Is the Comcast/Time Warner/Adelphia Deal In Trouble?

Back some months ago, I wrote about fighting further consoldiation in cable. In particular, I talked about fighting the proposed division of the Adelphia cable systems by Comcast and Time Warner and system swaps between Comcast and Time Warner which would give Comcast and Time Warner dominance in many regions of the country. As usual, back when the parties filed their applications with the FCC in May, the parties predicted a cake walk and the industry analysts agreed.

The smart money is still betting on no major conditions, with the possible exception of requiring Comcast and Time Warner to provide access to their regional sports programming. But a number of recent developments have raised questions. Between that and the political situation, I suggest that, like that remaining piece of Christmas cake at New Year’s, things have gotten a little stiffer and a little stickier than expected. Warning: a lot longer and not nearly as fun as my last cable post, but worth it get a picture of events you won’t get from trade journalists and industry analysts…..

So whats up on the Adelphia/Comcast/TW transaction? “Nothing,” according to the companies. “Everything is going just as expected, merger should close by July 2006, nothing to see here folks, move along.”

“Hold up. July 2006? Funny, until recently, the parties have been saying ‘first quarter 2006.’ Thats [counts] by March 2006. Given that the bankruptcy court will give a final approval (dependent on regulatory o.k.s) in February 2006, and the deal was filed in May 2005, isn’t this a significant delay?”

“No, no,” say the companies. “This is business as usual. Look, it took a long time for the two major telephone mergers and the Sprint-Nextel merger. The Commission is still split 2-2. Martin just hasn’t had a chance to focus on this one yet. Now it’s our turn and things will roll along smoothly.”

Well, the FCC has certainly focused on the Adelphia transaction. On December 5, the FCC sent the parties a request for more information. “Oh that,” wave the companies dismissively. “Heck, every merger has a request for further information. Nothing unusual here. We’ve been waiting for it for awhile. We’ll comply and get our merger.”

Well yes, information requests happen all the time in mergers. In fact, folks have been waiting for awhile now for this to come out. What’s unusual is not the request, but the scope of the request. And there is also the the fact that the FCC is not even pretending to stick to its 180 “shot clock” (which expired last week). “Nothing odd there,” say the companies. “Big mergers take time and the ‘shot clock’ is not binding. Given that Martin reassigned the prior team leader (Barbara Esbin) out of the cable bureau to enforcement, there were other pending big mergers in a 2-2 Commission, and Martin has been out for a bit with the birth of his son Luke, some delay is inevitable.”

Well, perhaps. But dig a little bit and you find some very interesting straws in the wind.

1) The Federal Trade Commission (FTC) does not appear terribly close to a decision either. Of course, the FTC is very hard to read since, unlike the FCC, it is designed to be a closed investigation rather than an open one. But they (like the FCC) are about to get two new commissioners who will need to get brought up to speed and will have their own decisions.

2) The parties have clearly known for some time they face a serious battle at the FCC. In addition to their usual consel, they have hired FCC experts Wiley, Rein and Fielding. Among other things, according to the FCC’s records, Wiley, Rein has been negotiating the content of the “run of the mill” request for information.

3) In the eight or so years I’ve been doing media and telecom work, I’ve never seen a request for infomration in a cable merger this detailed. As I lamented recently, cable has lead a charmed life at the FCC. With the exception of the AOL Time Warner merger, where Time Warner shot itself in the foot by kicking ABC off its system while the merger was pending and where the Federal Trade Commission imposed stiff conditions on its own, cable mergers generally don’t get a lot of scrutiny from the FCC.

The information request from the FCC tracks the major issues raised by the primary merger opponents: MAP, The America Channel, and the DBS companies. In particular, the FCC:

a) Asks for an explanation of the “afterdowningstreet.org” incident last summer. We asked in one of our Petitions to Deny why Comcast blocked any email referencing afterdowningst.org, an anti-Iraq War website for a week last summer. Comcast declined to address this in their Opposition. The FCC would like an explanation.

b) The FCC also asks about any decisions to prefer internet content of one type or origin over another generaly. That goes to the heart of the “network neutrality” debate. Given that Martin has been skeptical about the need for network neutrality in the past, why ask now? (In the most recent telco mergers, Martin and Republican Commissioner Abernathy stated they had agreed to conditions to assuage the fears of Democrats, and the Democratic Commissioners, Copps and Adelstien, stated they voted for approval because this was the best set of conditions they could reasonably hope to get.) This marks the first evidence of real concern by the FCC about network neutrality since the Republicans took over.

c) The FCC asks the companies to provide information on subscribers at the most granular level possible (e.g., by individual system, by nature of service subscribed to by each subscriber, and profit per subscriber). It asks for worksheets showing how these results were obtained. It requires certification that the numbers are accurate, subject to penalty of perjury. This goes directly to a complaint we at MAP have made for years, that the cable companies use numerous loopholes in the FCC’s rules to produce the most favorable set of numbers possible. If this is “business as usual,” why ask the companies to recaluclate subscriber information submitted under the regular rules when they made the applications?

d) The FCC asks detailed questions about programming decisions and acquisition of local sports networks and broadcasting rights, as well as any undisclosed affiliation agreements with various other networks. This exactly tracks accusations by the DBS providers (DirecTV and Echostar) as well as The America Channel and the Mid-Atlantic Sports Network that Comcast is using its regional and national market power to exclude independent programmers and exclude rivals from “must have” programming.

e) Finally, the FCC wants a direct response to the accusations of The America Channel about carraige preferences for affiliated networks.

And the FCC requires the applicants to support all of their answers with copies of contracts, explanations of corporate governance structures, worksheets, and any other documentation available. In other words, the FCC is not going to trust assertions by the Applicants as it has in the past. It will require Applicants to show their work and prove their case (as the statute requires, but as the FCC generally does not).

Granted I’m partisan, but this doesn’t look like the hum drum run of the mill informaton request Comcast and Time Warner say it is. To add to Comcast and Time Warner’s woes, the Florida Attorney General has now issued a set of civil investigation demands to the merging companies to determine if the impacts on Florida will raise cable rates and eliminate competition. Again, the companies say there is no cause for concern, they will cooperate immediately, and the deal will close without major conditions and on schedule. But this obscures the facts that state Attorneys General almost never get involved in reviewing major cable deals. Review takes place generally on the federal level and on the local franchising level. For a state AG to act shows something beyond run of the mill concern that the merger will have anticompetitive impacts.

So, is the merger in trouble? No, say most analysts. I’ll agree that nothing here mandates a result one way or the other. The FCC has only asked for information, after all. It could very well conclude in the end it agrees with Time Warner and Comcast that, taking everything together, the merger produces more benefits than harms and thus serves the public interest.

At the same time, however, no one (with the possible of exception of yr hmbl obdnt and America Channel CEO Doron Gorshien) thought the FCC would ever give the merger this much trouble in the first place. Why would Martin, an avowed deregulator, give Comcast and Time Warner such a hard time? If nothing else, generating all this information is expesive and inconvenient for the two companies, and potentially builds a devestating record against allowing the merger — a record the FCC will inevitably share with the Federal Trade Commission. If the data produced show the anticompetitive effects that I and merger opponents think are there, and if restating subscriber counts reveals a large number of previously “invisible” subscribers attributable to Comcast, the FCC will have a very hard time granting the merger without conditions even if Martin wants to do so.

I can think of two possible explanations. I will call these the “cynical” explanation and the “optomistic” explanation.

The cynical view, as explained in this CNN Online article, is that Martin only cares about getting a “family friendly tier” on cable. If Comcast (the largest cable operator) and Time Warner (the second largest) go along, that takes care of about 50% of the total cable market (after the Adelphia transaction). It also puts pressure on the other cable operators to make the same offer. The cynics will note that one day after the FCC sent Comcast and TW the information request, USA Today reported that Comcast and Time Warner were looking at doing a family tier. Indeed, this LA Times Article (the daily in TW’s home town)(free sub required) goes so far as to claim that Martin has made an explicit quid pro quo threat of “do family tier or you don’t get your merger through.” (There is a similar comprehensive write up in Comcast’s home paper, the Philadelphia Inquirer, here.) (free sub required) In this theory, the information request shows the companies Martin means business.

This dovetails with Martin’s appearance at the Senate indecency “forum” the week before. Martin suggested that Congress could address indecent programming and help push down cable rates by requiring cable companies to offer programming “a la carte.” Under a la carte, cable companies have to let viewers chose what programming networks they want, not make them pay for bundles of programming as they do now. Just a few days later, Martin suggested in an article in Multichannel News (a trade magazine) that, under certain conditions, the FCC might have statutory authority to impose a la carte without Congressional action.

Add these things together, goes the cynical view, and we see a classic application of the Karl Rove/Dick Chenney school of politics. If someone doesn’t do what you want, you show them how hard you can hurt them and get them to say “uncle” as soon as possible — as a lesson to them and to anyone else who might hold out on you. Let Brian Roberts (head of Comcast) and Dick Parsons (CEO of TW) make pilgrimage to Martin, do proper homage, and promise family tier, and all will be well for them.

I’m suspicious of the cynical view. For one thing, I find it realy, really hard to believe that Martin ever was so heavy handed and stupid as to make a direct threat like those described in the LA Times and the Philadelphia Inquirer. I also find it oddly suspicious that stories of Martin’s supposed heavy handedness got planted in the home town papers of Time Warner (LA) and Comcast (Philly) when the Wall St. Journal got nothing of the sort. Such stories smell to me of a deliberate counter-campaign by Time Warner and Comcast. By offering (off the record and via anonymous sources) the cynical explanation, it avoids speculation about possible merger problems and tries to put pressure on Martin to back off lest he be perceived as “unfairly” using the merger to gain leverage for censorship. By such slight of hand, Martin the possible consumer protector is transformed in the public eye to Martin the socially conservative prig. The Democrats and progressives that should support tough conditions on cable cos retreat because this is “really” about indecency.

If that seems too conspiracy-theory for you, consider this. Even if Martin made such a promise/threat, the cable companies run a very serious risk that they could end up with conditions even if they do Family Tier. By the time the FCC votes on the merger, it will have two new Republican Commissioners. Nothing guarantees two Republicans will rubber stamp a deal Martin made before they came to the Commission. The Democrats will certainly want conditions, based on their concern for network neutrality and program diversity in the past (both held out for network neutrality in the telco mergers and both have long voiced concern about diversity of programming and media consolidation). Without knowing the two new Republicans will support him, Martin may not be able to deliver on his “promise” to push the merger through absent conditions other than Family Tier.

So what else is there?
The optomistic view. Martin prefers deregulation and starts with a presumption that conditions are not necessary. But Martin also recognizes when regulation is necessary to promote competition. Three years ago, then FCC Chairman Michael Powell and then Commissioner Kevin Martin had a knock-down drag out fight about deregulating the phone industry. Martin insisted the phone industry needed heavier regulation to keep voice telephony competitive. Powell wanted complete deregulation. This produced the rare spectacle of the FCC Chairman calling an item to a vote and losing. Martin, in what appears to have been foreshadowing to his tenure as Chairman, sided with the Democrats for phone regulation and then voted with the Republicans to deregulate the broadband/fiber market.

Martin has made it clear he wants to see phone companies enter into video programming to compete with cable, the same way the Democrats in the 1990s wanted cable to offer telephone service. Although the telephone companies have not shown up in the Adelphia Transaction as a matter of policy (phone giants never oppose someone else’s merger, and expect similar courtesy from the cable folks), they filed extensive comments in the recent inquiry on video competition and raised many of the access to programming points raised by the satellite providers. Phone companies have also come out in favor of a la carte. Add that to the concerns by companies like Google and Microsoft about maintaining an open internet and “network neutrality,” and the concern about programming and network neutrality begins to look a lot more credible even from a deregulatory Republican.

Finally, Martin has always acted as a “straight shooter.” Throughout his time as Commissioner, he insisted that the FCC should do its job and avoid playing games to reach the desired result. If Martin disagrees about the proper goals of the FCC or the scope of action it should take, he will tell you so to your face. I think Martin has some genuine concerns, as reflected in the request for information and the remarks about the a la carte report, that the cable companies have enjoyed special privileges at the FCC. This information request will help settle whether we are right when we say the cable companies game the system, or if the cable companies are right when they say they haven’t.

So, Harold, what conditions do you think are likely?
Even in the optomistic view, nothing requires the FCC to actually impose conditions. But I think we may well see a “net neutrality” condition similar to that imposed by the FCC in the Verizon-MCI merger and the SBC-AT&T Merger. I also expect to see something that addresses access to programming, particularly regional sports programming. The FCC imposed such a condition on News Corp. when it acquired DirecTV, and the phone companies (as well as the DBS companies) need some serious relief there to compete. Finally, I think the FCC will do something to address the complants of independent programmers that Comcast and Time Warner actively shut them out of their clusters. This could be anything from an expedited complaint process with real teeth, to a “leased access” provision requiring the applicants to open their lines to independent programmers willing to pay a flat fee per subscriber.

This brings us to the interesting question- what are the “deal breakers” for Time Warner and Comcast? So far, neither company has indicated it will give an inch. How much of Comcast’s or Time Warner’s strategy is tied up in exclusive access to programming, or in the ability to favor one form of internet content or service (such as their own VOIP over a competitor like Vonage) over another? It amy be that access to sports pogramming is too high a price for one of the companies to pay.

Another question is timing. Even if the cynical view of Martin is correct, Martin may have trouble getting a merger through without conditions. Unless the White House nominates a second Republican in the next day or two, Martin will open Janaury with a 2-2 Commission again. While some names have floated in the rpress, nothing seems definite enough to forestall a 2-2 Commission for at least January.

The Democrats have shown in the last several major mergers that they will stand up for real conditions. Twice, Martin has gone to the bargaining table and agreed to compromises to get megrers through. How long will Time Warner and Comcast wait to get their mergers approved by a Republican majority (and there is no guarantee a Republican majority would simply rubber stamp a deal between Martin and the cable cos for Family Tier programming)?

Usually a merger invovles two companies working to the same goal. This merger invovles three companies with potentially very different (even conflicting) goals and modes of operation. Adelphia is bankrupt. It must maximize both value to creditors and speed of closing. If the transction gets held up too long, the creditors and bankruptcy trustees may push the parties to accept conditions or back out of the bankruptcy reorganization.

At the same time, Time Warner is a publicly traded company subject to shareholder pressure. Corporate Raider Carl Icahn is already pressuring Time Warner CEO Dick Parsons on a number of issues, most especially about maximizing value by selling AOL, which Parsons declines to do. If the Adelphia deal continues to remain unresolved, or looks like it may require significant conditions, Parsons may feel pressure either to walk away or to accept conditions that Comcast does not want to accept.

Comcast, on the other hand, while a publicly traded company, does not have to worry about shareholder pressure. Comcast’s governance papers put the voting power in the hands of a few “Class B” shares of common stock primarily held by Brian Roberts (the CEO) and his family. So Comcast can afford to hang tough where Time Warner may not. At the same time, it does not have nearly the same investment in programming networks that Time Warner does. Conditions that Time Warner objects to with regard to program access may not present the same problem for Comcast.

So far, the companies appear to have avoided thinking about this all together. With the exception of the nod to family tier programming, the companies continue to maintain that everything is going well. But if there is more going on here than the cynical view suggests, the comapnies may find themselves unexpectedly pushed to make hard decisions about conditions quickly. That, in turn, could get very, very ugly.

Stay tuned . . . .

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