A New Charter

Submitted on May 13, 2016

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Robbie’s Round-Up for the Week of May 2-13, 2016

Nearly a year after the deal was announced, Charter Communications this week won final regulatory approval to buy Time Warner Cable and Advance/Newhouse Partnership (the parent of Bright House Networks, LLC). The resulting company will be named “New Charter,” which will be the second-largest cable company (after Comcast), and third-largest pay-TV company (after AT&T/DirecTV and Comcast), with over 17 million video subscribers.

Public Interest Concerns
On June 25, 2015, Charter, Time Warner, and Bright House filed a public interest statement, effectively stating the merger would result in faster Internet for online video, affordable prices, transparent billing, and commitment to American jobs. But there was skepticism. Public interest advocates felt that the acquisition would result in less competition, adding to increased prices and poor customer service in the industry. The concerns fell into two main categories: video competition and broadband development.

Video Competition
One of the main concerns raised about the deal was that New Charter would have greater incentive and ability to impose or broaden contractual restrictions on programmers and limit their ability to distribute their content through online video distributors (OVDs). Basically, the big fear was that a gigantic Charter will have both the power and the incentive to hurt rival streaming services, and could hinder the invention of new offerings. For example, HBO expressed concern that the merger of the two cable companies would impede the development of its streaming business, HBO Now.

Internet/Broadband Development
In its application for regulatory approval, New Charter committed to building out to one million additional customer locations within four years of closing the deal. Public interest advocates asked the FCC to consider universal service deployment obligations within all of Time Warner Cable’s and Bright House’s franchise areas as a means of promoting rural broadband deployment.

Merger Conditions
The Department of Justice, in approving the merger, provided the following condition: “Under the terms of the proposed settlement, New Charter will be prohibited from entering into or enforcing any agreement with a programmer that forbids, limits or creates incentives to limit the programmer’s provision of content to one or more OVDs."

On May 6, the FCC voted 4-1 in approving the merger, with FCC Commissioner Ajit Pai the lone nay vote. On May 10, the FCC released its order approving the deal. The order includes the following conditions:

No Data Caps: For seven years, the FCC will prohibit New Charter from imposing data caps or charging usage-based pricing for its residential broadband service. This condition ensures that New Charter will continue Charter’s past pricing practices and protects subscribers from paying fees designed to make online video consumption more expensive leading subscribers to stick with a traditional pay-TV bundle.
Settlement-Free Interconnection: To prevent New Charter from raising prices on companies that deliver Internet traffic—including online video traffic—requested by its broadband subscribers, the FCC is imposing a settlement-free interconnection condition. The Applicants committed to interconnect with qualifying companies for free. FCC modifications will ensure that companies may more easily qualify for free interconnection and that they may increase their traffic and expand their services at a greater rate before needing to pay to deliver content to New Charter’s subscribers.
Protecting OVD: Because New Charter will have an increased incentive to use its greater leverage over programmers to frustrate online video competition, the FCC and the Department of Justice will prohibit, for seven years, New Charter from entering or enforcing contractual terms that prevent or penalize programmers from distributing content online.
Monitoring New Charter: The proposed transaction will likely result in a number of modest efficiencies and public benefits, including lower overhead and programming costs and increased enterprise competition. The FCC will impose conditions to permit the transaction’s likely efficiencies and benefits to proceed while mitigating the likely harms. The FCC acknowledges, however, that conduct remedies may not eliminate all harms and require close monitoring to prevent evasion in ways that cannot be anticipated. The FCC is adopting a monitoring system designed to watch for any attempts by New Charter to avoid the letter and spirit of the conditions.
Broadband Deployment and Low-Income Program: The FCC is requiring New Charter to undertake a build out program that will deploy high-speed broadband to 2 million more homes and a low-income broadband program for eligible households.

Taken together, the FCC claims, the conditions provide confidence that the transaction’s public interest benefits will outweigh any harms.

Last month, FCC Chairman Tom Wheeler said that the conditions he had proposed create a "seven-year innovation and competition zone."

On May 12, the California Public Utilities Commission gave final approval for the merger, marking and end to the last regulatory hurdle that the merger faced.

Additional News
Following the announced approval, two more news stories came out about the merger. First, Charter prevented customers from using their own modems for two years beginning in 2012. As punishment, the company will have to pay a $640,000 fine and complete a three-year compliance plan. Second, press reports noted that federal regulators had placed no conditions on the deal related to media mogul John Malone's sprawling media and telecommunications holdings. Malone controls Liberty Broadband, which will own about 18 percent of New Charter and has rights to name three board members. Privately held media firm Advance/Newhouse will own about 13.5 percent of New Charter. Malone holds a 28.7 percent voting interest in Discovery, a 31.8 percent voting interest in Starz, a 37.7 percent voting interest in the QVC Group, and a 3.3 percent voting interest in Lions Gate Entertainment, which holds a stake in Epix. While much of Malone’s media holdings will now constitute New Charter’s “affiliated programming,” the FCC says it already has rules in place to govern those companies’ relationships with other pay-TV providers. Public Knowledge, the American Cable Association and others had asked the FCC to look into Malone’s holdings as part of the Charter review.

Reaction
FCC Commissioner Pai said, “It is quite clear the Commission’s majority does not believe that the merger of Charter, Time Warner Cable, and Bright House is in the public interest. This order spends over 100 pages detailing the harms that would allegedly result from the transaction. And when the discussion turns to the merger’s purported benefits, the words ‘modest’ and ‘minimal’ are used over and over again." Commissioner Pai called the deal conditions "ideologically inspired extortion," and said it had to end. "In sum, I do not believe that the adoption of this order is in the interest of the American people. I therefore dissent."

Tom Rutledge, president and chief executive of Charter, said that the transaction has "significant benefits" including greater competition, broader access to affordable broadband, and new US jobs. The FCC-imposed conditions "are largely extensions of the longstanding consumer friendly values and practices of our company."

"Creating broadband monopoly markets raises consumer costs, kills competition, and points a gun at the heart of the news and information that democracy depends upon,” said Michael Copps, a former member of the FCC and a special adviser to Common Cause. “FCC approval of this unnecessary merger would be an abandonment of its public interest responsibilities.”

"Chairman Wheeler has just tarnished his legacy as head of the FCC," said Free Press President Craig Aaron. "As he nears the end of his term, this wasteful merger undermines his oft-stated priority of ‘competition, competition, competition.’ I guess he decided it was time for a new mantra...There’s nothing about this massive merger that serves the public interest. There’s nothing about it that helps make the market for cable TV and Internet services more affordable and competitive for Americans."

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