FCC Information Requests to Charter/TWC/BHN Signal Tough Review, Experts Say

FCC staff takes the position that everything being asked about is a priority or else it wouldn't ask, but Sallet's remarks before the Telecommunications Policy Research Conference in Arlington, Virginia (see 1509250040), made clear competition with the online video distribution market is going to weigh heavily, as it did in the aborted Comcast/TWC deal, said a cable attorney with experience in major transactions. While programming is asked about considerably, it won't likely be the most pressing issue since Charter doesn't own programming, the lawyer said. Programming questions come up in 20 of the 35 pages of questions to Charter. The questions include what programming cost savings it expects from the $89.1 billion acquisitions and "whether, when, and how" those savings will result in lower subscription prices.

The company and industry data requests -- a normal part of the deal review process -- don't point to any "intrinsic problems" with the transactions, said Georgetown University adjunct faculty member Adonis Hoffman, who was chief of staff to Commissioner Mignon Clyburn during AT&T/DirecTV and Comcast/TWC. "Very few people, including the merging compan(ies) themselves, really know what is at the heart of the merger review other than a few folks on the eighth floor and those on the designated merger review team," Hoffman said. He also said Charter/TWC/BHN likely will be approved.

The FCC "core concern" in Comcast/TWC was whether it would have both the incentive and ability to safeguard its pay-TV operations by limiting competition among online video distributors (OVDs), Sallet said, according to prepared remarks. Even as that agency review was going on, OVD services were mushrooming in late 2014 and early 2015 -- especially services offering live linear programming like sports, threatening the revenue streams of traditional pay-TV, he said. Regulators' concerns about the possible cumulative effects of Comcast/TWC on the nascent OVD market, when presented to Comcast and TWC, caused the companies to abandon their deal, Sallet said. The FCC declined to comment about its possible priorities. In a statement, Comcast said the review process "is moving along and we continue to work with the FCC. We are already preparing our responses (to the data request) and look forward to further demonstrating the consumer benefits of these transactions.”

OVD-related questions come up in 14 of the 35 pages of questions to Charter. The questions include how Charter's business has responded to OVD competitors like Amazon Instant Video, HBO Now and Netflix; information about any Charter decisions to block or limit transmission of any OVD provider's services; any plans Charter might have for its own OVD service and data about any time it previously considered doing so; and any plans for integrating an OVD into Charter's set-top boxes.

Liberty Broadband, a major Charter shareholder, and its Chairman John Malone also seemingly are coming under scrutiny. In the request to Charter, the FCC asks Charter to document any precautions that will be in place to ensure Malone, Liberty and BHN parent Advance/Newhouse don't withhold programming from multichannel video programming distributors or OVDs in order to benefit New Charter. Other topics in the data request include Charter's plans to get into such offerings as mobile wireless broadband and IP set-top boxes.

The data dump, plus Sallet's address, send a clear message, New Street Research wrote investors Monday: "Don't assume approval; you have a lot of work to do; you have to prove your case for a public benefit for the mergers." The document request "clearly explores all potential avenues" of the same theory that was at the heart of the Comcast/TWC review, that cable consolidation could step on OVD growth, and questions whether such a transaction has any kind of public interest benefit, the analysts said. While Charter already agreed to allow OVDs access to its broadband network, which bodes well for its approval, proving the deal meets the public interest standard could be more challenging, New Street said.

A case can be made for blocking Charter/TWC/BHN, as well as Altice's plans for Cablevision, since they don't appear to increase cable competition, BTIG analyst Richard Greenfield wrote investors Monday in a note parsing Sallet's speech and recent comments from Justice Department Deputy Assistant Attorney General for Economic Analysis Nancy Rose (see 1507100049). "If you take Sallet's focus on adding to competition and the DOJ's bigger is badder commentary, blocking the transaction would appear to be in the public interest." But Greenfield said the FCC also could argue that the same public interest benefits Comcast espoused in its now-abandoned attempt to buy TWC -- such as faster Internet speeds, cost savings and business competition -- also exist with Charter/TWC/BHN "but that the harms this time do not outweigh the benefits given Charter's smaller size ... and its commitment to settlement-free peering and no usage based pricing/caps." Charter's voluntary commitments mitigate the potential harm to OVDs and protect an open Internet, particularly if the FCC requires a consent decree of seven to 10 years instead of the three proposed by Charter, Greenfield said.