The Week The Comcast-Time Warner Cable Deal Died

Comcast announced that its merger agreement with Time Warner Cable and its transactions agreement with Charter Communications have been terminated

"Once you get through the hysteria, [this transaction] is pro-consumer, pro-competitive and strongly in the public interest," Comcast Executive Vice President David Cohen told reporters in February 2014 when the nation’s biggest cable TV and broadband service provider announced it would purchase Time Warner Cable, the number 2 provider. Fourteen months later – hysteria duly subsided – and it appears regulators may not agree. On the morning of April 24, 2015, Comcast Chairman and CEO Brian L. Roberts said, “Today, we move on. Of course, we would have liked to bring our great products to new cities, but we structured this deal so that if the government didn’t agree, we could walk away.” And, with that, the deal was dead.

How'd we get here? Here's a recap of what we learned this week.

For the past year, the Department of Justice and the Federal Communications Commission have been studying how the potential tie-up between the nation’s two biggest cable companies could reshape the telecommunications landscape in the U.S. Such a deal would have implications for the future of the Internet and television, affecting how and where Americans can watch programming that is increasingly being delivered on platforms other than televisions with set-top cable boxes. Now, as Andrew Jay Schwartzman wrote here last year, the DOJ’s review is not a transparent process. The Department is a prosecutorial agency, not a regulatory agency, and it conducts its investigations in private. In cases like this one, the DOJ’s Antitrust Division conducts a thorough investigation, during which it asks for submission of tens of thousands of pages of documentation, perhaps conducting depositions, and engages in detailed discussion with the parties. It also consults with competitors and other affected parties. None of these activities are a matter of public record, and the DOJ generally refuses to issue any public statements during its investigation.

On April 17, however, Bloomberg’s David McLaughlin and Todd Shields reported that, “according to people familiar with the matter”, staff attorneys at the U.S. Justice Department’s Antitrust Division were close to recommending the department block Comcast’s bid to buy Time Warner Cable. So, although McLaughlin and Shields don’t attribute the news to any source within the DOJ, here’s what they are reporting:

  • The Justice lawyers were contacting outside parties in the last few weeks to shore up evidence to support a potential case against the merger.
  • Officials at the Antitrust Division and the FCC weren't negotiating with Comcast about conditions to the merger that would resolve concerns, such as selling parts of its business or changing practices. Discussions on potential remedies would have been an indication that the agencies hadn't yet made a firm or final decision on the merger.
  • Among regulators’ concerns was whether the resulting company could choke new ways of delivering programming. They were focused on three areas: whether the combined entity would have too much control over nationwide broadband Internet delivery, whether a cable giant could use its financial influence to strike exclusive cable deals that could keep programming off of other platforms, and whether it could limit how programming is delivered through video streaming services.
  • Antitrust officials also were looking at whether Comcast complied with terms under a previous merger deal with NBCUniversal.

On April 21, the Wall Street Journal reported that the FCC was considering designating the merger for a hearing. A hearing order would put the merger in the hands of an administrative law judge, a move which would be seen as a sign that the FCC wasn't convinced the deal would be good for the public. The FCC is required to refer merger proposals to a judge via a hearing designation order if it cannot determine that a deal is in the public interest or if it has substantive questions about its details. An administrative law judge then reviews the deal in a trial-style process. “Mergers are never put to hearing in order to approve them,” said Robert McDowell, a former FCC commissioner. “They are designated for a hearing in order to kill them.”

On April 23, the Wall Street Journal confirmed the earlier report, saying that FCC staff concluded that the best option for the FCC is to issue a “hearing designation order.” The recommendation from the staff for a hearing order is the first step in a regulatory process. It must be circulated to all five FCC commissioners who would then vote on whether to approve it.

Despite the news reports this week, company officials, at least publicly, voiced confidence they would ultimately win approval.

Here’s some of the issues that were being scrutinized:

1. Size Matters

“The reality is there is no competition. For the vast majority of consumers, there is no choice for broadband.”

Combining the nation’s two largest cable and Internet providers would create a company with control over roughly 30 percent of the pay-TV market and 57 percent of the market for broadband service, now defined by the FCC as 25 megabits-per-second speeds and above. The companies have presented the deal as a straightforward cable merger that doesn’t reduce consumer choice since cable operators don’t overlap geographically, but the increased market share in broadband Internet has been under more intense scrutiny.

“The challenge is when you put these two companies together what the government is looking at is that broadband share,” said Rich Greenfield, an analyst at BTIG. “The reality is there is no competition. For the vast majority of consumers, there is no choice for broadband.”

2. Control of Hulu
The Wall Street Journal reported that, specifically, the Justice Department is looking closely at Comcast’s role in Hulu, the streaming service it became a part owner of through the NBCUniversal purchase. In return for approval of the NBCUniversal takeover, Comcast agreed to have no management role in Hulu and be a silent partner. The department is said to have asked questions in the past few weeks about that arrangement, particularly with regard to the aborted effort by co-owners Walt Disney and 21st Century Fox to sell Hulu in 2013. [More on Comcast and Hulu in Comcast Role in Aborted Hulu Sale Raises Questions for Regulators.]

3. Internet Essentials
As we’ve written about before, Comcast’s Internet Essentials program, which offers families with low incomes broadband service for $10 a month, was put in place after Comcast acquired NBCUniversal in 2011 as part of more than 150 commitments it made to secure the transaction’s approval. Internet Essentials was scheduled to expire in 2014, but Comcast said last year — one month after announcing its deal with Time Warner Cable — that it would continue Internet Essentials indefinitely. Comcast has trumpeted the program as a success story and example of how it can live up to the conditions imposed as part of its big acquisitions. This week, though, the New York Times highlighted how critics call Internet Essentials a public relations stunt that failed to deliver on its promise, with restrictive qualifications, limited reach and poor service. Comcast committed to making the program available to 2.5 million low-income households. The company announced in March that the program had connected 450,000 families — or about 18 percent of eligible households.

“Regulators were sold a bill of goods,” said John Bergmayer, a senior staff lawyer at Public Knowledge, a consumer advocacy group that has criticized the effectiveness of Internet Essentials and is urging regulators to block the Time Warner Cable deal. “I’d be curious whether they spent more time marketing in D.C. to policy makers than to people who qualify for the program.”

In addition to Internet Essentials' shortcomings, some cite Comcast’s failure to promote a stand-alone broadband service that is not tied to a television package, making it hard for people to find out about it or sign up for it. In 2012, Comcast was fined $800,000 after the FCC found that it had violated this Comcast-NBC Universal condition.

Comcast on the Defensive

On April 22, Comcast’s David Cohen released a long defense of the Time Warner deal and, specifically, addressed criticism of the Internet Essentials program. He had four main points:

  1. Regarding a "low" adoption rate for the program: Internet Essentials has now reached 17 percent of its estimated eligible population, with a number of cities and states over 20 percent. And the program has accounted for approximately one-quarter of all of the national broadband adoption growth for low-income families with children from the program’s inception through June 2014.
  2. Regarding the program’s sign-up process: Comcast has repeatedly implemented significant enhancements to further improve the process so applicants are approved and connected quickly and efficiently. In addition, Comcast works with local partners to facilitate the process, distributing program materials in 14 different languages, and staffing a call center that is dedicated to the program and promoted through English and Spanish toll-free numbers.
  3. Regarding restrictive eligibility requirements: Comcast has expanded the original eligibility criteria for Internet Essentials twice, first by extending it to families with children eligible to receive reduced price school lunches, and then by offering it to parochial, private, cyberschool, and homeschooled students. Comcast also created an amnesty program for families with debt older than one year for the purpose of connecting to Internet Essentials. Now, nearly 2.6 million families are now eligible for Internet Essentials, an increase of approximately 30 percent from the originally estimated eligible base.
  4. Regarding digital literacy as a barrier to broadband adoption: Internet Essentials is designed as a wrap-around solution that marries low-cost broadband access with training and education. Comcast has invested more than $225 million in cash and in-kind support to help fund digital literacy and readiness training and education, reaching more than 3.1 million people through our national and local non-profit community partners.

Concerning standalone broadband, Cohen writes, “Of the more than 150 conditions placed on the NBCUniversal transaction there has only been one compliance concern to date regarding whether Comcast adequately marketed its standalone broadband product. It occurred in the first weeks after the deal, and was quickly resolved with a voluntary consent decree that was fully implemented and satisfied. Meanwhile, Comcast continues to offer every tier of its broadband service on a standalone basis, and this has become a substantial component of our broadband business.”

Could Concessions Have Saved the Deal?

Comcast’s past performance on merger promises make new conditions unlikely this time around

On April 19, the Wall Street Journal reported that Comcast and Time Warner Cable representatives were slated to sit down on April 22 with Justice Department officials to discuss potential remedies in hopes of keeping the merger on track. The Journal reported that it wasn’t clear whether the companies could have offered concessions that would have satisfied regulators. The Justice Department prefers remedies in which businesses and assets are sold to preserve competition, said Jennifer Rie, a litigation analyst for Bloomberg Intelligence in New York. Conditions which impose behavioral requirements on companies are difficult to police and are disfavored, Rie said.

The concessions could have included:

  • Divestiture of more of the roughly 30 million customers the combined company would have served if the deal closed.
  • Giving up entire markets like Chicago, Detroit and parts of Florida in exchange for gaining Time Warner Cable markets in Los Angeles and New York. Maurice Stucke, a former lawyer with the Justice Department’s antitrust division who is now at the Konkurrenz Group, said that’s probably the only scenario that would have appease the government.
  • Another option would have been selling its one-third stake in Internet video service Hulu. Or Comcast could have agreed to offer faster broadband as part of Internet Essentials.

However, the Wall Street Journal Journal reported that if the FCC had asked Comcast to live under the new network neutrality policies regardless of whether they are held up in court to win deal approval, Comcast might have walk away from the acquisition. Writing in the Digital Beat this week, former-FCC Chairman Michael Copps coupled the recently-adopted net neutrality rules and blocking Comcast-Time Warner Cable as “a two-front people’s crusade to prevent gatekeepers from wresting control of our nation’s communications ecosystem.”

In any case, on April 21, the Wall Street Journal reported that Justice antitrust officials doubted that their concerns about the deal could be resolved by promises, known as behavioral remedies, about how the cable giant would conduct business after the merger. People in the know said the promises would be a tougher sell with enforcers than when Comcast purchased NBC Universal, at least in part because there are questions about whether the earlier set of conditions have worked as intended.

“It’s becoming clear that the FCC and perhaps DOJ want to reject this deal,” said Craig Moffett, an analyst at MoffettNathanson. “The issue now is whether they legally can. If they decide they have a strong enough case, I’m not sure there are any remedies out there that will fix it.” One of regulators’ biggest concerns -- whether the company would have too much power over online video -- doesn’t go away if Comcast gives up more subscribers, according to Moffett. If regulators decide Comcast could use its expanded broadband footprint to impede online video services, it wouldn’t matter whether Comcast has 30 million subscribers or 24 million, he said.

While Comcast had said there is no basis to block the deal, fighting the Justice Department in court could significantly delay the merger and test Comcast’s patience, said Amy Yong, a media analyst at Macquarie Capital USA. “The bigger question is: would Comcast want to slug it out with regulators for two or three years to get this deal done,” Yong said.

Opposition Raises Their Voice

Six U.S. senators voiced their opposition to the deal this week.

“The track record is bad on conditions,” said Sen Al Franken (D-MN), who has urged regulators to block the deal. “They can’t be trusted, and they shouldn’t be.” Sen Franken has been a vocal critic of the deal since it was announced. In an op-ed published this week, he pointed to several issues related to the company’s compliance with the conditions that it agreed to as part of its NBCUniversal acquisition. Sen Franken said that the deal should be blocked rather than passed with conditions and that putting conditions on it would not work because regulators do not have the resources to enforce them.

Five senators joined Franken in a letter to the DOJ and FCC this week urging the regulator to block the deal, arguing that the combination of the country’s two largest cable operators would give one company too much power over the future of television and broadband. In the letter, the senators said Comcast’s “unmatched power” would harm competition, choke innovation and lead to higher prices, fewer choices and worse service for consumers. They said they had fielded complaints about the merger from consumers, advocacy groups and companies.

The other senators who signed the letter were four Democrats — Elizabeth Warren and Ed Markey, both of Massachusetts, Ron Wyden of Oregon and Richard Blumenthal of Connecticut — and Bernard Sanders, the independent from Vermont.

Late last week, 37 organizations (including the Benton Foundation) sent a letter to FCC Chairman Tom Wheeler stressing that the Comcast-Time Warner Cable combination would be unacceptable even though the FCC adopted strong network neutrality rules earlier this year. "Your steadfast commitment to competition," the groups wrote, "would risk being eviscerated if Comcast were allowed to control over 50% of high-speed residential broadband connections nationwide. No condition, including but not limited to a 'net neutrality' provision modeled on the Open Internet order, can address the myriad ways a combined Comcast/Time Warner Cable would be able to thwart competition and convert its massive network into a closed system of preferential treatment for its own content or the content of a select few."

It's All About the 'Net, About the 'Net

With Comcast's announcement, we are and will be seeing lots of post-game analysis on why an army of 128 lobbyists couldn't sell this deal to regulators. Pro Publica's Leticia Miranda pointed to: 1) TV program stifling; 2) Monopoly on broadband Internet service; and 3) Comcast's broken promises in the NBCUniversal transaction.

The real issue in Comcast + Time Warner Cable was broadband, just as Om Malik called it when the deal was first announced and GigaOm's Stacey Higginbotham highlighted back in November 2013.

Echoing Michael Copps in the Digital Beat this week, the New York Times concluded, "The air of inevitability that once hung over the deal had been dissipating for months, as the debate over net neutrality — in short, the question of whether Internet providers should be allowed to charge content providers for speedier service — played out in Washington. And a merger that had at first seemed to be primarily about cable television turned into something much different. The government’s verdict on the merger and its stance on net neutrality were separate issues, but they were very much intertwined. At the end of the day, the government’s commitment to maintaining a free and open Internet did not square with the prospect of a single company controlling as much as 40 percent of the public’s access to it."

“It shows that even big cable has to listen to the American people who spoke loudly and clearly on this and who understood how important this was to keep the communications infrastructure free and open, and protect it from gatekeeping,” said Michael Copps on April 24.

The Story's Hero?

Finally, Bloomberg's Mark Drajem and Chris Strohm highlight the unsung hero in the debate -- former cable lobbyist Tom Wheeler. Confounding his former allies and winning praise from public interest groups, the FCC chairman pushed through strong net neutrality rules, and scrutiny by FCC staff helped push Comcast to abandon Time Warner Cable.

“Today, an online video market is emerging that offers new business models and greater consumer choice,” Chairman Wheeler said after Comcast's announcement. “The proposed merger would have posed an unacceptable risk to competition and innovation, including to the ability of online video providers to reach and serve consumers.”

“It’s like Nixon going to China,” said Gene Kimmelman, president of Public Knowledge. “He’s used his industry background not to favor his old friends in industry but to take that knowledge and apply it towards strong public interest protections.”

By Kevin Taglang.