Time Warner-Charter Merger: How Big is Big?


As Charter continues its efforts to win approval for its takeover of Time Warner Cable and Bright House Networks, there has been some confusion as to just how big the New Charter will be.

While cable conjures up visions of television service for most, what the FCC is really paying attention to when mulling the merger is the effect of consolidation on the broadband and over-the-top (OTT) video markets. Comcast's attempt to buy TWC last year after all was shot down by the FCC over fears that Comcast would use its sheer scale to harm online video services.

And if this new merger is approved, there’s no doubt that New Charter and Comcast will control the majority of the broadband market—and the video market—but what will that actually look like is a matter of some debate.

This much can be agreed upon: If the pending merger is approved, it will combine the fourth, seventh and tenth largest MVPDs in the country. Using FCC data, some of which is more than a year old, the picture that emerges is this: If Charter buys TWC and Bright House, Comcast would remain the country's largest ISP with 22.87 million Internet subscribers. The New Charter will edge into second place with at least 20.56 million (AT&T will be a distant third with 15.83 million).

However, not all ISP connections are the same, and DSL is a far cry from the 1Gbps being tested in some markets. Combined, Comcast and Charter would account for less than half of home Internet connections—but, they would together dominate at least 70 percent of the high-speed connections that are out there.

“High-speed” is now considered to require download speeds of at least 25Mbps, according to the FCC’s recently revised definition of broadband. That gives Comcast a 56 percent market share today.

Beyond the FCC Data: Other Estimates

There are plenty of interested parties struggling to eyeball just how big the big new company would be.

According to SNL Kagan, The merger will mean that the top four MVPDs will control 79 percent of the nationwide pay-TV market, measured in terms of subscribers, and the top three alone, "will control two-thirds of the video delivery universe.”

IBISWorld estimates that the top five players — Comcast, TWC, Cox, Charter and Cablevision — generate about 84.1 percent of industry revenue, and said that Charter and TWC would constitute a combined 29 percent of market share if the deal were to go through. And while the deal will better position Charter to compete with its larger rival, Comcast, McKitterick said that the new company would be unlikely to unseat Comcast as the industry's dominant player.

"What is unclear is whether the merger will lead to better services or faster streaming for customers, or whether it will stem the exodus away from cable providers towards pure stream services," he said in an emailed comment.

Charter has said that it would use its new-found scale to build out faster broadband for subscribers; launch an improved cable TV interface; and wider availability of public Wi-Fi. It also stressed that it would invest in innovation that would benefit consumers.

Unsurprisingly, opponents vehemently deny Charter’s claims. Opponents argue that the Charter deal would stifle competition from innovative streaming services, decrease opportunities for independent, diverse programmers, reduce competition across a range of related technologies, and increase costs for consumers, all while bringing even worse customer service.

"Once again we are faced with a proposed cable merger that threatens the emergence of robust competition for streaming services," said Gene Kimmelman, president and CEO of Public Knowledge. "This merger, as proposed, would create a cable giant that, alongside Comcast, would control the overwhelming majority of high-speed broadband homes in this country, most of which have very few competitive options. This proposed transaction would create strong incentives for Charter and Comcast to coordinate their treatment of video programmers and broadband video distribution in ways that could damage competition and harm consumers."

Recently the Stop Mega Cable Coalition launched. The group has done its own math, and said that the merged New Charter would control more than a third of the markets for cable pay-TV (35 percent) and cable broadband (36 percent), with a dominant position in the country's largest and most important geographic markets like New York City, Los Angeles, Dallas-Ft. Worth, Charlotte, Raleigh-Durham, among others.

Two-thirds of subscribers would have no other option for high-speed broadband, it said, and argued that New Charter would, along with Comcast, create a dangerous duopoly controlling an estimated 90 percent of the nation's broadband connections.

“That puts these giants in position to control the fate of new and emerging over-the-top (OTT) services that rely on a robust high-speed broadband connection,” said the group, whose members include Cincinnati Bell, Common Cause, Consumers Union, DISH, FairPoint, Communications, Future of Music Coalition, Greenlining Institute, ITTA, Media Alliance, Open Technology Institute at New America, NTCA-The Rural Broadband Association, Public Knowledge Sports Fans Coalition, USTelecom – The Broadband Association, Writers Guild of America, East Writers Guild of America, West, and  Zoom Telephonics.

It further argued that New Charter and Comcast could coordinate their actions by simply responding to the others' behavior. This could take the form of parallel action or even express agreements, which would limit consumer access to stand-alone broadband service, or raise the price to compel consumers to only subscribe to their bundles.

"It feels like Groundhog Day with yet another mega cable merger threatening to consolidate too much of this country's high-speed broadband connections, all to the detriment of competition and consumer choice," said Jeffrey Blum, SVP and deputy general counsel of DISH. "This merger severely threatens the innovative online streaming services that rely on a robust broadband connection. 'Mega Cable' simply does not serve the public interest, and Charter has failed to prove otherwise."

FCC: Still Weighing New Info

The FCC is far from approving the deal. It recently stopped the review clock for the proposed merger, so that it could weigh the influence that Charter investor Liberty Media would have in the new entity. The regulator has received responses from the company regarding its relationship to New Charter, and the ramifications of the merger on competing OTT video providers. It had asked Liberty to discuss its relationship to Starz and Discovery, and its "incentive or ability" to withhold programming from New Charter and influence decisions there.

Charter CEO Tom Rutledge has pointed out that Liberty chief John Malone's 27 percent stake in Charter would be diluted to 18 percent by the merger.

The FCC also has asked networking firm Level Three for details on its most recent interconnection agreements with Bright House and with others.

"Pausing the clock will ensure that commenters have sufficient time to review and comment on this new information," the FCC said.

The National Association of Broadcasters (NAB) also recently asked the FCC to hold up its review. In a petition filed with the FCC, the NAB argued that if the regulator fails to reform broadcast ownership rules, some of which are over 70 years old, to better reflect current competitive realities, then the FCC should deny the proposed merger.

"The FCC has repeatedly failed its congressional mandate to review and update broadcast ownership rules while, on the other hand, approving massive consolidation amongst pay-TV providers," said NAB president and CEO Gordon Smith. "The commission should fulfil its statutory obligation so it can better factor in the effect another combination of behemoth cable companies will have on local broadcast stations and the millions of viewers who rely on our service."

An Era of Consolidation

With or without New Charter, global telecommunications, media and technology deals reached an all-time high in 2015 according to research firm Mergermarket, with 3,021 transactions valued at $768.3 billion, a 46 percent increase over 2014.

TMT M&A increased its presence in global deal-making, accounting for an 18 percent market share of total activity, up from 16 percent in 2014, and the second highest on Mergermarket record (since 2001) following 2013 (23 percent).

The US was the most targeted country for Technology M&A activity, attracting $249.4 billion worth of deals, an increase of 92.1 percent compared with 2014 ($ 129.8 billion). M&A activity targeting the technology sub-sector (2,225 deals, US$ 421.6bn), drove overall TMT value during 2015, increasing 88 percent compared with 2014 to reach both its highest deal value and count on Mergermarket record.

The media sub-sector saw 600 deals for a total of $87.4 billion, reaching its highest annual value since 2007; the $78.7 billion Charter-TWC merger ranked as the largest US deal in the overall TMT market. Telecoms (196 deals, $ 259.3 billion) achieved its highest annual value on record, a 5.8 percent increase by value compared to 2014 ($ 223.9 billion, 194 deals), and 2.1 percent above 2013’s previous record ($254 billion, 239 deals). Similarly, media (600 deals, US$ 87.4 billion) reached its highest annual value since 2007, highlighting a spread of interest in deals throughout the TMT sector.

Mergermarket believes the momentum will continue this year. “The golden age of TMT M&A looks set to continue into 2016, driven in particular by US activity as companies seek to expand their presence in new markets,” the company said in its report. “The sector will continue to draw attention from a diverse range of investors seeking to innovate in the face of transforming consumer demands.”

"This merger demands the highest degree of scrutiny," added Kevin Rupy, vice president of USTelecom. "The stakes of this merger are too high – for both consumers and the future of the broadband marketplace. Regulators and elected officials must ensure that the threatened harms to consumer choice, competition and innovation are fully addressed."

Edited by Kyle Piscioniere
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Contributing Writer

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