Comcast, Time Warner Deal Signals Changing Times in Cable Industry

By Michelle Maisto  |  Posted 2014-04-12

Comcast, Time Warner Deal Signals Changing Times in Cable Industry

AT&T hopes to expand its fiber broadband network business, called U-verse with GigaPower, beyond Austin and Dallas, Texas, and into bustling areas of North Carolina, it announced April 10.

This expansion—which would have AT&T following Google into yet another region to lay fiber—is exactly the type of new growth that Comcast and Time Warner Cable (TWC) spoke to in their April 9 testimony, during a meeting of the U.S. Senate Committee on the Judiciary to examine Comcast's proposed $45.2 billion acquisition of TWC.

In their joint written statement, Comcast Executive Vice President David L. Cohen and TWC Executive Vice President and CFO Arthur T. Minson Jr. argued that the greater scale the companies could achieve together is "essential" to compete in today's marketplace.

"The media and communications industry has changed dramatically over the past two decades and today has evolved into a vastly larger, more complex and multi-faceted communications, media and technology ecosystem, in which a host of sophisticated companies with national and even global footprints, like AT&T, Verizon, DirecTV, Dish, Amazon, Apple, Sony, Google, Netflix and Facebook, are increasingly competing against one another for customer attention and loyalty," they said.

Further into their testimony, Cohen and Minson suggested that the dynamics of the industry are making rivals of erstwhile partners and customers, sometimes to their own detriment, but to the benefit of consumers.

"New digital platform providers, with their roots in software and hardware, are using the robust Internet connectivity provided by Comcast, TWC and our competitors to grow into global powerhouses. These companies are increasingly pursuing new businesses that compete with ours," they continued.

"As one industry expert has observed, 'Broadband connectivity is the glue that permits multiple firms, once walled off from one another in distinct product-market categories, to compete, cooperate, buy and supply products and services from one another in order to satisfy customers that are able to buy from any one of them.'"

That expert was Jonathan Sallet, an attorney and acting general counsel at the Federal Communications Commission (FCC), who in a 2011 paper described how in addition to business value chains there are now value circles in which companies, in "not necessarily the same product markets, are able to offer competing packages of value to consumers."

The value circle is a tool, wrote Sallet, for strategists and policymakers to "understand the velocity and seeming chaos of important markets."

Among the four other witnesses contributing to the examination was Gene Kimmelman, the president and CEO of consumer advocacy group Public Knowledge, who also celebrated the potential offered by value circles.

"After years of suffering from enormous rate increases and poor service from Comcast and other providers, a vibrant broadband economy is just beginning to bring exciting new alternatives to subscription television," he told the committee. "Everything from new devices ... to new video services—like Amazon Prime, YouTube, Netflix and Aereo—are demonstrating that online video can compete with some elements of traditional cable TV."

The merger, said Kimmelman, would give Comcast control of nearly 50 percent of high-speed Internet access in the country, 30 percent of Multi-Channel Video Programming Distributor (MVPD) subscribers (this includes services like satellite TV, Verizon FiOS and AT&T U-verse) and almost 60 percent of cable subscribers.

This "unprecedented accumulation of market power" would create "incentive and enormous leverage" for Comcast to essentially pinch the hose.

It could "stifle slowly emerging competition from rivals such as Netflix and Amazon," said Kimmelman, "position itself as the dominant gatekeeper for all new services," slow the pace of equipment, device and service innovation "to lock in maximum revenue" for its own infrastructure and business model, and, among other offenses, drive up the cost of programming to other distributors and so increase prices to consumers.

Kimmelman concluded, "Because the merged company will have both the incentive and ability to thwart development of innovative Internet services that threaten Comcast's excessively priced offerings across a much broader swath of the market than is true today, this merger must be rejected."

Christopher S. Yoo, a professor of law at the University of Pennsylvania, argued in his testimony that the technological and economic changes transforming the markets today "make the prospect of anti-competitive harms ... remote."


Comcast, Time Warner Deal Signals Changing Times in Cable Industry

In his closing remarks, again playing down popular concerns, Yoo cited AOL's 2000 purchase of Time Warner for $164 billion. "What many predicted would be the end of history" just wound up being "the end of $200 billion in Time Warner shareholder value," he said.

"In addition, just a few short years ago, many argued that fiber-to-the-home would soon consign the cable industry to the dustbin of history," Yoo continued. "These episodes underscore how easy it is to hypothesize problems that never materialize and how easy it is to forget that innovation and willingness to undertake commercial risk have created greater consumer benefits than anyone could have anticipated."

Arguing to the contrary was James Bosworth, CEO of Back9Network, a new golf and lifestyle cable network. Bosworth was looking for distribution for Back9Network and had had five meetings with Time Warner and strong assurances. But since Back9Network's programming competes directly with Comcast's Golf Channel, Bosworth is nervous.

"I hope Comcast will remain true to its commitments and not discriminate based on its ownership of the Golf Channel, and I hope Comcast will judge us on the merits of our business plan. But, so far, that has not been our experience," said Bosworth.

"If the structural problems in the distribution system get worse through mergers, it will not only be bad for those of us trying to launch new networks, but consumers will not have the programming choice—or diversity of viewpoints—they want."

The day's final witness was Richard J. Sherwin, CEO of Spot On Networks (SON), who was also concerned about how TWC's practices might change after the merger, though in a different area of its business.

SON is a WiFi provider to multifamily residences—the "step-child," he said, in a telecommunications industry geared toward serving single-family households.

The young people in these communities rely almost exclusively on wireless technologies, which contribute to an overall "challenging environment" with the "interaction of their dense population of wireless devices so close to each other and the burgeoning demand on the one side and the limitations of the cellular system capacity on the other," said Sherwin.

Further exacerbating the issue are certain "green" materials used in the buildings, which make it hard for cellular signals to reach residents, to the point that 911 calls "are 'sketchy' at best," he said.

But through a combination of communitywide managed WiFi services, swaths of frequency provided in the WiFi bands by the FCC, and specially designed hardware and software approaches created by WiFi providers such as SON, these communities get served, said Sherwin.

Still, SON and others require access to bandwidth that's owned or controlled by companies such as TWC and Comcast, which sell to them "at a reasonable price and with reasonable terms," thanks to conditions put in place by the FCC. These conditions may have since expired, said Sherwin, but until recently they were still honored.

What Sherwin wants is a condition in the merger guaranteeing a continuance of such good behavior.

"The absence of such a condition would reward any entity's anti-competitive sub-industry standard conduct, metastasize such anti-competitive practices and serve to reduce broadband choice and access and decrease innovation and competition," added Sherwin.

Ultimately, the FCC and the Justice Department will decide whether, or under what terms, the merger can happen. The role of Wednesday's hearing, said Sen. Chuck Grassley, R-Iowa, a host of the event, was to conduct some oversight responsibility and "examine the current state of the television and Internet market."

"It's a chance for us to see," he added, "how well our laws are working in an area that has a direct impact on the lives of Americans."

Follow Michelle Maisto on Twitter.


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