Comcast's surprising announcement of a deal to buy Time Warner Cable for $45 billion is being met with outrage by consumer advocates, concern by politicians, and uncertainty by Wall Street. Bringing the country’s top two cable operators under single ownership will draw heavy scrutiny from both the Department of Justice and the FCC.
Comcast has preemptively tried to allay concerns that the deal runs afoul of antitrust regulation. In a conference call explaining the move, Comcast CEO Brian Roberts noted that the company would voluntarily jettison 3 million subscribers to remain below the now-symbolic 30% threshold of U.S. pay TV subscribers. Furthermore, Roberts assures that the move, “will not reduce competition in any relevant market be because our companies do not overlap or compete with each other.”
Opponents of the deal claim, however, that it would limit consumer choice and note with irony that the reasons the two companies don’t overlap, can be found in decades of industry-friendly legislation that has hindered, not spurred competition. “They wrote the competition out of the books,” says Todd O’Boyle, Program Director for Media And Democracy at Common Cause. “It should be inconceivable that a deal like this can get regulatory approval.”
Senator Amy Klobuchar (D-Minn.), chairwoman of the Senate Commerce’s Subcommittee on Antitrust released a statement along with committee member Mike Lee (R-Utah) saying they will hold a hearing on the proposed merger, promising to, “carefully scrutinize the details of this merger and its potential consequences for both consumers and competition.”
Wall Street doesn’t appear to be completely sold on the idea either, with Comcast’s stock dipping slightly on the day of the announcement. Time Warner's stock did go up on the news, but remains well shy of the $158.82 per share that Comcast is paying for the beleaguered cable giant. This could be more of a reflection on the chances of such a deal gaining regulatory approval, rather than a vote on the financial prospects of the deal.
Industry watchers are mixed on whether the sale will be rejected on antitrust grounds – there are no statements yet from the Department of Justice or the FCC – but agree that the deal will face significant hurdles in gaining regulatory approval. “There’s no question it will be a tough regulatory process,” says SNL Kagan analyst, Robin Flynn. “The current FCC appears to be more willing than those of previous administrations to challenge these.” Most expect that Comcast will have to sweeten the deal from a regulatory standpoint. “With the sheer size of this deal,” says David Heger, analyst at Edward Jones, “there will likely be concessions to regulators.”
Those could involve an extension of the FCC’s order that Comcast abide by net neutrality rules (rules which were recently overturned by an Appeals Court) that Comcast agreed to as a condition of approval to acquire NBC Universal. Comcast could also be asked to expand the scope of the low cost broadband accounts that the FCC has required it to provide to low-income households.
A rather unusual aspect of the deal is that it does not include a break-up fee, should the government prohibit the sale. Whether this reflects an acknowledgement of uncertainty with regard to approval, or simply the strong bargaining position of Comcast, who has saved Time Warner from what was shaping up as a prolonged proxy war with Charter, is unclear.
So just what is it that Comcast’s board feels is worth a $45 billion price tag, likely concessions to Washington, and the possibility of outright rejection by regulators? It’s not the pay TV market. While Comcast, unlike its competitors, has been reporting recent gains in video subscribers, it’s well-understood that the consumer pay TV market is not a growth opportunity. But with Time Warner in the fold, Comcast widens it lead as the nation’s largest broadband provider. Together, Comcast and Time Warner would account for 32 million Internet customers, or nearly 35% of the total U.S. market, according to SNL Kagan. While the number of pay TV defectors could easily increase, no one imagines consumers giving up the Internet.
Another big prize, notes Heger, is the opportunity to become a player in business services. “Comcast has just 10% of the business market, and that is largely restricted to small companies,” he says. “With the expanded national reach that a Time Warner buy provides, Comcast can go after mid-size businesses, an area where it has almost no presence right now.” Expansion into a market with both higher profit margins and significant growth opportunity may have been too tempting for Comcast’s board to pass up.
While the regulatory outcome is uncertain, everyone agrees that we’re in for a long wait for any decision. The amount of scrutiny that is sure to come with a deal of this scale makes Comcast’s prediction of a resolution in 2014 seem overly optimistic.