What the end game holds

As Comcast merger enters final phase, deal may be on thin ice

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When telecom giant Comcast announced plans in February to swallow its largest rival, Time Warner Cable, the consensus in Washington and on Wall Street was that regulators would let the deal go through. Now, as the final phase of an FCC comment period draws to a close, all bets are off.

Recently, views of the merger have shifted amid growing public concern over the state of U.S. broadband, which is rapidly eclipsing pay TV as consumers’ go-to source for entertainment and information. Meanwhile, Comcast’s rivals have gained momentum in their quest to stop the deal.

The final outcome of the review process involves many wild cards — from the fate of net neutrality to Republican control of Congress — but it’s safe to say for now, based on evidence and experts, that the merger’s chances of passing are lower than they were a few months ago.

A new skepticism

A shift in sentiment over Comcast’s proposed merger has been reflected in both stock market activity and by the behavior of the deal’s opponents.

Investors’ doubt about the merger’s fate can be seen in the fact that share prices of [company]Comcast[/company] and [company]Time Warner Cable[/company] are still valued as if the companies are separate entities. As the New York Times noted in November, the adjusted share price of two firms should move toward the same value as the close of the merger approaches — but that is not happening.

Corporate opponents, such as Netflix and smaller telecom firms, have recently ramped up their lobbying game, and launched a new anti-merger campaign.

According to sources in Washington, the fact these companies are bankrolling new initiatives like “Stop Mega Comcast” so late in
the process reflects a newfound hope that the FCC or the Justice Department will block the deal. This is a contrast from the summer when merger opponents sometimes conceded in private that they viewed Comcast as too big and too well-connected to stop.

These developments are evidence of the growing skepticism over the deal’s prospects, but they don’t describe the underlying reasons for that skepticism. Those reasons are rooted in evolving views over how regulators should examine the antitrust issues that led to a review of the deal in the first place.

When the deal was announced in February, Comcast sought to preempt antitrust objections by promising that it would divest some cable TV subscribers in order to ensure the combined company would have less than 30 percent of the U.S. market — thereby quelling concerns about monopoly.

The problem is that the monopoly fears surrounding the deal don’t just stem from its potential effect on the cable TV market.

big dog

Bully for broadband

“What makes Comcast unique is its power in three different facets — as a programmer, a distributor and an ISP,” Maurice Stucke, an antitrust professor at the University of Tennessee, told me in a recent interview.

According to Stucke, who opposes the merger, Comcast has tried to frame its proposed acquisition of Time Warner Cable through the lens of cable distribution and downplay other dimensions of the deal, especially its potential effect on the market for internet services.

Stucke suggests the combined company would have an unrivaled ability to leverage its broadband connections in order to get exclusive online deals from content providers, or to give special treatment to some websites over others.

In practice, this would see Comcast and its X-1 set-top box acting as a new type of master gatekeeper, determining which apps and websites can be easily accessed by consumers. Indeed, there are signs this is happening already.

[pullquote person=”Maurice Stucke, University of Tennessee professor” attribution=”” id=”902775″]”What makes Comcast unique is its power in three different facets — as a programmer, a distributor and an ISP.”[/pullquote]

Earlier this year, Comcast demanded that Netflix pay tolls to prevent its internet stream from being degraded. In the future, critics fear, a merger would make it easier for Comcast to exercise the same sort of control over a wide range of other over-the-top internet services, including a standalone HBO. Comcast could one day control online entertainment options in the same way that it currently controls TV channels.

Such fears have led merger opponents to say the FCC or the Justice Department should step in not because of cable TV concentration, but to ensure that Comcast can’t monopolize broadband-based content.

The actual amount of control that a combined Comcast–Time Warner Cable would wield over the internet is in dispute. Comcast claims the merger will not give it a commanding slice of the broadband marketshare, while critics warn the merger will hand the company control of over half the residential high speed connections in the country.

The question now is what the FCC will conclude, and how both the agency and the Justice Department will respond.

So far, FCC Chairman Tom Wheeler has been clear that he believes the U.S. needs more and faster broadband, and that competition is the key to achieving this. This could bode ill for Comcast’s merger plans if Wheeler agrees that the deal is indeed about internet service, not cable TV.

At the same time, Wheeler will have to contend with Comcast’s contention that internet competition should not be defined only by conventional connections, but by other forms of internet access like fiber, next generation DSL or over-the-air offerings from phone carriers and others.

“Anyone who tells you what the future of broadband holds is shooting in the dark. We’ve seen time and again people’s inability to predict what will happen in the real world,” said Christopher Yoo, a law professor at the University of Pennsylvania, who argues that the FCC should leave broadband build-out to the market and let the merger go through.

Entrepreneur Mark Cuban has likewise expressed concern that the FCC might do more harm than good by taking a hands-on role in promoting broadband. Others, however, point out that many consumers have only one realistic option for high speed-broadband and that a Comcast merger would result in these de facto monopolies becoming more entrenched.


Picking battles

Comcast’s proposed merger is facing an unprecedented level of opposition, which will grow more shrill in the wake of a final round of comments that poured in this week from competitors and public interest groups. Meanwhile, a new filing foul-up by Time Warner Cable has forced the agency to slow down the review process for a second time, and the longer the review process drags on, the less likely it will succeed.

While the momentum is on the sides of the opponents, the overall merger process itself is tied not only to the broadband debate, but to the greater game of the FCC and Washington politics. In this context, Chairman Tom Wheeler must take account of an incoming Congress that will be controlled by Republicans, many of whom support the merger.

While the FCC is an independent agency and Wheeler controls three of the five necessary votes to make decisions, any sign that he intends to block the merger could result in a partisan backlash in the form of threats to the FCC budget or a series of subpoenas. People who know Wheeler say he would find the latter possibility — in which he would have to sit before grandstanding minor-league Republicans — especially irksome.

The threat of partisan obstruction also has implications for the FCC’s other agenda items, including a major spectrum auction that Wheeler regards as critical to the country’s broadband future and that he hopes to make part of his legacy. A political blow-up with Republicans could make the auction harder to pull off.

Meanwhile, there is the ongoing dance over net neutrality, and whether the FCC will reclassify broadband providers as so-called Title II common carriers, which, for now, is the only legal path to prevent internet companies — including Comcast and Time Warner Cable — from giving special treatment to some websites over others.

After the White House delivered an unexpected declaration of support for Title II in November, the FCC is expected to go forward with the reclassification process early in 2015. The plans to do so, however, are already drawing howls of protest and political shenanigans from the telecom giants, including Comcast. As a result, a decision to block the merger would make Comcast a double loser, and potentially lead the company to seek political payback against the rest of Wheeler’s agenda. (For now, however, the outcome of the Title II is still up in the air pending the FCC’s decision and recent proposals for a new type of net neutrality legislation.)

A final piece of the political puzzle related to the merger lies with the Justice Department, which could offer the FCC important covering fire but has yet to do so.

Specifically, the Justice Department could declare that it regards the merger as a violation of antitrust laws, and that it intends to sue under the Clayton Act. The legal case for a lawsuit appears to be strong, and the mere threat of legal action would likely be enough to scupper the deal (as occurred when AT&T sought to acquire T-Mobile). But for now the file still lies in the FCC’s lap, in part because it can stop the merger simply by not acting.

Under the law, the FCC must conclude that a cable merger benefits the public before granting approval. In the case of Comcast and Time Warner Cable, the benefits are far from clear, which means the agency can stop the merger by demanding a sky-high host of concessions or simply by sitting on its hands.

Doing either of those things, however, would require Wheeler to absorb the full political backlash, which is why he may be waiting to see if the Justice Department will weigh in.

The end game

Right now, the proposed merger between Comcast and Time Warner Cable still stands a good chance of going through. Yoo, the law professor, and people at Comcast acknowledge that its prospects are not as rosy as before, but are ultimately optimistic about its chances.

The final outcome, though, is likely to be determined by a combination of politics and straight-up policy analysis. At Gigaom, the editorial staff is opposed to the merger on the grounds that it will diminish competition in the market for broadband, and allow Comcast to shoehorn the new era of online entertainment into the old bundle model of cable TV.

But these considerations may not be determinative. The ultimate decision, which is likely to come in February or March, must be made by Chairman Wheeler, and will be shaped in large part by the degree of support he receives from the Justice Department.

Federal Communications Commission (FCC) Chairman Tom Wheeler testifies before the Communications and Technology Subcommittee on Capitol Hill in Washington, DC, May 20, 2014.    (Photo by Jim Watson/AFP/Gett
Federal Communications Commission (FCC) Chairman Tom Wheeler testifies before the Communications and Technology Subcommittee on Capitol Hill in Washington, DC, May 20, 2014. (Photo by Jim Watson/AFP/Gett

19 Responses to “As Comcast merger enters final phase, deal may be on thin ice”

  1. Max Broeder

    One point that is missed in the above is the fact that FCC is toying with the idea of classifying the likes of Internet Streaming Companies such as NetFlix as Cable Companies and regulating them as such This will either complicate the merger situation or in the eyes of FCC simplify it. Either way the subscriber is at the end of the proverbial dogs tail and will be wagged some more as they will be forced to “pay-up” for one of the outcomes – approval (in terms of increase in pay TV rates) . This even before the political angling begins in earnest in the new year.

  2. Ryan Mathis

    I worry that self proclaimed free market advocates have long since lost their bearings in regards to the ways in which not just monopolies, but monopolies run by companies with long track records of anti-consumer behavior, have on free market competition. The fact that the University of Penn professor proclaimed that not only should we just leave the broadband market as is but that the Comcast-TWC merger should be approved kind of speaks to credibility.

  3. Jonathan Lee

    There are, likely, antitrust issues with the Comcast merger. But the area of overlap/govt’ focus is properly focused on restricting broadband output (or usefulness of BB Internet) service through program access restrictions. See, e.g., this article–where I predicted back in April that the gov’t would use 10mbps as the definition of broadband. http://bit.ly/1hYrgsp

    What is not helpful–except to Comcast and TWC–is this article’s focus on Netflix’s fairy tales about discrimination. See, e.g., http://bit.ly/1zIesit While Netflix’s story is important to keep IT out of the “hot seat” (http://bit.ly/1wD7Tgq) with federal regulators, the problem is that when Netflix’s complaint is seen as the primary competitive threat of the merger, the merger becomes MORE likely to be seen as benign.

    This is because investigators will truly find no “there” there when they look into Netflix’s spurious claims. It is a legitimate concern that If investigators assume the “Netflix throttling” this is as bad as it gets, once the DoJ learns the truth, there’s not much to dissuade them from just imposing some conditions, patting Netflix on the back, and getting ready to do it again in a couple years.

    Meanwhile, consumers will continue to wonder why the Internet is still mostly for porn, piracy, and re-runs–but not football, basketball, or baseball . . . .

  4. No one can say for certain what will be the long term effects of this merger. But I do know that whenever Comcast rolls into acquired areas they invest a lot to upgrade those systems. Many dense coastal communities are lacking these upgrades so whenever the merger happens there will be some pretty happy former TWC customers out there.
    Yes Comcast needs front line improvements but it can also be stated that when their service works it works very well. My area has very limited outages years running.

  5. Comcast broadband customers enjoy higher speeds and lower prices than TWC’s do, and that for reason alone the merger should be allowed to go forward. It’s funny that so few tech bloggers are willing to acknowledge this. Competition for cable broadband companies won’t come from other cable companies, it will come – and has come – from the telcos upgrading their networks, as all the majors have done and are doing – from wild cards like Google, and from higher-speed mobile networks. In the overall scheme of things, the US broadband market is strong and getting stronger, so there’s nothing really worrisome about this merger, regardless of what Netflix has to say.

    • Are you serious??? Comcast gouges every consumer with outrageous prices, tricks to increase you’re bill unknowingly every month such that 6 months later its now double what you agreed to forcing the consumer to call them and complain until you get the deal you agreed to. Comcast is simply OUTRAGEOUS with its greed and customer service. Meanwhile the rest of the world offers FASTER speeds and LOWER prices while USA companies suck as much money from us because right now they can. We need COMPETITION. NO MERGER!

  6. Robert Glenn Pope

    Corporate America and Government America learned some time ago the American “sheeple” are preoccupied with mindless activities, and will take what ever is handed them, even if it’s obviously bad.

  7. The article says, “The ultimate decision…will be made by [FCC}Chairman [Tom} Wheeler…” This certainly does not bode well for opponents of the merger. Tom Wheeler is the former president of the National Cable Industry Association–the chief lobbyist for the monopoly cable industry, which is staunchly in -favor- of the merger. He is also the former president of the National Cellular and Internet Industry Association. Unbelievable conflict of interest.

    I simply cannot believe he will part ways with a decades-long string of friends, former employers, and a long line of bad, pro-industry lobbying positions, and deny this merger without enormous public pressure. I believe the multiple delays in considering the merger are simply an attempt to get the public and Congress to forget about it, tire of it, believe that its’ already done. Move on.

    We cannot let this happen. The standard, set by statute, is high in the US communications industry for mergers, acquisitions, and service changes. This merger doesn’t come close to meeting any of these standards. Comcast and Time Warner Cable should be broken up, not allowed to merge. It is outrageous that we are even still considering it.

  8. It should be patently obvious that there -no- “conditions,” “concessions,” or “promises” that Comcast can make that would cause this behemoth merger to be acceptable–and Comcast, like AT&T, has a clear history of ignoring such agreements anyway.

    Of course, as the article states, Republicans are generally in favor, and Democrats are opposed. Under Republican control, America is rapidly becoming a corporatist state. Lobby groups, corporations, and the wealthy elite are beginning to control everything. We are becoming an oligarchy in ways that even eastern dictatorships might envy.

    In every way you can possibly imagine, write, phone, telegram, VISIT, every official you can think of to demand that this merger be denied. Comcast and Time Warner Cable should be broken up, not allowed to merge.

    Why are we even still considering this awful idea?

  9. Patrick O'Neil

    $67 a month just for internet and I bought my own modem. Ridiculous. Dumped the TV service a couple years ago and don’t miss it except for sports. If I had other options, I’d dump Comcast completely.

  10. I hope to god the headline is correct. And that the ice cracks under their feet. We shouldn’t even be considering allowing this merger. Comcast and Time Warner Cable should be broken up, not allowed to merge. How can we possibly be considering allowing one company to control high-speed internet service for 54% of American households? Which would basically mean they would control the internet. Every other monopoly cable company would easily follow their lead on Metered Billing, technology adoption (none,) ransom to content providers, and more. Unbelievable and Outrageous that this behemoth merger is even getting an ear at the FCC.

    America is rapidly becoming a corporatist state. Industry lobby groups, corporations and wealthy elites are running everything that our authorities are supposed to be protecting us from.