Comcast-Time Warner merger: Dramatic impact on California

A national merger between communications giants Comcast Corp. and Time Warner Cable could lead to an unprecedented consolidation of California cable and broadband markets.

The pending $45 billion merger would grant Comcast — already the state’s No. 1 cable provider — a greater share of the California market, stretching from northern California and the San Francisco Bay area and Sacramento region, down the Central Valley through the Los Angeles basin, east to the Nevada and Arizona lines and southeast to the Mexico border.

Under the deal, which requires approval of the Federal Communications Commission (FCC), the biggest prize in California is Los Angeles, the nation’s second-largest media market, which is currently served by Time Warner. Of the state’s other major cities, only one — San Diego — would not be served by Comcast under the new arrangement.

It will give them “enormous power and unprecedented dominance in the market place,” said Delara Derakhshani of Consumers Union in Washington. D.C.

Comcast, Time Warner and Charter have maintained that the deal serves the public interest.

“Together, Comcast and Time Warner Cable will make life online better for more people by bringing faster Internet speeds, a more reliable and more secure network, net neutrality protection, low-cost Internet access, and programming diversity to millions of new customers across the country and in California,” Comcast spokesman Bryan Byrd wrote in an email.

But consumer and utility ratepayer advocates are unconvinced.

It will give them “enormous power and unprecedented dominance in the market place,” said Delara Derakhshani of Consumers Union in Washington. D.C. “Nationally, it (Comcast) already is the No. 1 cable and broadband provider. We think the results of this will be higher prices…”

Comcast first proposed the acquisition of Time Warner in February, with a bid that, in its current state, would leave the company with 30 million subscribers nationwide and control over 40 percent of U.S. homes with broadband Internet. The company currently has more than 21.7 million television subscribers nationally, according to the company’s 2013 filing with the Securities and Exchange Commission.

The CPUC, the powerful panel that regulates telecommunications, is considering weighing in on aspects of the merger that will affect the state.

The deal also includes a complex transaction with a third major cable company, Charter Communications, that would result in Charter’s exodus from California in exchange for control over traditional Comcast and Time Warner markets in the Midwest and Southeast.

The consequences of those deals would be concentrated and magnified in the California market. Comcast would gain more than 1.5 million customers in the state, nearly doubling its statewide subscriber base and consolidating a share of the California cable market of about 72 percent, according to figures from the companies and the California Cable and Telecommunications Association.

Privately, some industry observers say the market share could be higher, reaching 80 percent or more, because of variations in the way the numbers of subscribers are calculated.

Comcast currently retains around 2.2 million California customers, or about 40 percent of the state cable market.

“We’re concerned that the market for broadband Internet access is getting more and more concentrated and we have fewer players,” said Chris Ungson, a communications policy manager at the Office of Ratepayer Advocates (ORA), which advocates for consumer interests at the California Public Utilities Commission (CPUC). “With the proposed merger, you’re going down to basically just Verizon, Comcast and AT&T (in California)… That kind of concentration should be a concern to consumers as well as regulators.”

The CPUC, the powerful panel that regulates telecommunications, is considering weighing in on aspects of the merger that will affect the state.

“This is of the highest priority to California consumers,” said Sunne Wright McPeak, president and CEO of the non-profit California Emerging Technology Fund, which is funded by money from industry titans AT&T and Verizon and the federal government. “The CPUC and Legislators would do a great service to Californians to hold public hearings (on the issue).”

The role of the CPUC is unclear
The precise role state regulators will play in the proposed merger remains unclear, according to California and national communications experts.

While the FCC and U.S. Department of Justice bear responsibility for investigating nationwide impacts of the merger and interpreting related anti-trust law at the federal level, state utilities commissions like the CPUC also play a role by controlling the transfer of licenses and assets owned by Comcast and Time Warner, said Brad Ramsay, the top lawyer for the National Association of Regulatory Utility Commissioners.

If the CPUC chooses to follow the lead of court precedent and New York State’s Public Service Commission,  it could launch a “full-blown” regulatory inquiry that would likely last up to 12 months.

Though the CPUC can’t halt the merger from occurring nationwide, the Commission does reserve the right to final approval — or denial — of the transfer of Comcast’s California acquisitions. Ramsay indicated that if the CPUC denied Comcast’s bid for the transfer of Time Warner’s state licenses and assets — and if California represented a large enough roadblock to the merger as a whole in terms of total assets and customers — then the state might pose an obstacle to Comcast’s broader ambitions.

“The states have a role in the approval process, and it’s not a small role,” Ramsay said.

With control over nearly 4 million customers at stake in California — more than 13 percent of the merged companies’ anticipated nationwide subscriber base — the CPUC exerts authority over a significant portion of the transaction, representing a potential barrier to the merger should the Commission rule against Comcast.

But that’s unlikely to happen without some legal legwork by the Commission, according to past CPUC commissioner, former Comcast government affairs vice president and current CETF Board of Experts Chair Rachelle Chong.

The CPUC’s regulatory authority over cable companies like Comcast and Time Warner is limited to their actions as telephone service providers, Chong and others said. But a January decision from the Washington, D.C. Circuit Court of Appeals in the case Verizon v. FCC ruled that reasonable interpretation of federal law allows the FCC and state commissions to extend their regulatory authority to broadband providers when they display anti-competitive behavior, according to Chong.

“From Santa Rosa to San Jose, with some exceptions, will all be Comcast. All systems in L.A. will become Comcast, Sacramento already is Comcast and Charter Communications will roll over to Comcast, so you begin to see the scope of this in California. It’s a pretty big deal” — Sue Buske

“Typically, the CPUC doesn’t get involved in the broadband aspects of (a merger),” Chong said, adding that telecommunications mergers have been mostly noncontroversial at the CPUC level in the past. “But because of the Verizon (decision) which came down from the D.C. circuit, state commissions and the FCC might be able to find authority…if there’s anti-competitive behavior.”

If the CPUC chooses to follow the lead of court precedent and New York State’s Public Service Commission, which will conduct a “thorough and detailed investigation” of the merger’s merit, it could launch a “full-blown” regulatory inquiry that would likely last up to 12 months, according to Chong.

“It’s an open question what could happen,” Chong added.

Others think such a review is advisable in California.

“From Santa Rosa to San Jose, with some exceptions, will all be Comcast. All systems in L.A. will become Comcast, Sacramento already is Comcast and Charter Communications will roll over to Comcast, so you begin to see the scope of this in California. It’s a pretty big deal,” said Sue Buske, a consultant who advises local governments on telecommunications issues.

Lingering questions about the public interest
The CPUC must find that the transfer of Time Warner’s California licenses to Comcast is “in the public interest” in order to approve them, according to state law. But the Commission’s inquiry might not consider impacts on the broadband market at all — the major point of contention for state utilities advocates petitioning the CPUC — unless it opts for a particular interpretation of federal law, reading of court precedent and collaborative strategy with the FCC.

The word “broadband” appears in the companies’ CPUC filings only three times, signaling that Comcast and Time Warner expect telephone services — as in the past — will be the focus of state scrutiny in their case.

Byrd, the Comcast spokesman, said the merger will help Comcast invest billions in new Internet and television technologies, provide more Internet access to low-income families and diversify its cable program offerings.

Groups like The Utility Reform Network (TURN), the Greenlining Institute and the ORA, meanwhile, say that simply doesn’t make sense.

“It’s incumbent on (the companies) to make the case that it will lead to more innovation and access in California,” Ungson said. “But this (deal) won’t expand competition – it concentrates it. If you want competition, you don’t lessen the number of competitors, you actually expand it.”

But Comcast and Time Warner’s joint filings with the CPUC dispute the notion that their combined company’s sizeable market share will decrease statewide telecommunications competition. Instead, the companies say that a consolidated Comcast-Time Warner corporation will be able to offer a broader array of higher-quality telephone services in the state, and more consistently compete with small local providers.

Byrd, the Comcast spokesman, said the merger will help Comcast invest billions in new Internet and television technologies, provide more Internet access to low-income families and diversify its cable program offerings.

In addition, the companies note that current geographic boundaries prevent Comcast and Time Warner from directly competing in the state — a reality which makes proof of anti-competitive behavior hard to come by for the FCC, DOJ, state commissions and interest groups, according to Ramsay.

Despite the controversy, CPUC spokesman Andrew Kotch said only, “The CPUC is not reviewing the merger of the parent companies. That is being done at the federal level. Issues such as market concentration and rate changes will be addressed there.”

But the CPUC hasn’t exactly ignored past mergers.

Then, in May, the FCC voted to open debate for new net neutrality rules that might allow so-called Internet “fast lanes” for parties willing to pay a premium to providers, although the exact implications of the FCC’s actions remain unclear.

In 2005, for example, the CPUC required AT&T and Verizon to contribute a combined $60 million over five years for the creation of the CETF, which promotes Internet access for low-income families, as a condition of approving of their respective mergers with SBC and MCI Communications.

A pre-hearing conference of the CPUC to determine the nature of its initial inquiry met on July 2, according to Paul Goodman, a lawyer at the Greenlining Institute, which has also protested the merger in filings with the CPUC. Goodman suggested the Commission may take a closer look at the merger than Comcast and Time Warner anticipated.

But Goodman was also careful to note that the Commission could find any broadband impacts of the merger to be beneficial for the state. If merger really is in the public interest, Goodman said, it might profit Comcast and Time Warner to expand their discussions with the Commission to include broadband.

Concerns for the fate of net neutrality
Comcast, however, is more than just a cable television, broadband Internet and telephone service provider — it also owns a range of online content creators through its subsidiary NBC Universal. The company’s noticeable straddling of the market, and controversial recent reputation, has some questioning whether it will uphold “net neutrality,” the doctrine that all content on the Internet should be subject to equal fees for equal quality of web services.

In February, Internet film distributor Netflix agreed to pay Comcast additional toll fees for assurance that its bandwidth-heavy videos will stream smoothly to customers — but only after accusing Comcast of intentionally slowing its broadband speeds during contract negotiations. Comcast dismissed the allegations as “based on inaccurate claims and arguments.”

Then, in May, the FCC voted to open debate for new net neutrality rules that might allow so-called Internet “fast lanes” for parties willing to pay a premium to providers, although the exact implications of the FCC’s actions remain unclear.

“The merger raises some pretty profound issues,” said Regina Costa, telecommunications director at TURN. “Because the way the public receives information, including making telephone calls and using the Internet…the companies that control information are also companies that control a lot of content.”

Ungson concurred.

“Comcast and Time Warner own content,” Ungson said. “When you mix content and distribution of content, it (allows) providers to discriminate against distribution of content. There are currently no rules to keep that in place.”

In an email, however, Comcast spokesman Byrd defended the company’s record and commitment to net neutrality.

“Comcast is the only Internet service provider in America bound by full Net Neutrality rules, ensuring an open Internet and protecting customers,” Byrd said, pointing to Comcast’s net neutrality agreement with the FCC that is set to expire in 2018. “Comcast’s transaction with Time Warner Cable will bring Net Neutrality protection to millions of new customers across the country.”
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Ed’s Note: Connor Grubaugh, a student at UC Berkeley, is a Capitol Weekly intern from the Public Affairs Journalism program at the University of California’s Sacramento Center.