Not even the FCC can get excited about Charter's buyout of Time Warner Cable

Charter's proposed merger with Time Warner may pass FCC scrutiny, but the outcome for consumers is likely to be less rosy

Not even the FCC can get excited about Charter's buyout of Time Warner Cable

Just one month after being jilted by Comcast, Time Warner is planning a new trip down the merger aisle with Charter Communications.  But this go-around, Charter -- which pursued the larger, rival cable company for years -- hopes to profit from the lessons of Comcast's failed attempt and bring its rebound romance successfully to the altar.

By the numbers, Charter's $56 billion merger with Time Warner -- and the $10.4 billion acquisition of Bright House Networks that completes a three-way deal -- has a better chance of gaining FCC approval. Post-merger, Charter would nearly quadruple its customer base to 24 million, but it would still be smaller than Comcast with its 27 million subscribers. "New Charter" would control less than 30 percent of the market for high-speed broadband, whereas the proposed Comcast-Time Warner behemoth would have held 57 percent. And Charter does not have as big an investment in providing content as Comcast and NBCUniversal, although its major shareholders -- Liberty Broadband and Bright House owner Advance/Newhouse -- do have ties to content companies Discovery, Starz, and Lions Gate Entertainment.

The union of Charter and Times Warner might well withstand FCC scrutiny, but it's hardly a slam dunk; the mere fact that Charter is not Comcast -- not already No. 1 in the industry -- does not guarantee approval. FCC Chairman Tom Wheeler has indicated he isn't totally against such mergers, but the bar for approval is set high. According to his brief statement after the merger's announcement:   

The FCC reviews every merger on its merits and determines whether it would be in the public interest. In applying the public interest test, an absence of harm is not sufficient. The Commission will look to see how American consumers would benefit if the deal were to be approved.

Therein lies the rub. While the rewards to Comcast and Charter in acquiring Time Warner are clear, the benefits to consumers are dubious at best.

Cable companies face declining TV subscriber numbers as viewers cut the cord and switch to streaming services like Netflix, Amazon, and Hulu. The battle now is about broadband and the pipes that deliver video content.

In contrast to declining cable TV numbers, during the first quarter of this year the 17 largest cable companies added 1.2 million broadband subscribers, according to Leichtman Research Group. For the first time, Comcast has more high-speed broadband subscribers than cable TV subscribers

Providing broadband is also more lucrative than providing TV -- no high programming fees to the likes of ESPN and The Disney Channel -- and less competitive.  By carving up the broadband market "the way a drug cartel divides up territories," as John Oliver said in his rant on Net neutrality, cable companies have ensured that broadband competition remains negligible.

According to the FCC's Wheeler, "At 25Mbps, there is simply no competitive choice for most Americans. Three-quarters of American homes have no competitive choice for the essential infrastructure for 21st century economics and democracy…. Things only get worse as you move to 50 Mbps, where 82 percent of consumers lack a choice."

Some analysts argue that the lack of service area overlap between Charter, Time Warner, and Bright House bodes well for approval of the deal. But the outlook is probably not so rosy for consumers. Historically, with consolidation, "prices for cable and broadband continue to go up, and customer service is dismal," said Consumers Union policy counsel Delara Derakhshani.

Charter and Time Warner both rank near the bottom in customer service. "My impression overall of Charter is that they talk very well about their services and their breadth and depth, but quite honestly they don't deliver very well," Terrence Allen, a longtime Charter subscriber who has had no other cable options for the last 15 years, told the New York Times.  

And the Wall Street Journal notes that Charter may need to raise broadband prices to recoup its investment on the deal, especially with the cable TV business under pressure. "Broadband pricing is almost an insurance policy for cable operators in that if all else fails, you've always got the option to raise broadband rates," Craig Moffett, an analyst at MoffettNathanson, told the WSJ.

Still, Charter CEO Tom Rutledge has been saying all the right things to appease FCC doubts about the merger. Rutledge pledged that New Charter will keep away from data caps, and said the company will "not block, throttle, or engage in paid prioritization of Internet traffic,"even if the agency's Net neutrality rules are ultimately defeated.

Of course, these are the same assurances that Comcast made.

Rutledge also promised that "with our larger reach, [New Charter] will be able to accelerate the deployment of faster Internet speeds, state-of-the-art video experiences, and fully-featured voice products, at highly competitive prices."

But Michael Copps, a former FCC Commissioner, said the agency should apply "a healthy dose of skepticism" to executive promises to innovate. 

S. Derek Turner, director of Free Press Research, has similar doubts. "These potential mergers won't make Charter as massive as a merged Comcast-Time Warner Cable would have been but they raise similar public interest concerns… We will carefully examine Charter's case, in particular its arguments for why this transaction is supposedly better for competition in the broadband and pay-TV markets than new investment."

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