Could These 25 Conditions Derail Comcast’s Acquisition of Time Warner Cable?

On February 13, 2014, Comcast announced it had entered into an agreement to buy Time Warner Cable for approximately $45 billion. The all-stock deal would combine the nation's top two cable TV companies. Comcast has 22 million pay TV customers; Time Warner Cable has 11.2 million customers. A transaction of that size requires, by law, approval by federal regulators. In the Comcast-Time Warner Case, both the Department of Justice and Federal Communications Commission (FCC) are reviewing the acquisition in a process outlined by Andrew Jay Schwartzman in the Digital Beat last year. With the lobbying power of Comcast, the nation’s largest cable provider, helping to drive the review, one might suspect relatively easy approval for the deal. But as the one-year anniversary of Comcast’s announcement passed, we saw instead headlines like “A year later, is the huge Comcast-Time Warner Cable deal doomed?”, “One year later, Comcast’s megamerger faces unknown fate, dubious public”, “Skies darken over Comcast merger”, and “Comcast's customer service incidents jeopardizing $45 billion deal”. Clearly, it is time to check in on the merger review. But California regulators -- not the Department of Justice or the FCC -- are the first to show their hand on the prospects of the deal gaining approval.

In addition to federal regulators, Comcast also has to obtain permission from states and municipalities whose cable providers would change as a result of the deal. More than 90 percent of municipalities have provided their blessing. Among states, New York and California are the big ones. The deal has inspired protests in each state and regulators have not yet made a decision. These state processes often run parallel to the FCC's, but it's not clear whether they will conclude before or after the federal probe.

A Recommendation for Approval from California

According to California law, the merged company must:

• Maintain or improve the financial condition of the resulting company;
• Maintain or improve service to ratepayers in the state;
• Maintain or improve the quality of management of the resulting company doing business in the state;
• Be fair and reasonable to the employees of the company;
• Be fair and reasonable to the majority of all affected company shareholders; and
• Be beneficial to state and local economies and to local communities.

On February 13, Chief Administrative Law Judge David M. Gamson at the California Public Utilities Commission (CPUC) recommended that the CPUC approve the deal. But the recommendation includes 25 conditions on the acquisition. To win approval of the deal, Comcast would have to:

1. Offer California Lifeline and Federal Lifeline programs, that subsidize telephone service for low-income households, on the same basis as Time Warner;
2. Reach workforce diversity goals of “at least equal to the average of AT&T’s and Verizon’s” in the previous year;
3. Advise customers of the necessity for using backup batteries in connection with a VoIP-based telephone system and the risks associated with power outages;
4. Supply backup batteries at no cost as part of any new installation of VoIP telephones, fully implement the guidelines for customer education programs regarding backup power systems, and offer to sell backup batteries at cost to any present or future customer;
5. Review the design and presentation of information available on the company’s web site;
6. Ensure that all customer communications are accessible to customers with disabilities;
7. Offer Time Warner’s Business Calling Plan with Stand Alone Internet Access to interested, competing providers of telephone service (CLECs) for a period of five years from the effective date of the merger at existing prices, terms and conditions;
8. Offer Time Warner’s Carrier Ethernet Last Mile Access product to interested CLECs for a period of five years from the effective date at the same prices, terms and conditions as offered by Time Warner prior to the merger;
9. Offer all of its California customers the ability to use Roku or other independent video programming platforms, on the same basis that Time Warner did prior to the merger for five years;
10. Not interfere with any customer’s ability to access voice services or degrade a user’s ability to originate or complete calls;
11. Extend its Internet Essentials program to all former Time Warner customers and provide all elements of the program that are provided at the time of the merger. In addition, Comcast shall at a minimum provide broadband service speeds of 10 Mbps download and 1 Mbps upload as part of the Internet Essentials program and, at no additional cost, a Wi-Fi router so that Internet Essentials enrollees can benefit from accessing more than one device to the Internet, especially devices such as tablets that are provided at low or no cost by numerous California school districts;
12. Revise its eligibility criteria for participation in the Internet Essentials program to include all households having household incomes equal to 150% of the federal poverty level or less;
13. Enroll at least 45% of eligible households in Internet Essentials within two years of the effective date of the parent company merger; submit a plan to achieve the Internet Essentials enrollment requirement including a) specific cost details, the amount of funds allocated to outreach and marketing, with a minimum amount of $275 allocated per eligible household, b) process improvements to speed enrollment and reduce wait times and the burden on the household trying to enroll, and c) Wi-Fi options for multiple users in an eligible household;
14. Within four years, connect and/or upgrade Internet infrastructure for K-12 schools and public libraries in unserved and underserved areas in Comcast’s combined California service territory so that it is providing high speed Internet to at least the same proportion of K-12 schools and public libraries in such unserved and underserved areas as it provides to the households in its service territory;
15. Within two years, upgrade facilities to make broadband services available in all California households where the companies currently provide only video service; such upgrades shall provide, at a minimum, broadband service speeds of 10 Mbps download and 1 Mbps upload;
16. Within five years, make broadband services available throughout its service territory at 25 Mbps down and 3 Mbps up, to conform to the FCC’s definition of minimum broadband speeds, as may be adjusted by the FCC;
17. For five years, allow all California customers the option to purchase stand-alone broadband Internet service at a price not to exceed the price charged by Time Warner for providing that service to its customers, and at speeds, prices, and terms, at least comparable to that offered by Time Warner (currently 3 Mbps broadband service for $14.99 a month, 10 Mbps service for $29.99 a month, 50 Mbps service for $34.99 a month, and 100 Mbps service for $44.99 a month);
18. Within three years, build at least 10 new broadband facilities that are adjacent to or near areas that Comcast currently serves by broadband, or within the next three years Comcast will serve by broadband, and are areas that are unserved or underserved by broadband according to the FCC definition;
19. For five years, neither oppose, directly or indirectly, nor fund opposition to, any municipal broadband development plan in California, nor any California Advanced Services Fund (CASF) or California Teleconnect Fund (CTF) application within its service territory that otherwise meets the requirements of CASF or CTF;
20. Take action to respect customer privacy and not contest California PUC jurisdiction regarding any customer privacy complaints for its California voice or broadband customers;
21. Take action to improve customer service including respecting customer choice and competitive choices, and meet the minimum service quality standards on metrics related to voice service installation intervals and service orders completed; complete installations, including broadband installations, in a time frame no longer than Time Warner’s average service prior to the merger; Comcast shall not contest California PUC jurisdiction regarding any customer service, slamming, cramming or service quality issues for its California voice customers [Note, some of Comcast's worst publicity has come from customers recording cancellation calls in which customer service agents practically refuse to disconnect service.];
22. Improve the reliability of its phone and broadband service and ensure that service is adequate to support 911/e911 standards;
23. Report, every six months, on a) its efforts to improve reliability and address service outages or complaints, including providing information about the duration of outages, the extent and type of service degradation experienced by customers, the number of customer complaints about service outages or degraded service, any geographical or other concentrations of customers experiencing outages, and Comcast’s actions to address those issues, b) its commitment to improve consumer service and respect customer choice in California, and to comply with the CPUC’s rules, orders, decisions, and the California Public Utilities code regarding any request for change or discontinuation of service, and c) its commitment to protect customer privacy in accordance with the California constitution’s privacy protection, and the CPUC’s rules requiring telephone corporations to protect customer privacy;
24. Report annually, for five years, detailing compliance with these conditions; and
25. Agree that non-compliance means the public or the CPUC may take enforcement action against Comcast based on the Commission’s rules, orders, and decision, and the California Public Utilities Code, and Comcast shall not contest the Commission’s jurisdiction to do so.

David L. Cohen, Comcast’s Executive Vice President and Chief Diversity Officer, posted a response not long after Judge Gamson’s recommendation was released. He writes that some of the conditions “could potentially prevent the full benefits of this transaction being realized by Californians, and create a more intrusive regulatory regime where innovative services could be hampered rather than helped. In addition, at least some of the suggested conditions simply lie outside the authority of the CPUC or are unrealistic.”

Cohen focuses on penetration rates and time frames, saying they are “simply unattainable under market conditions, especially with populations that have been slowest to adopt broadband.” Cohen notes, for example, that even though Comcast has spent “billions” on marketing and advertising its services, just 40% of the households passed by its networks subscribe to Comcast services.

Opposition from Congressman Cárdenas

Not all California policymakers are sold on the Comcast-TWC deal. Rep Tony Cárdenas (D-CA) is urging federal regulators to examine Comcast's contract negotiations with small programmers as they review Comcast's proposed acquisition of Time Warner Cable. Cárdenas's interest was sparked by a dispute between Comcast and Estrella TV, a Spanish-language station that is demanding payment from Comcast. Rep Cárdenas said that he does not intend to "tak[e] sides in the current contractual dispute." However, he said antitrust regulators should examine whether Comcast's increased size would give it too much power over small programmers. In July 2014, Rep Cárdenas rallied more than 50 House colleagues to send a letter to Comcast and Time Warner Cable that expressed concerns about the merger's potential impact on small programmers.

On February 18, Rep Cárdenas became one of the first members of the U.S. House to publicly oppose a proposed Comcast-Time Warner Cable merger. Rep Cárdenas called on the Department of Justice and the FCC to block the merger from occurring.

“I have been open to hearing from both sides of this issue and have been assessing the impact on public interest and competition,” said Rep Cárdenas. “Today I announce my strong opposition to the Comcast-Time Warner Cable merger. I ask the FCC, the Department of Justice, and the California Public Utilities Commission to deny this merger because it is bad for consumers, will harm competition, will lead to less diverse content and more expensive cable and internet access, and will eliminate good jobs in California.” Rep Cárdenas went on to cite issues with potential mistreatment of independent programming providers, issues with vertical integration between Comcast and its various television stations, the immense broadband footprint a Comcast-Time Warner merger would create and the impact a potential merger, and all of the other issues with it, could have on jobs in the Los Angeles area.

Comcast was quick to respond to Cárdenas’ statement, pointing to the consumer benefits of the deal: faster Internet speeds, better video products, broadband programs for low-income Americans, more competition for small businesses, and better diversity practices, including more diverse programming for consumers. The Comcast statement reads, in part:

With the Comcast-Time Warner Cable transaction, while we’ll be getting larger, we’ll actually have about the same number of video customers as we had about a decade ago. Even when the two-companies are combined, we’ll serve less than 30% of the national video market – a level the courts have twice found does not cause issues for programmers in the marketplace. That means 70% of video customers will be served by other competitors and operators. Today, our competitors Dish and DirecTV can reach nearly 100% of US homes – including nearly all Hispanic homes. Other services like Netflix can reach any home in America with a broadband connection and already has millions more subscribers today than the Comcast-TWC combination will have.

Could Comcast Walk Away from the Deal?

Could such a long list of conditions, conditions that the FCC and Department of Justice could also seek, drive Comcast away from buying Time Warner Cable? Earlier this month, the Wall Street Journal reported that investors have become increasingly concerned that the deal will not be completed -- either because federal regulators block it or demand major concessions. "Some analysts think that Comcast might simply walk away," Maureen Farrell writes.

Analyst Craig Moffett wrote that the deal has lost “its air of inevitability.”

Happy anniversary.