Weekly Update

Charting a new path for net neutrality

Given how far apart the two still are on price, I wouldn’t want to hazard a guess right now as to whether Charter Communications will succeed in its bid to take over Time Warner Cable, although reports that Charter is close to a deal with Comcast to lay off some of its TWC action post-acquisition, if true, greatly increases the odds. As media analyst Craig Moffett of MoffettNathanson noted, having Comcast’s money in its back pocket would give Charter some cushion to raise its offer for TWC while making the deal significantly less leveraged, which should appeal to TWC shareholders.

Should the three-way deal come together, though, it could — or at least in my view should — open up a new chapter in the unfinished story of net neutrality.

As Om and Stacey Higginbotham have noted, the drive to consolidate the cable TV industry, championed by John Malone of Liberty Media, which controls Charter, is about broadband, not TV. While cable operators could gain some leverage with programmers in carriage and retransmission consent negotiations by bulking up, the TV side of their business is not a growth business at this point and isn’t going to be anytime soon. The real upside for the buyer in such deals lies in the fat margins and still-growing subscriber base of cable operators’ broadband business.

In its most recent quarter, for instance, Time Warner Cable actually lost 217,000 video subscribers. But it still posted a 5.3 percent increase in net income on the strength of adding 39,000 new broadband customers and a shift among subscribers toward higher-speed, higher-priced broadband plans.

Whatever the motive, any mergers among MSOs will need to pass regulatory muster, which is where net neutrality could come into it again. Comcast has reportedly been in discussions with regulators since the fall about a possible bid for Time Warner Cable, but those talks are likely to have focused on aspects of the consent decree Comcast signed with the Justice Department to sanctify its acquisition of NBC Universal. The bigger wildcard is the FCC, which would also need to review the deal and would be charged with applying a more open-ended “public interest” standard in its analysis.

Should a deal for TWC happen relatively soon, moreover, it would come as the FCC is in the midst of formulating a new approach to enforcing net neutrality standards now that the court has vacated its formal net neutrality regulations. That convergence of circumstances offers an opportunity for the FCC and antitrust regulators together to take a more comprehensive view of net neutrality than the FCC’s previous rules would admit.

The weakness of the FCC’s now-dismissed rules was always jurisdictional. The agency tried to create a level content playing field online by regulating the network management practices of last-mile broadband providers under telecommunications law. A big part of the threat to net neutrality, however, lies not in network management per se but in the incentive that broadband providers’ monopoly positions in their markets gives them to act anti-competitively toward other content providers. And for jurisdictional reasons, the FCC’s rules could not and did not reach many of the points in the network where that temptation could rise.

As we’ve seen in the many peering disputes that have arisen between last-mile providers and over-the-top content services like Netflix and YouTube, even under the FCC’s old rules there were ways that broadband providers can achieve anti-competitive effects without violating the letter of the law.

Even reclassifying broadband service as a Title I common carrier, as many are now urging the FCC to do, wouldn’t really solve the problem because the rules would still apply only to data traffic once it’s on the last mile, not to the choke points before the last mile.

A consolidation among last-mile broadband providers, as contemplated by John Malone and Comcast, can only exacerbate the danger.  Should a deal result in Comcast taking over Time Warner Cable’s systems in New York City, New England and North Carolina, as analyst Craig Moffett anticipates, Comcast would have something on the order of 25 million subscribers, on systems blanketing most of the East Coast of the U.S. That would be a very formidable hurdle for any over-the-top service to get over unless it was willing to play ball with Comcast.

The merger review process, however, offers regulators an opportunity the impose some limits on how high Comcast and Charter could raise those hurdles, particularly since Comcast is already operating under a consent decree, giving the government a lot of leverage.

That would address at least some of the goals of the FCC’s original net neutrality order, perhaps even more effectively than the rules themselves could have done because an antitrust settlement would not have to be limited to policing traffic on the last mile.