In any state where the infrastructure is designed to support a competitive, market-based economy a potential deal between the No. 1 and the No. 2 participants in a given industry will be subject, properly, to intense scrutiny.
And so will be the proposed $45.2 billion engagement of Comcast Corp (NSDQ: CMCSA) and Time Warner Cable Inc (NYSE: TWC) before they can be joined as one.
During a Feb. 13, 2014, conference call with analysts and members of the media to discuss his company's latest audacious move, Comcast Executive Vice President David Cohen noted that customers' interests will be advanced via "quality of service, by quality of offerings, by technological innovations" achievable by a combination with Time Warner Cable.
Mr. Cohen's statement is part of Comcast's effort to define the terms of the regulatory review process. Ultimately it will come down to two questions, whether Comcast and Time Warner can demonstrate that the deal is in the public interest and whether the government show, convincingly, that it will harm competition.
The first issue will be reviewed by the Federal Communications Commission (FCC), the second by either the Federal Trade Commission (FTC) or the US Dept of Justice (DoJ). Congress could get involved as well.
The FCC will be involved in the review process because Time Warner Cable would have to transfer Cable Television Relay Service licenses and telephone service licenses to Comcast.
In this respect the FCC is actually the adjudicator. The FCC will determine whether the transfer of the licenses serves the public interest. The burden will be on Comcast and Time Warner Cable to show sufficient benefits to offset any potential harms to the public interest.
The FTC shares antitrust review authority with the DoJ. To block the transaction the FTC or the DoJ would have to sue in federal court. And one or the other would have the burden proof un! der a traditional antitrust analysis to demonstrate by a preponderance of the evidence that there's a substantial likelihood that the transaction would reduce competition in some relevant market.
In attempting to define the market Comcast has placed its focus on the multichannel video programming distribution (MVPD) market, noting that the acquisition of Time Warner Cable would bring Comcast from 22 million to 30 million subscribers, or less than 30 percent of the nationwide total.
Comcast also offered to divest itself of three million subscribers in a bid to get under 30 percent and perhaps appease regulators.
Comcast has also pointed out that it doesn't compete against Time Warner Cable in any individual cities or towns. That fact is illustrates how cable TV providers have effectively divided up territories to the point where individual consumers have few choices.
But for Comcast and its antitrust lawyers this is a positive: The merger won't reduce the number of cable choices customers have.
Comcast also argued that its increased size will bring cost savings and efficiencies that can help it improve quality of service and technology offered to consumers. Theoretically, economic benefits of the combined efficiencies and economies of scale should flow to consumers in the form of lower prices and/or higher quality service.
But it's likely that rates charged to cable TV customers will continue on the course they've held whether or not Comcast is allowed to absorb Time Warner. In fact Mr. Cohen expressly stated that Comcast is "certainly not promising that customer bills are going to go down or even increase less rapidly."
He also said, "I don’t believe there’s any way to argue that [consumers are] going to be hurt from a price perspective as a result of this transaction."
Comcast will certainly enjoy a better negotiating position vis-à-vis content providers in carriage negotiations, though it already pays significantly lower ra! tes than ! smaller MVPDs due to its size.
Where Comcast and Time Warner Cable differ, critically, from other companies such as Verizon Communications Inc (NYSE: VZ) and AT&T Inc (NYSE: T) that provide "conduits" is that Comcast and Time Warner Cable also own significant interests in content providers. This mingling of conduit and content could form the basis of further concessions from Comcast when it gets down to the nitty-gritty with the government.
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Should it come to pass Comcast would also become the largest broadband provider in the US, with control about half of "triple-play" services–video, voice and Internet. The two companies together would have about 33 million broadband connections that brought in about $18 billion in broadband revenue during 2013. More and more, "cable TV" is about broadband Internet.
According to Susan Crawford, a former tech policy advisor to President Obama, for the vast majority of businesses in 19 of the 20 largest metropolitan areas in the country, their only choice for a high-capacity wired connection will be Comcast.
Ms. Crawford also noted that Comcast, "serving the interests of its shareholders," will keep network investment as low as possible rather than "provide the world-class fiber-optic connections that are now standard and cheap in other countries."
The reaction to the announcement thus far has been rather muted from a Comcast shareholder's perspective. The key of course is execution, integrating the Time Warner Cable footprint and existing subscribers, leveraging increased scale into better terms with content providers, advancing broadband offerings to meet the challenges represented by Netflix (NSDQ: NFLX) and Amazon (NSDQ: AMZN) as well as Apple Inc's (NSDQ: AAPL) Apple TV offering.
Comcast's audacity could have knock-on effects in the form of new confidence! on the p! art of SoftBank Corp (Japan: 9984, OTC: SFTBF, ADR: SFTBY) CEO Masayoshi Son, who may be emboldened to make his own move on behalf of Sprint Corp (NYSE: S), the No. 3 wireless carrier in the US, for No. 4 T-Mobile US (NSDQ: TMUS).
Up until now the prevailing assumption among telecom analysts had been that the FCC's rejection of AT&T Inc's (NYSE: T) bid to acquire T-Mobile in 2011 established a hard-and-fast mandate that the nationwide wireless competition include no less than four carriers.
Mr. Son, inspired by Comcast, may simply bid now and make concessions later.
Cable TV is not the future. But Comcast, should its Time Warner Cable aspiration be realized, will have significant existing relationships to exploit as it beefs up its Xfinity everywhere, all-the-time offering.
For Time Warner Cable shareholders it's clearly a boon, should it be consummated.
My cynicism is not so deep-rooted that I assume the deal will be approved simply because of connections between and among certain key and some ancillary players in what will be a compelling drama. But it's reasonable to assume Comcast at least put out feelers before it took such a significant step. And it has long feelers.
David Cohen, before he joined Comcast in 2002, was a partner with the powerful, well-connected Philadelphia law firm Ballard Spahr LLP.
From 1992 to 1997 he was Chief of Staff to Philadelphia Mayor Ed Rendell, who subsequently served two terms as governor of Pennsylvania and was General Chairman of the Democratic National Committee during the 2000 federal election cycle.
And he is probably well acquainted with Sen. Charles Schumer, a Democrat from New York. Sen. Schumer, who shortly after the deal's announcement on Feb. 13, 2014, said in a statement on his website that he expected the "results of the merger will be positive for New York," has actually recused himself from a potential hearing before the Senate Subcommittee on Antitrust, Competition Policy and Consumer Ri! ghts beca! use his brother Robert Schumer, an attorney, worked on the transaction with his firm Paul, Weiss, Rifkind, Wharton & Garrison.
Sen. Schumer later said that he was unaware of his brother's involvement, despite the fact that Robert Schumer has represented Time Warner Cable on mergers-and-acquisitions (M&A) matters for a number of years.
And the assistant attorney general in charge of the DoJ's Antitrust Division, Bill Baer, while a partner at Arnold & Porter, worked on Comcast's acquisition of NBC Universal from his client General Electric Co (NYSE: GE)
Mr. Baer listed his involvement in the 2011 settlement as one of his "significant legal activities" in a questionnaire he filled out for the Senate Judiciary Committee before his confirmation to the DoJ post, which he assumed in January 2013.
That prior experience navigating the US regulatory review process, with the help of its longtime antitrust counsel at New York-based Davis Polk & Wardwell, and winning DoJ approval for its purchase of NBC Universal has certainly informed Comcast's decision to make an offer for Time Warner Cable.
Another key question, assuming a deal is finally consummated, is whether Comcast will invest at a level necessary to deliver the promised "quality" of services, content and innovation.
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