable providers.

By contrast, Charter’s acquisitions will make it the nation’s third-largest MVPD, behind Comcast and DirecTV.

The merger still must get clearance from California’s Public Utilities Commission. A final decision is expected by May 12.

“We are pleased that Chairman Wheeler has submitted the proposed conditions for consideration by the full Commission and that the DOJ has submitted its agreement for approval by the court,” Charter said in a statement. “The conditions that will be imposed ensure Charter‘s current consumer-friendly and pro-broadband businesses practices will be maintained by New Charter. We are confident New Charter will be a leading competitor in the broadband and video markets and are optimistic that we will soon receive final approval from federal regulators as well as the California PUC.”

As with the proposed Comcast deal, a central concern among regulators was what impact the Charter transaction would have on the growth of streaming video. Services like Netflix and Apple TV depend on Charter’s broadband delivery for their services, yet Charter also competes with them in its offering of cable packages.

The conditions outlined by Wheeler on Monday are provisions that Charter has already pledged to adhere to in its many filings with the commission in connection with the merger review.

The Charter/TW Cable/Bright House merger has its foes among media watchdog groups and in the industry. But the response to the deal was nothing like the tidal wave of opposition stirred by the Comcast-TW Cable acquisition pact reached in secret in February 2014, at a time when Charter was also making a very public effort to scoop up the company.

By April 2015, Comcast pulled its offer in the face of certain rejection by the FCC and Justice Department. That cleared the path for Charter, backed in part by John Malone’s Liberty Broadband, to swoop in again. During the review process there was much discussion of the level of concentration represented by Malone personal and corporate holdings, which range from Discovery Communications to Starz to QVC. But the statements from the FCC and DOJ give no indication that divestitures of programming or distribution assets — or the exit of Liberty Broadband as a partner with Charter in the deal — will be mandated by the feds.

Among the conditions outlined Monday:

Licensing deals: Charter will be prohibited from entering into or enforcing any agreement with a programmer that forbids or limits their distribution of content to an online video provider. There has been increasing concern in the industry over contracts that include “most favored nations” provisions, restricting content from being licensed to potential competitors. Charter would be prohibited from retaliating against a programmer for entering into deals with streaming services.

Interconnection: Charter will have to allow Internet services, including streaming video providers like Netflix and Amazon, to connect to its network on a “non-discriminatory, settlement free” basis, under an FCC condition. This was a key concern raised in the proposed Comcast-TW Cable deal, as it would have allowed Comcast to control access points have to means to limit competition. But the DOJ on Monday noted that in contrast to Charter, Comcast is “significantly larger.” Shortly after it announced its merger deal last year, Charter indicated that it would be open to such a condition, as it said that it would engage in “reasonable and nondiscriminatory” interconnection practices, and submit any disputes to the FCC on a case-by-case basis.

Data caps/usage based pricing: Charter will be prohibited from charging subscribers for broadband service based on how much they use. This has been another potential red flag as it would be a way for major cable companies to potentially limit the growth of streaming video if consumers face higher fees for watching movies and TV shows online. Charter already had pledged not to impose data caps or usage-based pricing in a series of commitments it made shortly after the deal was announced.

The conditions will last for seven years, and an independent monitor will help ensure compliance, Wheeler said.

“The cumulative impact of these conditions will be to provide additional protection for new forms of video programming services offered over the Internet,” he said.

In addition, Charter will be required to offer access to high-speed Internet to an additional two million homes. Half of those connections will have to be in competition with another high-speed broadband provider. The FCC condition sets benchmarks over the next five years.

Renata B. Hesse, head of the DOJ’s Antitrust Division, said that without the conditions, the merger “would have threatened competition by increasing the merged company’s leverage to demand that programmers limit their licensing to these online providers.” As is typical in major transactions, the DOJ filed a complaint in federal court along with a settlement agreement. The complaint noted that TW Cable has been “the most aggressive” multichannel provider in securing clauses in contracts that limit programmers from distributing content to streaming and online services.

Satcaster Dish Network lined up with other companies and public interest groups to oppose the combination or raise serious concerns, arguing that the combination would create a Comcast-Charter duopoly. Time Warner also raised concerns over the impact on its streaming services, like HBO Now.

The Stop Mega Cable Coalition issued a statement that called the conditions an “important first step,” but said it still

While the draft order circulated today would target a number of key issues tied to Charter’s mega merger, it still “falls short of addressing all of the threats to competition and consumers posed by this transaction.”

“Among other things, the conditions proposed in the draft order do not fully prevent Charter from using its dominant position in the marketplace to thwart competition from over-the-top streaming services and to stifle competitors in underserved, rural communities,” the group said. “For example, Charter should be required to offer a stand-alone broadband service that would enable consumers wishing to ‘cut the cord’ to have that option.”

Netflix, which opposed the Comcast-TW Cable merger, supported the Charter combination. Interconnection fees had been a flashpoint between Netflix and Comcast in 2014 as Comcast sought regulatory approval of its Time Warner Cable deal. Netflix argued that Comcast would gain too much power as it was able to demand fees to content providers for connecting to its network and to subscribers’ homes.

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