Tough for Regulators to Create Effective Merger Conditions for Comcast/TWC Deal, Say Analysts, Attorneys

Creating merger conditions to address the effects on programmers of Comcast’s proposed $45.2 billion buy of Time Warner Cable would likely be difficult for regulators, said several cable attorneys and analysts Friday. The leverage the merger would give the new cable giant in programming negotiations is likely to be an important front in the antitrust debate over the transaction (CD Feb 14 p1), they said.

"It would be difficult for regulators to get at the pricing,” said BakerHostetler cable attorney Gary Lutzker, who’s not involved in the transaction. The deal is unlikely to be approved without merger conditions, and could include both an extension of the merger conditions remaining from the Comcast/NBCUniversal merger and the imposition of newer ones, said cable attorneys and analysts. No matter what conditions might be imposed on a possible Comcast/TWC deal, they might not be enough, said several public interest groups. “It’s hard to see how conditions are going to fix this,” said former FCC Commissioner Michael Copps, who was the sole vote opposing the Comcast/NBCU merger and now works for Common Cause.

If the deal is approved, it’s likely to mean Comcast will get substantial discounts on buying programming because of its sheer size, said Fletcher Heald broadcast and transactional attorney Thomas Dougherty. That’s likely to make programmers uneasy, but making rules to control the prices Comcast receives from programmers “might be a stretch,” he said. The Comcast/NBCU merger contains a “benchmark condition” designed to ensure that Comcast provides its content to online video distributors at prices comparable to the rest of the market. However, large programmers like Disney and Viacom have fought against the condition because Comcast has argued that it requires the OVDs to share their contract information with the cable company. That sort of difficulty is likely to keep regulators from considering a similar condition to address the merger’s effect on programming prices, said Lutzker.

The merger may also affect programming costs from the other side, said the American Cable Association. “Vertical integration creates an incentive to a cable operator to charge discriminatory prices to other operators for programming,” said ACA Vice President-Legislative Affairs Ross Lieberman. That concern started as a result of the Comcast/NBCU merger, but grows larger with a TWC deal, he said. ACA wants the FCC to change program access rules to address that problem before ruling on the merger, but Lieberman said the issue could also show up in a merger condition. Both Comcast and TWC also own shares in regional sports networks in Los Angeles and New York, Lieberman said. Since the newly created cable giant would own a larger percentage of both networks, Comcast is likely to be able to demand high prices of cable and satellite providers that want to air the “must have” Lakers, Mets and Dodgers content, said Lieberman. Similar issues were addressed in the Comcast/NBCU merger by requiring arbitration to settle pricing disputes involving those networks, and a similar fix could show up in merger conditions for the latest deal, he said.

Comcast preemptively declared in its announcement of the deal that newly acquired TWC systems would be automatically subject to conditions of the Comcast/NBCU merger, most notably the Open Internet order (see related story). Broadcasters in the affected markets would also have “greater protections in their retransmission consent negotiations with the acquired systems” and public education and government channels in the affected market areas would also receive protections, Comcast said.

Overly harsh merger conditions could endanger the whole deal, said Guggenheim Partners analyst Paul Gallant in an email to investors. Since the deal doesn’t include a breakup fee, it would be “somewhat easier for Comcast to walk away if it views proposed merger conditions as unacceptable,” Gallant said. “So it clearly bears watching whether the FCC decides to seek aggressive conditions.” One such condition could be a restriction on usage-based pricing, which Gallant and other analysts suggested the FCC might bring up to address public interest group concerns. That would be a difficult “shackle” for a distributor to accept, said Lutzker: “It prevents you from responding to the market.” Regulators might be motivated to seek tough conditions because Democratic administrations are responsive to consolidation concerns, said Gallant. A Comcast/TWC merger is likely to generate a lot of public opposition, Dougherty said.

Merger conditions aren’t the best way to mitigate concerns about the deal, said Copps in an interview. The previous Comcast/NBCU conditions were “time-limited,” said Public Knowledge Senior Staff Attorney John Bergmayer, and set to expire in 2018. “I'd prefer permanent rules -- conditions are not the most effective way to promote the public interest.”