What Are Competitors Saying About Comcast/Time Warner Cable? (Part II)

As noted last week, the first round of public comment on Comcast’s proposal to buy Time Warner Cable was due August 25. The $45 billion transaction, announced in February, would combine the nation's top two cable TV companies. Comcast and Time Warner argue that the combination will create a world-class communications, media, and technology company significantly better positioned than either company alone to bring consumers the advanced services they want now and will need in the future and to keep America at the forefront of technology and innovation. The Federal Communications Commission is reviewing the transaction to determine if it is in the public interest. Here’s a look at what Comcast's and Time Warner's competitors are saying.

The Wall Street Journal reports that entertainment companies are using the regulatory review to press their concerns about "most favored nation" (MFN) clauses, a common industry practice that guarantees big pay-television distributors the best prices and terms. Those clauses are described by some media executives as "schmuck insurance," because they ensure that the most powerful pay-TV providers, including Comcast, get the industry's best deals -- even if they don't negotiate them on their own. In recent years, MFNs have expanded to cover not just prices for TV channels but also digital rights. Many of the biggest media companies, which count Comcast as a huge customer for their TV channels, are concerned about the growing scope of MFNs, media executives say. They believe the provisions make it harder for them to license their content to new entrants, hampering competition. However, none of them have filed public comments about the deal, the Wall Street Journal reports, in part because they fear retribution by the cable giant.

The New York Times featured one executive who has gone public with his concerns. Patrick Gottsch, the chairman of the Rural Media Group (parent of RFD-TV and Family Net), said, “As you folks in rural America know, every once in a while, you’ve got to take a two-by-four and hit the mule between the ears. That is what we want to do now with Comcast and Time Warner.” He’s worried the Comcast-TWC deal -- and AT&T’s $48.5 billion bid for DirecTV -- will create behemoths that will use their heft to push around networks, forcing them to either cut the fees they charge for their programming or risk being thrown off the air. Some executives say the consolidation would challenge new networks, especially those with niche or underserved audiences, and result in a lack of diversity on TV. Of the more than 63,000 comments filed at the FCC about the proposed merger, about a fifth mention RFD-TV. Gottsch is looking for the FCC to place conditions on Comcast to ensure that his networks and other independent channels are carried to maintain a diverse programming slate. Some critics question his motives, however, as companies often exploit mergers to negotiate better financial terms. In a letter to Gottsch dated Aug. 15, Comcast’s Cohen wrote, “Your efforts to drive a wedge between Comcast and rural viewers as a means to promote your own business interests is unfair and grossly inaccurate.”

Briefly, here’s some of what other companies have told the FCC:

  • Spanish-language programmer Entravision says the Comcast/Time Warner Cable merger will harm the Latino community and competing Latino-market program providers, and says the FCC should make Comcast divest its Spanish language networks as a condition of approval of the deal.
  • The American Cable Association, which represents small and medium-sized independent cable operators, said the deal poses vertical harms, horizontal harms, and spot cable ad market harms that need more than arbitration to remedy.
  • Sinclair Broadcasting told the FCC to either put conditions on the Comcast/Time Warner Cable merger -- including retransmission conditions -- deregulate broadcasters, or deny the deal.
  • Viamedia, a cable TV advertising outsourcer, said the merger would give the combined company too much control over the spot cable marketplace, and asked the FCC to impose conditions to make sure that doesn't happen.
  • Dish, the satellite television provider, urged regulators to reject the bid.
  • The Blaze, the conservative channel run by Glenn Beck, says the government should reject the deal because the two companies won't distribute the cable-TV channel. The Blaze has collected 42,000 comments from viewers, a spokesman for the network said.
  • WeatherNation TV wants the deal blocked because it says the combined company could foreclose competition in the meteorological programming space -- Comcast has a 25% interest in Weather Channel.

Netflix also delivered a petition asking the FCC to deny the transaction. “Unsurprisingly, given their dominance in the cable television marketplace, the proposed merger would give Applicants the ability to turn a consumer’s Internet experience into something that more closely resembles cable television,” Netflix argued. The company has complained bitterly about having to pay Comcast, AT&T, Verizon, and Time Warner Cable for direct connections to their networks. In its filing this week, Netflix said that, worldwide, it delivers traffic to 99 percent of Internet service providers without money changing hands. Comcast, TWC, AT&T and Verizon are the only ISPs that refused to give Netflix unpaid connections, known as "settlement-free peering." To Netflix, the fact that so few companies have the market power (i.e. size) to demand such payments is evidence that further consolidation should not be allowed.

Peter Kafka reported that Ken Florance, Netflix’s vice president of content delivery, told the FCC that Netflix had to pay Comcast for access to its broadband pipes because Netflix was starting to lose customers when they noticed a deterioration in Netflix service over Comcast-provided broadband. “For many [Comcast] subscribers, the bitrate was so poor that Netflix’s streaming video service became unusable,” Florance writes, then notes that Comcast customer service representatives eventually told subscribers to complain to Netflix. “Those customers complained to Netflix and some of them canceled their Netflix subscription on the spot, citing the unacceptable quality of Netflix’s video streams and Netflix’s inability to do anything to change the situation.” Florance didn’t say how many customers his company lost. But he does include a chart that shows a huge spike in customer complaints last fall, at the same time Netflix said its streams were compromised. The subtext: Guess what happens if Comcast gets even more powerful?

Pointing to Comcast’s dispute with Netflix, Vox’s Timothy Lee explored The problem with the Comcast-Time Warner Cable merger noting that cable companies don't only operate in the consumer market. They also negotiate with network owners and content providers on the "back end" of their networks. And here size has a huge -- and problematic -- impact on the competitiveness of the market. The dispute puts the FCC in an awkward position, because it's hard to draw a clear line between legitimate business practices and monopolistic ones. The FCC probably doesn't want to get bogged down with policing the terms of each of the hundreds of peering agreements made between cable companies and ISPs. Yet Netflix, as well as ISPs such as Level 3 and Cogent, have raised some legitimate concerns about Comcast's business practices; ignoring them entirely isn't a good option either. This is a problem created by Comcast's vast size. As the broadband market gets more concentrated, the danger of broadband companies abusing their power becomes correspondingly larger.

In the Washington Post, Brian Fung wrote a reminder on how the Justice Department and the Federal Communications Commission handled AT&T’s acquisition of MediaOne back in 2000. You may not remember MediaOne, but back in 2000 it was one of the biggest Internet providers around. It so happened that through an ISP called Road Runner, MediaOne served a large chunk of America's broadband subscribers. AT&T, meanwhile, sold Internet through a Road Runner competitor called Excite@Home. A merger would've given AT&T control not only over MediaOne's operations, but also part ownership in Road Runner -- and together with its stake in Excite@Home, AT&T would've controlled an estimated 40 percent of the country's access to broadband. The Justice Department believed that if AT&T-MediaOne went through, AT&T's newfound position as a gatekeeper would let it dictate outcomes for broadband across a national market. While regulators have been wary of gatekeeping for decades, this marked the first time that the concept had been raised in the Internet industry, policy analysts say.

What does this have to do with the Comcast merger? According to Netflix, Dish and others, regulators currently face a similar situation where you have two major Internet service providers who don't compete against each other in local markets, but whose combination would create an entity that would be similarly empowered to dictate outcomes across a range of other industries nationally. (Where AT&T-MediaOne would've controlled 40 percent of the broadband market, Comcast-TWC's post-merger broadband market share would stand at 36 percent.)

In the case of MediaOne, regulators made AT&T sell off its newly acquired stake in Road Runner as a way to address the potential gatekeeping problem. But today's case isn't as simple, largely because the Internet has become far more than an information retrieval system. It's now a platform for a host of applications that were traditionally provided by distinct industries. These industries are now in the process of converging and moving online, and Comcast conveniently sits at the intersection of them all. Even if regulators thought that Comcast should sell off some part of its business to keep it from becoming too powerful, it isn't clear what it could spin off.

"The relevant question,” argues Comcast’s Sena Fitzmaurice, “is whether consumer choices for broadband services will be diminished, and this transaction will not diminish competition or consumer choices anywhere." (Cynics at this point might object that in many parts of the country, choices are limited to just a few providers. And in any case, there's often a high cost to switching providers.)

Fung writes: “It’s clear that Comcast's position in content and distribution creates incentives for it to get the best deals that it can in negotiations with other cable and Internet companies. And it's those relationships -- not the one between consumers and their local ISP -- that could create the most serious harms.”

Fung concludes: “The MediaOne case showed regulators that high-speed Internet, like other industries, could be subject to a gatekeeper problem if one company gained too much leverage over the others. That early realization prompted the government to intervene. Since then, broadband's not only matured — it's become a central part of the economy. Unfortunately, that's only made today's questions more difficult, not less. Comcast is now a key actor at every level of the Internet and media ecosystem, making it hard to draw any specific prescriptions from the MediaOne episode. Opponents of the Comcast-TWC merger want to convince the FCC that MediaOne offers a major precedent. But due to the scale of this transaction and the way it implicates so many industries and companies at once, it might be more accurate to say we're in completely uncharted waters.”

In an August filing at the Securities and Exchange Commission, Comcast said it expects to gain the necessary regulatory approvals for the acquisition of TWC in early 2015. That is a few months later than the company rather optimistically expected when it announced the deal in February. At the time, Comcast said it expected to close the deal by the end of the year.

We’ve been tracking the merger since it was announced and we invite you to follow along. And, as always, we’ll see you in the Headlines.

By Kevin Taglang.