April 9, 2015

Cable Consolidation Update: DOJ Would Likely Clear Potential Charter/TWC Deal with Conditions; A Closer Look at Charter Acquisition of Bright House Networks

Cable Consolidation Update

Charter has indicated it remains interested in purchasing Time Warner Cable (TWC) if the Comcast/TWC deal does not close. In a potential Charter/TWC tie-up, DOJ would likely address competitive concerns through merger conditions rather than challenge the deal outright.

A Charter/TWC tie-up could hinder competition by increasing regional clustering and would likely raise concerns regarding Regional Sports Networks (RSNs). Concerns may also arise regarding market power in local cable advertising and program carriage. However, because Charter has a much smaller video and broadband footprint than Comcast, and because Charter lacks Comcast’s extensive content holdings, Charter’s potential TWC acquisition would raise less significant competitive concerns than the Comcast/TWC merger.

In-Depth Look at Antitrust Merits of a Charter/TWC Deal

A combined Charter/TWC would have a smaller broadband footprint and would lack major content holdings, meaning broadband gatekeeper power and program access are not likely to raise insurmountable concerns. Comcast currently has approximately 22 million broadband subscribers, TWC has over 12 million, and Charter has 4.4 million. Accordingly, a combined Charter/TWC would have 16.4 million broadband subscribers, still less than Comcast’s existing broadband subscriber base. The incremental add of Charter’s broadband subscribers to TWC’s larger footprint is unlikely to raise the same level of concern among regulators regarding broadband gatekeeper power that we have seen in Comcast/TWC.

An industry insider to whom we spoke explained that in Comcast/TWC, the “biggest concern has been the combination of programming assets with distribution assets.” “That doesn’t really happen in a Charter/Time Warner Cable merger because there’s not a lot of owned content by either company,” he continued. “That kind of concern by both cable operators and any MVPD, or OVD, regarding accessing programming,” is not going to be present. “If TWC is the bigger operator with 10 million [video subscribers] and they grow to 14 M,” it’s “not anywhere near the problem of Comcast.”

The lack of major content holdings by Charter or TWC also reduces incentives to utilize broadband gatekeeper power to disadvantage OVD rivals. But since online video is a threat to the cable business model, these incentives are still significant. Merger conditions related to preserving OVD competition would thus be likely. And, although monopsony power over programming would be less of a concern, we would also expect merger conditions related to program carriage.

Regional clustering and Regional Sports Networks likely to be biggest competitive concern. A Charter/TWC deal would create “RSN-clusters” in the Los Angeles, Dallas/Ft. Worth, and Milwaukee regions. A TWC-Charter tie-up would lock-up nearly all of Southern California, where Charter is the number two system after TWC; Cox and Mediacom are a distant third and fourth. Charter is also number two after TWC in the Dallas and Milwaukee DMAs.

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“Clustering” is when an MVPD increases its penetration in a regional area by acquiring cable systems where it already maintains a significant presence. Although clustering does not result in an increase in concentration as measured by the traditional HHI concentration index (because the number of competitors from which consumers can choose remains unchanged after the transaction), one MVPD system dominating large metropolitan areas does have horizontal anticompetitive effects. Compared to a clustered region with only a single cable provider, a region with two or more adjacent providers is more likely to develop into a region with overlapping providers in some areas. Similarly, the presence of a single cable provider also makes a clustered region less attractive for new entry.

Clustering poses the most immediate concern to the antitrust agencies when an MVPD company controls a local RSN. Although Charter’s only current RSN asset is its minority stake in Comcast’s Cable Sports Southeast, Charter would achieve close to 100% penetration in three metropolitan areas where TWC controls premium RSNs. An MVPD’s incentive to raise licensing fees to rival MVPDs for RSNs increases with the size of the MVPD’s local subscriber footprint. By increasing the MVPD’s regional market share of a vertically integrated MVPD and RSN, the MVPD’s bargaining position is enhanced when it is negotiating RSN license fees to rival MVPDs. The cable company can recapture revenue lost by failing to reach a licensing agreement when the MVPD competitor’s subscribers switch to it in order to watch their favorite sports teams.

An example of this is the statement from a TWC representative issued recently, "We want all Dodger fans to have access to SportsNet LA. Despite our repeated attempts, other providers are unwilling to engage in any discussions. If Dodger fans want to enjoy SportsNet LA this season, we encourage them to switch to a provider that carries the network." The larger the local presence of the MVPD that owns the RSN, the more revenue they stand to gain if consumers switch. RSN subscription rates thus increase in DMAs where the cable operator is clustered compared to DMAs where the RSNs are independent or the cable operator shares the region with a competing cable operator. TWC’s long-term deals with the Lakers, Dodgers and other L.A. teams and its RSNs in Texas and Wisconsin would likely draw significant attention in a deal with Charter, since it is already number two in those regions.

Competitive effects regarding sports much less dramatic in the Charter deal than in Comcast/TWC. David Goodfriend, who represents several opponents to the Comcast/TWC merger, including Sports Fans Coalition, beIN SPORTS, WeatherNationTV, and DISH Network, told The Capitol Forum that a Charter/TWC merger “would be far less harmful than the proposed Comcast/TWC merger.” Goodfriend pointed to the lower post-merger broadband market share of Charter/TWC compared to Comcast/TWC, saying “Comcast's current restrictive behavior towards over-the-top distribution and online authentication, as detailed by beIN SPORTS in their ex parte filings, portends bad news for fans who want to access games online post-merger.”

Regarding RSNs, Goodfriend noted that “Charter does not have as bad a record as either Comcast or TWC on restricting fans' ability to see games televised through a vertically integrated RSN.” And while there would be concerns in some key markets, “we're just not talking about as many key markets under one company's control,” said Goodfriend. It is thus unlikely the agencies would block a Charter/TWC deal on RSN grounds. Rather we would expect merger conditions involving sports programming access and carriage and potentially subscriber or asset divestitures.

Charter’s Announced Acquisition of Bright House Networks

As the merger review of Comcast/TWC continues, Charter announced recently its acquisition of Bright House Networks for $10.4 billion. Conditions on the deal include the expiration of TWC’s right of first offer for Bright House and “the close of Charter’s previously-announced transactions with Comcast.” Charter is the number four

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cable system operator with 4.2 million video subscribers and 4.4 million internet subscribers. Bright House Networks is the number six cable system operator, with 2.1 million video subscribers and 1.9 million broadband subscribers in five states concentrated in Tampa and Orlando. Bright House was spun off from TWC in 2002 and received the right to buy programming under rates negotiated by TWC.

The Capitol Forum spoke to a cable industry source who shared his view that the Charter/Bright House deal is “actually helpful to Comcast” in its TWC merger. The source said he had expected the FCC to prevent Comcast from taking over the TWC/Bright House managed services agreement as a condition of any Comcast/TWC merger approval anyway because removing Bright House subscribers would push Comcast under the 30 million subscriber number it was hoping to avoid. In that sense, the Charter/Bright House deal “eliminates an issue,” he said. However, since DOJ’s primary focus of the Comcast/TWC investigation has been broadband gatekeeper power, it is unlikely that the Charter/Bright House deal will have a meaningful impact on DOJ’s decision of whether or not to challenge the Comcast/TWC merger.

One theory about the timing of Charter’s Bright House acquisition is that Charter wanted to stake a claim to Bright House before Comcast acquired TWC’s right of first offer for Bright House, if the Comcast/TWC deal were to close. But the industry source said, “I don’t think Comcast could have received regulatory approval to purchase Bright House anyway.” Comcast will have to “bend over backward,” to get approval to purchase TWC and understood it could not immediately “try to buy another 2 million subs.” Rather, “Comcast realized it was likely going to have to divorce itself from this asset,” and that “really concerned Bright House,” said the industry expert. Bright House’s business “was successful because it would get Time Warner Cable programming prices,” and “it was realizing it needed to find another partner,” he said.

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