Comcast Corporation’s proposed purchase of Time Warner Cable for $45.2 billion will pressure regulators and Congress to update laws to address net neutrality concerns and the growing impact of broadband on cable and telephone services.
The all-stock deal announced by Comcast on Thursday follows anticipation that the top paid TV provider was considering a purchase of No. 2 rival Time Warner Cable, which would expand its control of broadband networks. Comcast said its current CEO Neil Smit would lead the combined company and predicted that the deal would be completed by the end of 2014. Analysts agree with that timetable but predict the companies will have to weather tough scrutiny to get approval.
The proposed deal comes just a year after Comcast completed its acquisition of NBCUniversal, giving it vast ownership of programming. The Federal Communications Commission and the Department of Justice approved the NBCU purchase in 2011 after it received flack from critics including Sen. Al Franken, D-Minn., out of concerns that it could give the company too much power to increase subscriber fees and prices for rival businesses to access content.
This Time Warner Cable purchase would raise those same pricing concerns for rival businesses including Netflix, and for customers seeking a fair price for services they want on Internet and phone networks. House Judiciary Committee Chairman Bob Goodlatte, R-Va., and Rep. Spencer Bachus, R-Ala., released a joint statement on Thursday announcing the committee will hold a hearing on the antitrust implications of this deal “to ensure that the interests of American consumers and overall competition in the marketplace are protected.”
The deal will give Time Warner Cable customers access to services including Comcast’s Xfinity video and high-speed connections on larger networks, but would not reduce competition in the telecom market, said a news release from David Cohen, executive vice president of Comcast. Time Warner Cable is a stand-alone cable and Internet provider, which does not include the media properties of the former part of Time Warner, which spun off from AOL in 2009.
“Comcast and Time Warner Cable do not currently compete to serve customers in any zip code in America,” Cohen said. “This absence of horizontal overlap of the companies’ cable systems means that the transaction will not harm competition or reduce consumers’ choice in any way.”
The DOJ will review antitrust concerns while the FCC will analyze broader public interest concerns, including whether the merger would improve efficiency and consumer services enough to be worth a potential negative impact on market competition.
To meet those concerns on cable ownership, Comcast announced it is prepared to divest systems serving approximately 3 million subscribers. The deal will likely be completed in 2014, but Comcast may have to accept much stricter conditions than divesting those subscribers, says Jeff Silva, senior telecom policy analyst at Medley Global Advisors policy research firm.
Congress and the FCC are ramping up a partisan fight on net neutrality after a federal appeals court in January struck down the commission’s rules preventing broadband providers from prioritizing the traffic of groups they favor and charging fees for premium access. Comcast will be caught in the middle because of concerns that the deal would give it more power to control networks that power the phone and cable networks, Silva says.
“It will not be a straight, monolithic cable review,” Silva says. “It will be done with an appreciation that the nation’s laws and regulations governing telecom, media and technology business have not kept pace with development of the Internet and its impact on markets.”
Regulators set numerous conditions on the Comcast purchase of NBCU in 2011, including requirements that the company follow net neutrality behavior by not blocking rivals from accessing their programs, not slowing down traffic or prioritizing broadband traffic over others through 2018. Cohen said Comcast recognizes the competitive concerns, but was confident they would be addressed by the conditions set during the NBCU purchase.
The FCC will likely approve the deal in 2014 using the opportunity to apply those existing merger conditions on the Time Warner Cable deal to compensate for the net neutrality rules that the appeals court struck down, said an investor note from Christopher King, senior telecom services analyst at Stifel Nicolaus market research firm.
“There could also be some DOJ and FCC demands that the conditions be extended in duration and scope,” King said.
Consumer advocacy groups opposed the deal on Thursday, including Public Knowledge. The purchase is “unprecedented in its scale and scope,” because of the broadband ownership it would give Comcast's already vast media and telecom assets, says Harold Feld, senior vice president at Public Knowledge consumer advocacy group.
“This is really a whole new ballgame for how the DOJ and FCC are going to define the market and review mergers,” Feld says.
Time Warner Cable and Comcast ranked as the two worst cable and Internet providers for customer service in the American Customer Service Index published in 2013, so to please consumers the combined company would need to improve its competition with Verizon Communications, which ranked at the top of that index for its FiOS network service.
Lobbying on this Comcast purchase will mean a big year for consumer groups and lawmakers to debate not only net neutrality but plans in Congress to rewrite the Telecommunications Act, Silva says. The FCC's authority comes from the 1996 version of that law, which has been the only update of U.S. communications law since 1934.
“The deal should underscore the notion that a rewrite of the
1996 Telecom Act is sorely needed,” Silva says. “It does not take into account
the impact that the Internet has on other industries.”