Broadband Cable Association of Pennsylvania


April 9, 2014

Comcast Corp. on Tuesday submitted a lengthy document to federal regulators to justify its $45 billion proposed purchase of Time Warner Cable. But its filing also had the effect of showing the many ways in which the combined entity could use its leverage over both cable lines and programming to pressure competitors.

In a 180-page statement with the Federal Communications Commission, Comcast walked through the various parts of the media industry that could be affected by the deal, including online video, television programming, and broadband Internet access, as well as local ad sales in the cable market. So far, Washington has reacted to the proposed acquisition with cautious skepticism. FCC officials say they can't talk about pending mergers. Many analysts say they expect it will be approved, with conditions imposed by regulators.

On Capitol Hill, lawmakers have indicated they want the agency to scrutinize the deal-and are planning to do so themselves. Senators Wednesday will grill Comcast Executive Vice President David L. Cohen and Time Warner Cable's Chief Financial Officer Arthur Minson. "Consumers deserve to know how a merger between two of the largest companies in this industry will impact them," Senate Judiciary Chairman Patrick Leahy (D., Vt.) is expected to say, according to an advance statement. The proposed merger, he says in the statement, "also raises important questions for advocates of net neutrality," referring to efforts to ensure that broadband providers don't block or slow down individual websites, or favor others. "This merger also raises important questions about diverse and independent video programming, and promoting a vibrant marketplace for online video," according to Mr. Leahy's statement. "Our primary focus throughout should be on how this merger would impact consumers."

The hearing-which was postponed from last week so that lawmakers would have the benefit of Comcast's filing-will be the first event in what will likely be a lengthy, contentious debate over the deal, which must be approved by both the Justice Department and the FCC. The Justice Department will evaluate the transaction for possible harm to competition in the relevant markets. To gain FCC approval Comcast must prove the deal is in the public interest, and would result in benefits that couldn't be achieved outside the merger. Paul Gallant, telecom policy analyst at Guggenheim Securities, said he expects the deal to get approved eventually, but he noted that "there is a strain of concern in Washington about the overall power that Comcast would have, especially in the broadband market." MoffettNathanson analyst Craig Moffett agreed that approval was likely but with conditions imposed by regulators. Meanwhile, he said, "Any company within shouting distance of the pay TV or cable market is going to have something to say."

Comcast's argument for the merger on the cable-TV front is the most straightforward: The two companies currently don't compete in any market, and Time Warner Cable customers will have the same number of choices for cable and broadband providers as before the merger. The argument may be different with broadband, where the combined company would hold nearly 40% of U.S. subscribers. Executives at several big media companies warn that Comcast could have too much control over TV-viewing data and would be in a commanding position to determine how Web-connected services are delivered to consumers. No big media companies are testifying at Wednesday's hearing.

Some Internet companies are concerned about having to pay Comcast to ensure their Web traffic is delivered smoothly. Netflix Inc. recently agreed to such an "interconnection deal" with Comcast, but the company's chief executive, Reed Hastings, later characterized those payments as tolls and said free interconnection is "essential for an open, competitive Internet." In its filing Tuesday, Comcast classified the Netflix deal as an "economically attractive" way for a company to connect directly to its network, rather than moving traffic through a third-party carrier. Comcast said it has no incentive to limit access to its network.

Comcast contends the deal wouldn't affect broadband competition, because Comcast and Time Warner Cable don't compete against each other in any single market, and because phone companies offer DSL and wireless services that could serve as alternatives. The filing also notes the potential competition from Google Inc. 's nascent Fiber service; Google is exploring deploying the service in eight markets currently served by Comcast or Time Warner Cable. "It's understandable why any large merger will attract questions about competition and consolidation. But this particular transaction actually raises few competition concerns," Mr. Cohen said in a blog post accompanying the filing.

During a conference call with reporters on Tuesday, Mr. Cohen said expansion of Google's high-speed broadband service would force Comcast "to up our game." Mr. Cohen portrayed the merger as an effort by Comcast to get the scale needed to compete with Google and other behemoths like Verizon Communications Inc. and Apple Inc., with greater revenue and market capitalization. Opponents see it differently. Gene Kimmelman, president of the consumer advocacy group Public Knowledge, said wireless and DSL aren't fast enough for streaming video, and therefore don't really compete with Comcast's high-speed broadband offerings. "When you start to peel the onion, you actually find very few competitive options," Mr. Kimmelman said.

Ad executives complain that the combination would give Comcast control over the $5 billion market for local cable advertising, potentially driving up prices that could make it hard for small businesses to continue to advertise. Comcast would have 30% of the nation's pay-TV subscribers, but it also would have roughly half of the local ad sales market, estimates SNL Kagan. That is because Comcast and Time Warner Cable both already sell local advertising on behalf of other pay-TV companies in certain markets, including Verizon Communications, AT&T Inc. and Dish Network Corp. Some small ad buyers worry that the combination's enhanced market reach could end up raising ad prices. "If you had a competitive alternative, that puts pressure on price," said Dan Ryan, chief executive of AdGorilla, an advertising sales firm. "If one of those choices is eliminated, obviously the rate is probably going to up a little bit, maybe a lot."

Comcast played down its power in the ad market, arguing in Tuesday's filing that the deal "will not result in any competitive harm to advertising markets." The concern about local ad sales relates to two minutes of ad time every hour that TV channels, as part of their agreements with pay-TV operators, give to operators for sale. This ad time is often sold to local businesses such as car dealerships or furniture stores. But with a bigger footprint, Comcast would be more able to appeal to national advertisers-which could make it harder for smaller businesses to afford advertising. One small-business man agrees. Roy Hunter, owner of Sarasota Bay Real Estate in Sarasota, Fla., said that local ad consolidation "cripples us." He wrote a letter to the Florida State Attorney General last year when Comcast signed a deal with Verizon's FiOS to conduct its ad sales in the area. Mr. Hunter said his real-estate business was priced out of the market in Sarasota County. When advertising sales units combine, "You're being held for ransom," Mr. Hunter said. Wall Street Journal more in the New York Times and Los Angeles Times