Cable Consolidation, D.C. Style

FCC Could Accept Concentration in Service of Broadband Goals
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WASHINGTON — Cable operators have been talking a lot about consolidation lately, but any action would depend on signoff from the nation’s capital.

What are the odds of the Federal Communications Commission approving a Charter Communications- Time Warner Cable deal? That may depend on what conditions the stakeholders would accept.

After suffering under the lash of Republican FCC chairman Kevin Martin, who beat the industry up over its reluctance to offer programming on an a la carte basis, cable fared far better under Martin’s successor, Democrat Julius Genachowski — but that was generally the side benefit of having bet correctly on the future of broadband.

To the extent that a cable-friendly decision — such as on basic-tier encryption, viewability or tower siting — benefited broadband deployment, the FCC was all smiles. OK, there was network neutrality, but those rules haven’t been a deal-breaker.

CHECK ON COMCAST

While the likes of John Malone (now a major Charter investor) and Glenn Britt (TWC’s chairman and CEO) may be talking about heavying up, it will be policymakers, not dealmakers, who get the last word.

Comcast is always the elephant in the room, so if a cable merger creates a stronger competitor to the No. 1 U.S. cable operator, that could work in a deal’s favor in Washington.

And as distribution continues to fragment among telcos, satellite providers and Webdelivered video, there may be less argument against the horizontal concentration of two distributors outside the top three or four.

In the FCC’s most recent video-competition report, approved two weeks ago, over-the- top video and satellite TV both showed growth in share of the video market, while cable’s subscriber count and share of the market continued to decline.

The FCC will eventually need to look at ownership limits in a broader context, Pivotal Research Group senior analyst Brian Wieser said, pointing out that current regulations date from a world that existed two decades ago.

One veteran cable attorney who asked not to be identified pointed to the precedent of the FCC allowing cellphone companies to bulk up and essentially create a Big Four. He said the FCC could possibly allow for a similar consolidation in cable through mergers among or with midsized companies, though not among the top three or four.

One argument that could work in cable’s favor with the FCC and the Obama administration is the need for economies of scale to deliver more high-speed broadband.

But the attorney suggests that, despite the government’s high-profile push for high-speed Internet, cable is the victim of its own success. Five years ago, the argument that cable needed scale to upgrade to DOCSIS 3.0 had legs, but today it doesn’t, given the pace of that buildout.

But there are still broadband carrots that could be offered. Charter and TWC could propose merger conditions on delivering broadband to low-income populations similar to those Comcast agreed to in the NBCUniversal merger, for instance.

Harold Feld, senior vice president at Public Knowledge — a public advocacy group that’s no fan of big mergers — thinks a horizontal deal between a Charter and TWC is still going to be a tough sell to an FCC chaired by Tom Wheeler.

That’s because the combined company isn’t going to start overbuilding, so the only way to get the deal approved would be to load on enough conditions to create a regulated duopoly — more than a John Malone would be likely to accept.

Vertical mergers, like Comcast’s acquiring NBCUniversal, are harder for the FCC and Justice Department to say no to than horizontal ones that extend a company’s reach within its core business. Feld said the government might be uncomfortable with vertical deals, but it has a harder time articulating traditional antitrust reasons to justify a rejection.

The FCC under incoming chairman Wheeler might be amenable to, for instance, a combined TWC and CBS, the attorney said — especially under terms similar to those imposed on Comcast.

TEST CASE SEEMS LIKELY

The FCC looks beyond antitrust issues to weigh the impact on the broader public interest, but is more likely to recommend behavioral conditions than to put a kibosh on a deal.

Wheeler, in a 2011 blog posting made while he was working as a venture capitalist, said that the FCC could have put conditions on the AT&T/T-Mobile merger that could then be more generally applied, though he has since called that hypothetical speculation.

At press time, cable’s consolidation talk was still just that, too. But the more competitive other distribution models become — and it appears only a matter of time, with respect to over-the-top providers — the more likely the FCC will be asked to weigh in.

TAKEAWAY

Pledges to boost broadband penetration could help alleviate regulatory skepticism over a Charter-Time Warner Cable deal.

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