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Will Charter-TWC Pass the Smell Test?

Sizing Up the Merger’s Chances With D.C. Regulators 6/01/2015 8:00 AM Eastern

WASHINGTON — Charter and Time Warner Cable are not looking to be test cases, but their proposed deal could help the industry figure out how big is too big in the nation’s capital these days.

 

Traditional video is a competitive industry, or at least that is what the Federal Communications Commission has presumed in its effective competition order. So it’s likely the fate of the $77.8 billion merger (see cover story) is broadband, as it is with most communications issues in Washington these days, from cybersecurity to privacy to equality of digital opportunity.

 

With a more than 50% market share of Internet subscribers at 25 Megabits per second or faster, Comcast-TWC was clearly too big for both the FCC and the Justice Department. Both agencies have called Internet-service providers gatekeepers that hold the keys to the broadband kingdom and have the incentive and opportunity to block access to competitors.

 

A combined Charter-TWC would have just under a 30% share of the U.S. high-speed Internet market, the companies said last week. The merger partners will be looking to convince regulators and antitrust vetters that their combination will bring a culture of unlimited plans and blazing speeds.

 

They already face pushback from suspicious anti-consolidation groups for whom bigger is usually badder, period.

 

The deal — which also involves Bright House Networks, and will result in an MSO with some 17.3 million subscribers — was made possible when Comcast ended its more than year-long pursuit of Time Warner Cable in April. The FCC had signaled that the combination would put too many broadband subscribers into the hands of one company.

 

Technically, the FCC said nothing official, since the deal was scrapped before it had to weigh in. Nonetheless, the message was made clear when FCC chairman Tom Wheeler said scuttling the merger was the right call.

 

What isn’t clear is which combination of ISP “gatekeepers” would be OK.

 

Charter and TWC wouldn’t come right out and saying the deal would create a stronger competitor to top cable operator Comcast, particularly in broadband, but that was clearly part of the argument that will be made in D.C.

 

Here are some of the points Charter will be pressing in Washington as it tries to succeed where Comcast failed.

 

Broadband price break: Charter’s baseline speed is 60 Mbps, more than double what the FCC has set as an aspirational target for advanced telecom. According to one source familiar with the argument, Charter can point to its $40 promotional rate for that 60 Mbps service and compare it to TWC’s $64.95 for 50 Mbps. Then there is the fact that Charter does not charge a separate per-modem lease fee — TWC’s is $8. Charter has made clear last week it would be brining that model of faster, cheaper Internet to Time Warner Cable.

 

Look ma, no caps: Another big selling point will be the fact that Charter has no data caps, usage-based pricing or early termination fees, all things the FCC has been eyeing for their impact on consumers and net neutrality.

 

Jobs, jobs, and did we say jobs? Charter will talk about the fact that it has added 7,000 jobs over the past three years, most in customer service. Critics of “Big Cable” have hammered operators over customer service — and were doing so last week —but Charter will point out that it in-sources its customer service, and it will bring TWC’s customer service in-house and in-country.

 

Net neutrality: It is unclear whether the company would agree to network neutrality as a condition of the deal, but Charter has said it would not block, throttle or engage in paid prioritization regardless of what the courts decide.

 

“The cable platform is quickly becoming America’s local monopoly broadband infrastructure,” Free Press, a Washington, D.C.-based progressive media advocacy group, said. “Charter will have a tough time making a credible argument that consolidating local monopoly power on a nationwide basis will benefit consumers.”

 

It was short of pushback, but Wheeler released a statement soon after the deal was announced saying Charter and TWC would need to show public-interest benefits, not just the absence of antitrust issues.

 

In one sense, that was just stating the obvious, which is that the FCC has a public-interest standard test that goes beyond antitrust. But Wheeler might have also used the statement to clarify his position to anti-consolidation activists, after he reportedly phoned cable executives two weeks ago to say that Comcast-TWC’s failure didn’t mean all deals will face a chilly climate.

 

Regulators may find a combination of TWC, the second- largest U.S. MSO, and No. 4 Charter to be more palatable to Comcast-TWC, IBISWorld analyst Will McKitterick said, but concentrating “the vast majority of the nation’s landline high-speed broadband connections in the hands of two companies” could still get the regulatory hook.

 

Bernstein analyst Paul de Sa says he expected there will be a net neutrality condition on the deal, as well as conditions on interconnection.

 

An interconnection condition is also likely on the pending merger of telco AT&T and satellite-TV provider DirecTV deal, if it is approved. Approval of that deal would provide some guidance on the prospects for Charter- TWC, de Sa said, including the rationale for decisions and how concerns were addressed — answers Comcast’s early exit from the TWC deal left unanswered.

 

The deal already has a fan in Charles Herring, president of One America News Network and A Wealth of Entertainment (formerly WealthTV), who told Multichannel News he did not see any significant regulatory challenges.

 

“Over the last several years, Charter has demonstrated that it has a pattern and practice of extending fair carriage consideration to independent programming services,” Herring said. “Numerous independent programming networks have received carriage from Charter Communications, including AWE.

 

“We speak with nearly all the other independent networks, and I’ve never heard of any informal or formal complaint against Charter,” he said.

 

Charter may want to forward that comment on to the FCC’s deal vetters.

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