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Comcast-TWC Merger Hinges on Net Neutrality Conditions

NEW YORK (The Deal) -- Despite protests from anti-consolidation activists, analysts and regulatory experts in Washington said they expect Comcast's (CMCSA - Get Report) $67 billion deal to acquire Time Warner Cable (TWC - Get Report) will ultimately be approved by federal regulators after a long review that will likely result in additional conditions on how Comcast traffics rivals' content over its broadband network.

Michael Keeley, an antitrust partner at Axinn, Veltrop & Harkrider LLP's Washington office said the deal is likely to be cleared, but that the regulators will have serious concerns about the leverage that Comcast will have over content providers after their two companies' cable systems are combined.

"This has the potential to lead to more blackouts as the level of vitriol between the content providers and the cable companies over retransmission rights increases," he said. "In addition, as NBC becomes aligned with an even larger percentage of cable outlets, the likelihood that other content providers will want to complain to the reviewing agencies increases exponentially."

Stifel Nicolaus analysts Christopher King and Josh James agreed with that assessment. "We expect the Comcast-TWC deal will draw intense antitrust/regulatory scrutiny and even some resistance, stoked by raw political pushback from cable critics and possibly rivals," they wrote in a research note shortly after the merger agreement was announced Thursday morning. "But we ultimately expect the transaction will be approved, probably with some divestitures - as well as conditions along the lines accepted by Comcast and NBC Universal in their 2011 merger."

Must Read: Comcast's Deal for Time Warner Cable Is Good For America

The merger will also be the subject of hearings on Capitol Hill.

Because Comcast and Time Warner cable systems do not overlap in any local markets, the primary regulatory issue will be concern about the vertical integration of programming produced by Comcast's NBCU division in Time Warner markets.

"Comcast and TWC will argue that their merger would not be intrinsically different from the Comcast-NBCU combination," the Stifel, Nicolaus analysts wrote. "Comcast-TWC would essentially be extending Comcast-NBCU vertical integration of distribution and content to the TWC markets."

"The DOJ and FCC would have concerns about the market fallout of expanded cable concentration and vertical integration, in a broadband world where cable appears to have the upper hand over wireline telcos in most of the country (i.e., outside of the Verizon FiOS and other fiber-fed areas)," they said. "The government will probably have concerns about the ability of Comcast-TWC to bully competitors and suppliers, given their interwoven cable/broadband distribution."

In the NBCU deal, the Department of Justice and the Federal Communications Commission required Comcast to accept conditions addressing the vertical integration of distribution and content, and they are likely be extended to Time Warner markets now, they said.

Those conditions included net neutrality restrictions that prevent Comcast from carrying its in-house content at faster speeds or giving it other favorable treatment relative to rivals' content. Those conditions are in place until January 2018.

Despite any concerns regulators might have about the further vertical integration of the cable industry, the D.C. Circuit Court of Appeal's recent rejection of the FCC's industrywide net neutrality rules might make them more amenable to the Comcast-Time Warner combination, the analysts said, because it would give Washington power to keep more cable systems under a net neutrality regime. "The D.C. Circuit's rejection of key FCC open Internet rules makes the Comcast-TWC deal attractive in this respect," King and James said.

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