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The Regulatory War Between Comcast And Opponents Of Its Time Warner Cable Deal Has Officially Begun

Securing approval for its $45.2 billion deal will be a bare-knuckle brawl unlike any other Comcast has faced.

Posted on March 23, 2014, at 8:51 p.m. ET

The Associated Press

The regulatory review of Comcast's $45.2 billion takeover of Time Warner Cable is barely underway, but it is already clear that securing approval will be a large-scale battle unlike any other the company has faced.

With at least another nine months to go before a verdict is rendered — the deal is expected to close by the end of the year — the regulatory showdown between Comcast and the opposition is beginning to take shape. According to sources familiar with the situation, Comcast wants to focus the regulatory review around one or two keys issues where it can control the narrative — for instance, market competition and net neutrality. But, as evidenced in two separate developments last week, the review process can easily splinter off into many disparate areas of concerns, essentially forcing Comcast's legal team into an uncomfortable, defensive posture.

The first unexpected break from Comcast's plan: A blog post by Netflix Chief Executive Reed Hastings arguing that big broadband providers should not be able to charge fees for faster and more reliable access.

"Without strong net neutrality, big ISPs can demand potentially escalating fees for the interconnection required to deliver high quality service. The big ISPs can make these demands — driving up costs and prices for everyone else — because of their market position," Hastings wrote.

Hastings's post surprised many since only a few weeks prior he struck a deal under which Netflix would pay a "toll" to ensure more reliable service for its customers streaming movies through Comcast.

"I think Comcast is going to have to be ready for a lot more comments like those of Reed Hastings," said The Carmel Group's Jimmy Schaeffler. "Those types of comments during the months ahead will help give the merger a more thorough vetting process."

The second splinter came courtesy of an exclusive report by Reuters that a group of states, including Florida, Indiana, Pennsylvania, and others, were reviewing the merger to see if it was legal under U.S. antitrust law. Though the scoop generated fewer headlines than Hastings' blog post, the development is perhaps more concerning for Comcast since it means that now its deal will be scrutinized at the state level, as well as by the U.S. Department of Justice and Federal Communications Commission.

Comcast, which grew from a tiny, 1,200-subscriber cable system in Tupelo, Miss., in 1963 into the nation's largest pay-TV distributor through a five-decade acquisition spree, is well versed in the art of securing approval for its deals. In fact, the company has never had one of its deal rejected by regulators.

Comcast began seeking advice on regulatory concerns as far back as November, when it was still in talks about partnering with Charter Communications on a deal and a full three months before it decided to acquire Time Warner Cable on its own. And immediately upon announcing the purchase, it began taking steps to frame the deal as pro-consumer and pro-competition.

It began by borrowing a tactic used by Sirius Satellite Radio in getting its controversial merger with XM Radio approved, that the "addressable market" in which it competes has grown exponentially thanks to technology. While cable companies don't compete with one another thanks to its origins five decades ago as a very regulated regional industry with local franchise licenses given out to individual companies, they now face off against huge national rivals such as satellite operators DirecTV and Dish, telecom companies like Verizon and AT&T, and even technology companies delivering broadband access or streaming video, among them Google, Amazon, and Hulu, among others. Comcast Chief Executive Brian Roberts repeatedly stressed on a call announcing the deal that there is no overlap in any market between Comcast and Time Warner Cable, driving home the point that the deal doesn't eliminate a market competitor.

With regard to claims from independent cable networks that approval would make securing distribution on Comcast's systems virtually impossible, there is already precedent the company can use as a counterpoint. As part of securing approval for its acquisition of NBC in 2011, Comcast agreed to carry at least 10 new independent cable networks, including ones owned by and focused on minority audiences, to "ensure a diversity of voices" — Sean Combs' Revolt TV was born out of the pledge.

Knowing that its control over broadband access for a large swath of the country would be a major focus of the regulatory review, Comcast also announced that it was voluntarily extending its "Internet Essentials" program, which provides heavily discounted broadband access, affordable computers, and training to poor and disenfranchised families — a gesture in the direction of the legislators who represent poor urban and rural communities. The program, which was set up as a condition for approval of its NBC purchase, was set to expire in June but is now being extended indefinitely, with Roberts pledging it would also roll it out to Time Warner Cable subscribers if the deal was approved.

Further, even though there is currently no government-mandated cap on the number of subscribers one company can own, Comcast has already said it will sell 3 million subscribers to bring it below the previous 30% market share rule despite it having been vacated. But instead of just selling them to another cable company, who would in turn get bigger and more powerful, reports have said that Comcast is considering spinning them out into a separate company, which with 3 million subscribers would create a new cable company sizable enough to rank among the top 5 biggest operators.

The gesture is purely a good-faith cosmetic one since, as BTIG analyst Richard Greenfield said, Comcast doesn't have to sell any subscribers.

"DirecTV and DISH are national and have no [ownership] ceilings and now Google is looking to build in nine major U.S. cities," Greenfield noted. "There is no FCC or regulatory cap and the courts have struck down every time they've tried to set one. Is there any real difference between 33 million and 30 million subscribers?"

AP Photo/Elise Amendola, File

While Comcast anticipated complaints about competitiveness, programming diversity and broadband access, last week's two developments underscore how opponents of the deal can create a whack-a-mole problem for the company where every time it squashes one concern another pops up.

That's what made Hastings's blog post so inflammatory. Industry observers widely assumed that the deal Netflix struck with Comcast was a win, turning a potential foe into an ally. But it is increasingly looking like that deal was a Trojan horse, allowing Hastings to simply compile a few weeks worth of data showing how Netflix customers began receiving faster and more reliable access after he paid Comcast — only to then turn around and use it as a way to illustrate to regulators why such a framework is flawed and unfair.

"The essence of net neutrality is that ISPs such as AT&T and Comcast don't restrict, influence or otherwise meddle with the choices consumers make," Hastings wrote in his blog post. Later in the post he added, "A few weeks ago, we agreed to pay Comcast and our members are now getting a good experience again. Comcast has been an industry leader in supporting weak net neutrality, and we hope they'll support strong net neutrality as well."

For its part, Comcast's Executive Vice President (and chief Washington influencer) David Cohen quickly shot back at Hastings that Comcast has demonstrated a strong commitment to Internet openness and that the company is the only broadband provider in the country bound by the FCC's Open Internet rules.

"Providers like Netflix have always paid for their interconnection to the Internet and have always had ample options to ensure that their customers receive an optimal performance through all ISPs at a fair price," Cohen wrote in a statement. "We are happy that Comcast and Netflix were able to reach an amicable, market-based solution to our interconnection issues and believe that our agreement demonstrates the effectiveness of the market as a mechanism to deal with these matters."

At least part of that response is true. Hastings in clearly conflating two issues that have already been deemed to be separate — net neutrality and Internet interconnection, or basically the last mile connection between a broadband provider and the subscriber. And why wouldn't he? Dealmaking 101 dictates that you request every concession that you possibly can with the aim of reaching a settlement for the ones that you actually want. By hitting first, Hastings controlled the storyline and forced Comcast in a reactive position.

That, in essence, is what the regulatory battle is about. It isn't simply a matter of trying to get the deal rejected, but rather what concessions or guarantees can companies that do business with Comcast ensure for themselves in the event it is approved.

"The process of vetting a merger deemed anti-competitive, or where competition is a concern, is not necessarily a consistent and judicial kind of affair. Instead, one could argue, it's rather ad hoc, depending upon the administration in place, the political parties controlling which house of Congress, the relative lobbying might of the companies and industries pushing for or against the merger, and how those lobbying arms might sway not just the politicians, but the public, as well," said Schaeffler. "In short, the entire process of deciding a merger and acquisition could be a lot more consistent, a lot more reliable, and thus a lot more fair."

But then again, all's fair in a regulatory war.

A BuzzFeed News investigation, in partnership with the International Consortium of Investigative Journalists, based on thousands of documents the government didn't want you to see.