Cable Holds the Cards, But D.C. Owns the House

Policymakers at the FCC could be swayed to approve Charter/ Time Warner Cable deal in service of their broadband goals | @eggerton

Like any trend that keeps being resurrected with the times, consolidation has been
on the minds and lips of cable operators a great deal lately. But when it comes to such industry buzzwords, Washington remains
the arbiter of taste, and no action on that
front will happen without their approval.

Why This Matters
Cable operators see the need to scale up in a fragmenting distribution market, but it's the FCC that has ultimate say-so on the issue.

All of which means the odds of the FCC
signing off on a Charter/Time Warner Cable
deal will depend on what conditions the
stakeholders are willing to accept.

It’s par for the course, given the highs
and lows of recent cable history at the FCC.
After suffering under the lash of FCC chairman Kevin
Martin, who beat up the industry on the à la carte issue,
the cable industry fared far better under former recent
chairman Julius Genachowski, but that was generally
the side benefit of having bet correctly on the future
of broadband. To the extent that a cable-friendly decision—
basic tier encryption, viewability, tower citing—
benefitted the deployment of broadband, the FCC was
all smiles (granted, network neutrality was
part of the conversation, but those rules
have not proven to be a deal-breaker.)

So, while the John Malones (Charter)
and Glenn Britts (Time Warner Cable) of
the world may be talking about heavying
up, it will be the policymakers, not the
dealmakers, who get the last word.

Big Deals, Big Players

Comcast is always the elephant in the
room, so if a deal creates a stronger competitor
to Comcast, that could work in the
favor of Washington blessing some cable
consolidation. And as distribution continues
to fragment over telcos and satellite
and the Web, there may be less argument
against the horizontal concentration of two
distributors outside the top three or four.

In the FCC’s most recent video competition
report, approved two weeks ago, overthe-
top video and Direct Broadcast Satellite
both showed growth in share of the video
market, while cable’s subscriber count and
share of the market continued to decline.
(See “Cable Needs a Lifeline”).

Brian Wieser, senior research analyst at
Pivotal Research Group, says that eventually
the FCC is going to need to look at
limits on ownership in a broader context,
pointing out that those limits date from a
world that existed two decades ago.

One veteran cable attorney who asked not to be
identified points to the precedent of the FCC allowing
phone companies to heavy up—Verizon/
MCI, AT&T/Cingular, or more recently allowing
No. 4 wireless carrier T-Mobile to merge with No. 5
MetroPCS—to create, essentially, a Big Four in the
industry. And the attorney sees the FCC possibly allowing
for a similar evolution in cable through mergaers
among or with mid-sized companies, though
not among the top three or four.

0729 Washington Cable Lifeline chartGive My Regards to Broadband?

One argument that could work in cable’s favor at the
FCC and with the administration is needing the economies
of scale to deliver more high-speed broadband.

But the attorney suggests that, despite the government’s
high-profile push for high-speed, that argument
may be losing its steam, with the cable industry
the victim of its own success. He says that five years
ago, the argument that they needed scale to upgrade
to Docsis 3.0 (higher-speed broadband) had legs, but
given the current pace of that Docsis build-out, it
doesn’t. Still, there are broadband carrots to a deal;
specifically, the companies could offer merger conditions
similar to Comcast’s on delivering broadband
to low-income populations.

Harold Feld, senior VP for Beltway-based public interest
group Public Knowledge, which is no fan of big
mergers, thinks a horizontal merger between Charter
and TWC remains a tough sell to a Tom Wheeler-led
commission. He says that is because the combined company
isn’t going to start overbuilding, so the only way to
get the deal approved would be to load on enough conditions
to create a regulated duopoly—or, more conditions
than a John Malone would ever take, Feld believes.

Vertical mergers, like a Comcast/NBCU, or a Disney/
ABC, are harder for the FCC and the Department
of Justice to say no to. Feld says the government
may be uncomfortable with such deals, while
having a hard time articulating the traditional antitrust
reasons against it. The FCC looks beyond antitrust
to public interest concerns, but that is more
likely to result in behavioral conditions
than putting a kibosh on the deal.

A Wheeler-led FCC might be amenable
to a marriage between TWC and CBS, the
attorney agrees, which would offer stronger
competition to Comcast. It would also provide
an opportunity for the commission to
apply behavioral conditions, like those on
the Comcast/NBCU merger.

Wheeler, in a 2011 blog posting during
his time as a venture capitalist, said
that the FCC might have put conditions
on the AT&T/T-Mobile merger that could
then be more generally applied, though
he has since referred to that as hypothetical

At presstime, cable’s consolidation
talk was still just that, too. But the more
competitive other distribution models
become—and it appears only a matter of
time for over-the-top—the more likely the
FCC will be asked to weigh in with its
considerable weight.