Any TWC Break Up Seen Facing Stronger Challenge at FCC than DOJ or FTC

Any break-up and purchase of Time Warner Cable (CD Nov 26 p11; Nov 25 p16) by some combination of Cox Communications, Charter Communications or Comcast would likely face a stronger challenge at the FCC than at the Department of Justice or FTC, said several cable attorneys and industry observers in interviews last week. Individual cable operators’ lack of market power relative to some other sources of video programming would undercut antitrust arguments against such a deal, said the attorneys. Public interest groups disagree, contending operators have significant market power even though none are nationwide like DBS companies. “The cable operators will make a strong argument that any deal like this will be pro-competitive,” said Fletcher Heald cable attorney Paul Feldman. “They'll say they need to get bigger to stay competitive with the likes of DirecTV and telephone companies."

Arguments that large-scale cable consolidation is against the public interest will have more traction at the FCC, several cable attorneys and industry observers told us -- especially if Comcast is a player in the deal. “Comcast buying Time Warner Cable would garner the most opposition,” said BakerHostetler attorney Gary Lutzker. However, industry officials said the FCC likely won’t stop a deal from happening, no matter its final form. “The commission has a lot of experience dealing with this situation,” said a cable attorney. Through some combination of divestitures and deal conditions, even an outright purchase of Time Warner Cable by Comcast would eventually be approved, he said. “Having larger distributors to provide balance to consolidation on the programming side could be a real benefit to the cable industry,” said an FCC official.

The DOJ has a history of not challenging vertical transactions -- such as a Comcast purchase of Time Warner Cable -- “because courts were increasingly unwilling to accept government claims that they violated the antitrust laws” said Guggenheim Partners analyst Paul Gallant in an email to investors. In a scenario where a smaller company or a combination of smaller companies, such as Cox and Charter buy Time Warner Cable, antitrust objections would be a “nonstarter” said Feldman. “So the FCC will be even more central in a possible Comcast-TWC deal because its ‘public interest’ review is broader than pure antitrust analysis,” said Gallant. The FCC has a history of approving transactions and using them to make policy, said several industry observers. “We suspect the FCC ultimately would conclude that it could make more policy progress through conditions than merger rejection,” said Gallant. FCC Chairman Tom Wheeler has also said he would have approved AT&T/T-Mobile because of the opportunity to impose conditions, Gallant said. Merger proceedings and conditions tend to lead to negotiation, said a cable attorney.

Public interest groups said all of the cable consolidation scenarios raise concerns that should cause the FCC to block a deal for public interest reasons, and could motivate DOJ or FTC action. “There are a lot of things to worry about with a single cable operator getting too large a footprint,” said Public Knowledge Senior Staff Attorney John Bergmayer. Large operators have massive leverage when dealing with independent programmers, a dynamic that gets worse as operators get bigger, he said. Though cable providers such as Time Warner Cable and Comcast tend not to overlap geographically, the rise of over-the-top video means those geographic barriers are less important, said Bergmayer and Free Press Policy Director Matt Wood. “Time Warner Cable and Comcast might have been able to compete against each other in the future” through mobile video and other streaming options, said Wood. An argument that cable consolidation is smothering that chance could raise DOJ or FTC hackles or persuade the FCC that a transaction is against the public interest, said Bergmayer. Comcast and Time Warner Cable spokespeople had no comment for this story.

Small cable operators may also object to transactions that lead to an increase in the number of large operators that own their own programming, said American Cable Association Vice President-Government Affairs Ross Lieberman. If an operator that owns its own content buys another’s cable systems, those systems would be on the same competitive footing against smaller operators that the acquirer’s existing systems are, he said. “ACA has always felt that program access is important."

If a transaction involving Comcast is approved, it would likely be conditional on some form of divestiture or other concession, said several analysts and attorneys. “We suspect the government would be less likely to block a Comcast-TWC deal that stayed under a 30 percent multichannel market share,” said Stifel Nicolaus analysts in an email to investors last week. Gallant said the FCC might use transaction conditions to forward a host of different policies, including promoting OTT competition and net neutrality. Several industry observers said it was possible that existing conditions from the Comcast/NBCUniversal deal would have their time limit extended.

Existing curbs on Comcast/NBCUniversal might be “enhanced,” said an executive at an independent programmer that deals extensively with Comcast. Bergmayer and others said any discussion of Comcast’s current transaction conditions would include a review of the past difficulties of enforcing them. Conditions are not a desirable tool for reform, said Wood. “We prefer rational rulemaking that applies to a whole industry rather than merger conditions that have a time limit.” -- Monty Tayloe (mtayloe@warren-news.com)