Bloomberg News

Regulatory Barriers to Time Warner Cable Deal Limited Regardless of Buyer

December 24, 2013

Dish Network Corp.

The Federal Trade Commission required the combined company to share programming with competitors such as Dish Network Corp. and DirecTV. Photographer: Matthew Staver/Bloomberg

U.S. regulators who didn’t act as cable-TV prices almost tripled in the past two decades are poised to remain hands off on mergers among the industry’s biggest providers.

Few regulatory or antitrust barriers would prevent a potential acquisition involving Time Warner Cable Inc., the second-largest U.S. cable operator, by any of its three largest competitors, communications and antitrust lawyers said.

A U.S. court vacated a regulatory cap on the size of cable companies in 2009, and antitrust laws may have limited relevance because cable providers rarely compete among themselves for customers. That makes cable different than wireless, where a proposed merger of two of the four largest providers collapsed in 2011 after the Justice Department sued to block it.

“There is a ripe opportunity for cable transactions,” Andrew Lipman, a Washington-based communications attorney with Bingham McCutchen, said in an interview.

Charter Communications Inc. is said to be preparing an offer for New York-based Time Warner while market leader Comcast Corp. and closely held Cox Communications Inc., the third-largest provider, consider entering the bidding. Comcast and Charter are said to have discussed a breakup of Time Warner.

Washington hasn’t judged a major cable merger since the Federal Communications Commission and the Federal Trade Commission in 2006 let Comcast and Time Warner buy assets of bankrupt Adelphia Communications Corp. for $17.6 billion. The FCC required the buyers to offer their regional sports programs to competitors.

The FCC has singled out regional sports networks for attention while judging cable deals, saying that withholding coverage of games and events could be anti-competitive. Time Warner has regional sports networks in Los Angeles that show Lakers basketball and Dodgers baseball games.

Conditions Possible

Any merger involving Time Warner would go before the FTC or Justice Department, which focus on competition, and the FCC, which has broader authority to ask whether a combination advances the public interest.

A deal involving Comcast would provoke closer scrutiny than other deals because of the company’s ownership of programmers including the NBC network, said Andrew Jay Schwartzman, a Washington-based communications lawyer. Conditions may be imposed to ensure programming is distributed to competitors, he said.

“These deals are likely to go through, with some adjustments,” Schwartzman said in an interview. “But the FCC is likely to give them a harder time.”

Cap Gone

Gina Talamona, a spokeswoman for the Justice Department, declined comment as did Peter Kaplan, an FTC spokesman and Justin Cole, a spokesman for the FCC.

Sena Fitzmaurice for Comcast, Susan Leepson for Time Warner, Justin Venech for Charter and Todd Smith for Cox declined to comment.

Regulators have standing to question deals, even though there is no hard limit on cable size. Comcast in 2009 persuaded a U.S. court to throw out an FCC rule limiting providers to serving 30 percent of the pay-TV market.

“The fact that there’s not a cap does not end the analysis,” Gene Kimmelman, former chief counsel for competition policy at the Justice Department, said in an interview.

Regulators may be wary the enlarged company could leverage its control of transmission to distort markets for programming and online applications, he said.

“That might be a Comcast issue,” Kimmelman said. “I’m not sure I see any combination of the others that get up that high.”

Little Overlap

Comcast had 22 million video customers in 2012 compared with 12.2 million for Time Warner Cable and fewer than 5 million each for Cox and Charter, according to data compiled by Bloomberg Industries.

Comcast, at worst, might have to sell units with 1 million to 2 million subscribers, said Richard Greenfield, an analyst with BTIG LLC in New York.

“I think Comcast is a serious and credible bidder, and Charter should be very concerned that Comcast can outbid them,” he said in an e-mail.

One advantage for a combined company during a regulatory review would be that Time Warner operates in different markets than Comcast and Charter, Harry First, a professor at New York University School of Law, said in an interview.

For antitrust regulators, “the lack of geographic overlap is a big problem,” First said. “It’s hard to make out a case” that parties can raise prices if they’re in different areas, he said.

Programming Reviewed

The Justice Department said Comcast’s acqusition of NBC Universal in 2011 would leave the Philadelphia-based carrier with less incentive to distribute programming to Comcast rivals than NBC standing alone.

The FCC required the combined company to share programming with competitors such as Dish Network Corp. and DirecTV. The agency adopted an arbitration remedy for companies seeking access to sports networks.

Last year the FCC said cable companies generally are required to share regional sports networks.

“Exclusive arrangements for ‘must have’ programming can still lead to less competition, denying consumers the benefits of lower prices and higher quality services,” Jessica Rosenworcel, a member of the FCC’s Democratic majority, said at the time.

Cable Rates

Antitrust regulators would examine whether a Time Warner sale would reduce consumer choice in markets, and whether it would give the new company power to dictate prices when buying programming, said John Briggs, an attorney at Axinn, Veltrop & Harkrider.

Lawmakers have said competition from satellite and other providers doesn’t appear to be working to constrain rates. The average monthly price for expanded basic cable service, the most popular pricing tier, grew each year from 1995 through 2012, the FCC reported in June. The increase to $61.63 from $22.35 ran at more than double the pace of inflation, the agency said.

“You have the competitive issue on one side of the market -- consumers -- and what kind of choice do they have or lose, and then on the other side of the market, the providers, and what choice do they have or lose for selling their goods?” Briggs said.

Officials would want to ensure the enlarged company can’t use its influence to dissuade independent programmers from also selling to online services such as Netflix Inc., Jamillia Ferris, a lawyer at Hunton & Williams LLP, said in an interview.

“The agencies want to make sure any cable deal doesn’t stymie innovation in online video,” said Ferris, a former attorney with the Justice Department’s antitrust division.

AT&T, T-Mobile

AT&T Inc., the largest wireless phone provider, abandoned its $39 billion bid for No. 4 T-Mobile USA Inc. in 2011 after Obama’s administration challenged it. Regulators were concerned about eventual domination by two large carriers, said First, the New York University law professor.

Similar views about cable providers could prompt regulators to give less weight to arguments the companies don’t compete in the same markets, he said.

“If you buy that argument you could end up with one cable company or two as we’ve ended up with very few telephone carriers,” First said. “This Justice Department and the Obama administration would be a little less comfortable with that outcome.”

To contact the reporters on this story: Todd Shields in Washington at tshields3@bloomberg.net; David McLaughlin in Washington at dmclaughlin9@bloomberg.net

To contact the editors responsible for this story: Bernard Kohn at bkohn2@bloomberg.net; Sara Forden at sforden@bloomberg.net


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