FCC also opposed to Comcast-Time Warner cable deal, source says

Federal Communications Commission staff joined lawyers at the Justice Department in opposing the planned merger of Comcast Corp. and Time Warner Cable Inc., dealing a major blow to the the $45.2 billion transaction.

Representatives of the two biggest U.S. cable companies were told that FCC officials are leaning toward concluding the merger doesn’t help consumers, according to a person with knowledge of the situation, who asked for anonymity because the discussions aren’t public. Justice Department staff is leaning against the deal, Bloomberg News reported last week.

Opposition from the FCC, which met on Wednesday with Comcast and Time Warner Cable executives, was stronger than the Justice Department’s and could be the bigger obstacle. The companies left the meeting with the impression the deal was in trouble, according to the person. While the DOJ has to present a case in court to block the deal, the FCC can effectively kill it by calling a hearing that will drag the approval process out beyond the companies’ time frame for completion.

The merger, if completed as planned, would shake up the cable industry in central Indiana. Comcast plans to exit the market after the acquisition and hand 2.5 million customers off to a new spinoff called GreatLand Connections.

“I’d never say anything was 100 percent dead, but this is in the 99-percent category,” Rich Greenfield, an analyst at BTIG in New York, said. “It’s not every day that you have a transaction that is universally hated by everyone outside of Philadelphia,” where Comcast is based.

Opening salvo?

FCC officials will recommend that the agency’s commissioners send the merger to an administrative hearing, according to a person familiar with the deliberations. The recommendation reflects the complexity of the deal, which still requires a vote by the commission, the person said.

The concerns expressed by FCC staff could represent an opening salvo in negotiations because any final decision would need to be made by the five-member commission. The executives met separately with antitrust officials at the Justice Department, who informed them they were leaning toward blocking a deal but who left the door open for future discussions.

“We had one in a series of meetings with the Department of Justice today, as well as another meeting with the FCC,” Sena Fitzmaurice, a spokeswoman for Comcast, said in a written statement. The company said it had no comment on the meetings.

Painful choices

Spokesmen for the Justice Department and the FCC declined to comment on Wednesday’s meetings, as did Time Warner Cable.

Saving the deal, if at all possible, would require painful choices by Comcast, the biggest U.S. cable company. The company would have to decide which assets it could sell to satisfy regulators while preserving the deal’s value, industry analysts and lawyers said.

Comcast could offer to sell subscribers in major markets such as New York and Los Angeles, they said. Another option is selling its one-third stake in Internet video service Hulu, which has growth potential as consumers increasingly watch television online.

Concerns that the biggest U.S. cable company could stifle competition in online video may not be resolved by selling subscriber accounts, divesting businesses or vowing to offer faster Internet, analysts said.

No remedies?

“It’s becoming clear that the FCC and perhaps DOJ want to reject this deal,” said Craig Moffett, an analyst at MoffettNathanson. “The issue now is whether they legally can. If they decide they have a strong enough case, I’m not sure there are any remedies out there that will fix it.”

Going into Wednesday’s meetings, antitrust and FCC officials hadn’t started negotiating with Comcast about conditions to the merger that would resolve concerns, people familiar with the matter have said.

“Comcast doesn’t have a leg to stand on anymore,” Greenfield said. “Comcast is a consumer-facing business. If you go to war with the government, you’re going to war with consumers. They have consumers they have to keep.”

Lawsuit plans

Lawyers at Justice Department’s antitrust division were preparing arguments that could be used in a lawsuit to block the deal, Bloomberg News reported on April 17, citing people familiar with the situation.

Comcast argues the deal will lead to improved services for customers and says the merger won’t reduce choices for consumers because the two companies don’t have overlapping subscribers.

While Comcast has said there is no basis to block the deal, fighting the Justice Department in court could significantly delay the merger and test Comcast’s patience, said Amy Yong, a media analyst at Macquarie Capital USA Inc.

“The bigger question is: Would Comcast want to slug it out with regulators for two or three years to get this deal done?” Yong said.

Legal challenge

The Justice Department challenged 15 deals in the year ending Sept. 30, 2013, most of which settled or were abandoned, according to Bloomberg Intelligence. While seven resulted in complaints filed in federal court, only two were fully litigated. The department prevailed in both.

Regulators’ concerns about online video won’t go away if Comcast gives up more subscribers, according to Moffett. If regulators decide Comcast could use its expanded broadband footprint to impede competitors, it wouldn’t matter whether Comcast has 30 million subscribers or 24 million, he said.

The Justice Department prefers remedies in which businesses and assets are sold to preserve competition, said Jennifer Rie, a litigation analyst for Bloomberg Intelligence in New York. Conditions which impose behavioral requirements on companies are difficult to police and are disfavored, Rie said.

Keeping promises

Complaints that Comcast didn’t live up to promises made when it acquired NBCUniversal in 2011 may make regulators reluctant to agree to additional behavioral fixes, according to Rie.

“DOJ may be thinking, why is it going to work this time if it didn’t work the first time,” she said. “People are saying Comcast can’t be trusted.”

A combination with No. 2 Time Warner Cable, based in New York, would leave Comcast with about 29 million residential video customers, about 29 percent of the home pay-TV market, following divestitures unveiled after the merger was announced last year. Comcast would also have most of U.S. Internet subscribers with fixed broadband capable of the 25 megabits-per- second speed standard that the FCC adopted in January.

Selling customers

“The challenge is when you put these two companies together what the government is looking at is that broadband share,” said Greenfield. “The reality is there is no competition. For the vast majority of consumers, there is no choice for broadband.”

If Comcast shed more subscribers to appease regulators, those subscribers could be attractive to Cox Communications Inc., the industry’s No. 3 provider. Cox has customers near Time Warner Cable’s footprint in Los Angeles and Comcast’s footprint in the Washington area.

“If there are opportunities to acquire subscribers that make sense for our business we will take a look,” Cox spokesman Todd Smith said in a statement.

Charter Communications Inc., the No. 4 in the industry, has already agreed to take control of 3.9 million Comcast cable-TV customers to ease approval for the Comcast-Time Warner Cable merger. A Charter spokesman declined to comment on whether the company would be interested in acquiring more Comcast subscribers.

Pivotal Research Group analyst Jeff Wlodarczak says Comcast can offer other concessions.

Faster speeds

Comcast could agree to offer faster Internet as part of its low-income broadband program, agree not to sue the FCC over open Internet rules, or introduce ultra-fast 1 gigabit-per-second broadband speeds across its footprint within a year of the deal closing, he said.

Comcast could give up entire markets like Chicago, Detroit and parts of Florida in exchange for gaining Time Warner Cable markets in Los Angeles and New York, said Maurice Stucke, a former lawyer with the Justice Department’s antitrust division who is now at the Konkurrenz Group. He said that’s probably the only scenario that would appease the government.

“If Comcast already has significant power, how much bigger is DOJ willing to let Comcast be?” said Stucke, who represented a consumer group opposed to the merger. “DOJ may be saying, ’You’ve already gone beyond that point and we’re not going to allow you to get any bigger.’”

Comcast proposed the deal in February 2014. Comcast would gain 7 million video customers, for a total of 29 million residential video customers, or about 29 percent of the U.S. market, according to a Comcast filing.

Comcast would serve 57 percent of U.S. homes that receive broadband at speeds that meet the FCC standard set in January, according to a company filing.

Washington hasn’t judged a major cable merger since the FCC and Federal Trade Commission in 2006 let Comcast and Time Warner buy assets of bankrupt Adelphia Communications Corp.