Critics of Time Warner Cable Deal Turn up Volume

NEW YORK (The Deal) -- Opponents of Comcast's (CMCSA) proposed $45 billion acquisition of Time Warner Cable (TWC) stepped up their attacks on the deal, arguing at a congressional hearing Thursday that it will give Comcast too much power to set prices programmers receive for their television content and to determine prices for Internet connectivity.

"This merger is very likely illegal," antitrust lawyer Allen Grunes, a partner at Geyer Gorey LLP and former official with the Department of Justice Antitrust Division said during a hearing conducted by the House Judiciary Committee's antitrust subcommittee. "The parties know it and that's why they're here talking about how they plan to fix it."

The deal is being reviewed by the DOJ and the Federal Communications Commission.

Grunes criticized Comcast's offer to address any competitive concerns the agencies may have by shedding just over 3 million subscribers to Charter Communications (CHTR) and by extending conditions imposed on the company's 2010 acquisition of NBC Universal to the Time Warner Cable deal. Those conditions included open Internet requirements that prevent Comcast from favoring its in-house broadband content over third parties' content.

Public advocacy groups such as Consumers Union, Public Knowledge and the American Antitrust Institute have already voiced concerns about the deal.

Grunes said behavioral conditions like those Comcast is offering don't work because they are difficult to enforce and would leave Comcast operating under different rules than other broadband providers.

"The fix doesn't cut it," he said. "The best remedy is to simply say, 'No.'"

Grunes also dismissed Comcast's contention that the deal doesn't pose serious competition concerns because the two companies' cable systems do not have overlapping territories. "Comcast and Time Warner Cable say they don't compete for subscribers. But the fact is Comcast and Time Warner Cable do a number of ways. They compete to carry local and regional sports teams and they compete for advertising dollars."

He said the deal raises the same vertical competition issues as Comcast's acquisition of NBCU, which married the country's largest cable operator with a major cable and online content provider. The consumer harm is worse this time because the combined Comcast and Time Warner Cable would hold even more critical programming, he said. This merger would leave Comcast as the incumbent cable provider in 37 of the largest 40 markets, the pay TV provider to one-third of television households and the broadband servicer to 40% of high-speed Internet subscribers in the U.S.

"The company would have both the ability and the incentive to withhold NBCU and sports programming from rivals such as the satellite companies, telecos other cable systems," Grunes said. "That drives up competitors' costs and make them less them competitive."

The situation is even worse in the broadband market, he said, where Comcast would gain the ability to thwart the expansion of new content delivery platforms such as Netflix (NFLX), Apple TV (AAPL) and Amazon (AMZN). In the broadband arena the issues are similar to the Justice Department's successful case against Microsoft in the 1990s in which the Internet threatens an incumbent company's established business model, he added.

"Online video distributors like Netflix, according to the Justice Department, are likely to be the best hope for additional programming competition in Comcast territories," Grunes said. By building Comcast's share of some broadband markets to greater than 50%, the merger will allow Comcast "to influence how this new form competition will play out."

Opposition also came from Matthew Polka, president of the American Cable Association, which represents 850 small and medium-sized pay TV providers that service 7 million subscribers in the U.S. He said ACA members have three primary worries about the deal.

One is that combining Comcast's programming with TWC's regional sports networks will give the merged company greater bargaining power against all pay TV providers that carry this programming because it will be able to bundle more "must have" programming into a single package that other carriers will have to buy. Polka predicted this will occur in markets such as New York and Los Angeles where there is both an NBCU-owned broadcast station and a popular TWC sports network.

Another ACA concern is that after the merger Comcast will have an incentive to withhold its programming from smaller cable systems that compete with TWC, either permanently or temporarily during contract negotiations.

Finally, Polka worried that the combined purchasing power of the merged company will allow it to acquire programming from outside content producers at a much lower cost that rival systems can, further hurting the other systems' competitiveness.

Dave Schaffer, founder and CEO of Cogent Communications Group (CCOI), which has build a broadband fiber network that it uses to carry Internet traffic for small and medium-size businesses said the deal is likely to upend peering arrangements that allow Cogent and other Internet backbone providers to handoff traffic to last-mile providers like Comcast at no charge.

Schaffer said Cogent, which counts Netflix among its customers, has had increasingly testy relations with Comcast as original Netflix shows like House of Cards has grown more popular. Disputes between Comcast an Cogent were part of the reason for Netflix recent decision to pay Comcast to ensure favorable treatment for Netflix programming.

"Comcast is extracting an additional payment in the form of a toll from Netflix, simply to deliver that which Comcast subscribers have demanded and already paid for," Schaffer said.

The merger will likely make those relations worse because of Comcast's added broadband reach, he said.

Comcast executive vice president said the critics' fears have already been disproved in the marketplace. Only one minor complaint, Bloomberg TV's fight for better placement on Comcast's program guide, has been filed by a programmer since the NBCU conditions were put in place, he said.

As for Schaffer's concerns about peering, Cohen noted that Netflix can account for one-third of all Internet traffic during peak hours and that there needs to be some mechanism for ensuring orderly traffic flow as companies like Netflix, Amazon and Apple TV rollout services that are expected to be massive users to bandwidth. He noted that the agreement with Netflix is the kind of deal envisioned by new net neutrality rules that FCC Chairman Tom Wheeler is fighting to implement.

House Judiciary Committee Chairman Darrell Issa, R-Calif., acknowledged that the deal's critics have some legitimate concerns but asserted that current antitrust law is inadequate to address them and Congress may have to tackle them outside the transaction with new legislation. The merger itself, he said, appears to meet with all the boxes that have to be checked off for antitrust approval.

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