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) $67 billion deal to acquire Time Warner Cable (TWC) 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."

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.


As for possible divestitures of cable systems, the analysts predicted the regulators will have diminished legal authority to require spinoffs but predicted Comcast might makes such a move anyway just to stay on the feds' good side.

The analysts noted that the D.C. Circuit has twice thrown out an FCC cap limiting cable horizontal ownership to 30% of the wired and satellite TV market. Even though Comcast and Time Warner systems account for only 33% of the nationwide market, they speculated that Comcast might be willing to divest enough subscribers to get back below the 30% threshold "if they sense that level is important to regulators."

Whatever divestitures occur, Comcast is unlikely to spin off Time Warner's systems in New York City and other large markets, they said.

Former FTC official David Balto, who represented several consumer groups and the Writers Guild in opposing the Comcast/NBCU merger, said the proposed takeover of Time Warner Cable "is a bad deal for consumers." He held out hope that the DOJ and FCC's more recent challenge to AT&T's (T) attempt to acquire T-Mobile USA, and DOJ's signals to Sprint Nextel that it wouldn't be allowed to buy T-Mobile either, indicate that clearance for the Time Warner Cable deal isn't a given. "Fortunately, the Obama antitrust cops have shown a renewed willingness to block anticompetitive deals in court and aggressive enforcement is absolutely necessary," he said.

Public advocates are urging the regulator not to ignore the potential harm to competition caused by allowing the largest cable TV and Internet service provider in the U.S. to merge with the second-largest cable firm.

"In an already uncompetitive market with high prices that keep going up and up, a merger of the two biggest cable companies should be unthinkable," said Free Press president and CEO Craig Aaron. "Comcast will have unprecedented market power over consumers and an unprecedented ability to exert its influence over any channels or businesses that want to reach Comcast's customers. No one woke up this morning wishing their cable company was bigger or had more control over what they could watch or download. But that - along with higher bills - is the reality they'll face tomorrow unless the Department of Justice and the FCC do their jobs and block this merger."

Former acting FCC Chairman Michael Copps, now a special adviser to Common Cause's Media and Democracy Reform Initiative, called the proposed merger "an affront to the public interest."

"This is so over the top that it ought to be dead on arrival at the FCC," said Copps, who cast the only FCC vote against the Comcast/NBCU deal. The combined firms would have the muscle to push competitors out of the marketplace, leaving consumers exposed to continuing price hikes and declining levels of service, he said.

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