Tying
up the cable business
Lobbying over Comcast’s bid to create a
cable-TV behemoth is coming to a head
EMPLOYEES joining Comcast, America’s largest pay-television and
internet provider, are given a copy of “An Incredible Dream”, a history of the
company commissioned by the firm. On the cover is Ralph Roberts, its founder,
standing with arms outstretched, like the Christ statue on Rio de Janeiro’s
mountaintop. Comcast’s dramatic rise since 1963, when Mr Roberts bought a small
cable system in Mississippi, is an inspirational American business story, and
represents how tiny companies can become monumental ones. Today Comcast is run
by Mr Roberts’ son, Brian, employs 140,000 people and has a market
capitalisation of around $140 billion.
But when does “big” become “too big”? Regulators in Washington,
DC, will have to decide. In February Comcast announced a $45 billion bid for
Time Warner Cable (TWC), America’s second-largest cable company. Comcast has
agreed to divest around a quarter of TWC subscribers voluntarily, leaving it
with around 30% of the national pay-TV market and 40% of high-speed broadband
should the deal go through, according to Moffett Nathanson, a research firm.
Regulators at America’s Department of Justice and Federal Communications
Commission (FCC) are reviewing the merger on antitrust grounds, with the FCC
also assessing its impact on the public interest. They are expected to make a
decision by early next year.
The deal would give more might to a firm that, besides the
largest pay-TV and internet business in America has, thanks to its 2011
takeover of NBCUniversal, broadcast networks, cable channels, a film studio and
other media assets. Most crucially, it would cede to Comcast more control over
America’s high-speed internet, a buoyant business that is set to be the future
conduit of content delivery, but one in which Comcast already faces less competition
than in pay-TV. Comcast says it will invest more in broadband infrastructure
and provide more low-cost internet access to the poor, but it is far from clear
that the public will benefit from Kabletown (as Comcast was called in “30
Rock”, an NBC comedy about life inside NBC) turning into Kablecountry.
The way this giant deal is progressing reveals a lot about
corporate America. On October 8th and 9th shareholders of both Comcast and TWC
are expected to vote to approve the merger without hesitation. In doing so, TWC
investors will be breezily signing off on an $80m golden parachute for Robert
Marcus, who has been the firm’s boss for less than a year. The chief financial
officer, chief technology officer and chief operating officer will receive a
combined $55m for helping sell their company. If these numbers appeared in a
fictional television drama, they might seem somewhat implausible.
To get its deal signed off by regulators Comcast has taken
lobbying to new heights. Last year it spent around $19m on this, reckons the
Centre for Responsive Politics, more than both Boeing and Lockheed Martin, two
giant defence contractors. The firm has always made sure that the cord linking
its Philadelphia headquarters to the government in Washington is taut. Brian Roberts
has played golf with Barack Obama; David Cohen, Comcast’s chief lobbyist, has
repeatedly had the president round for supper at his home. This week Mr Obama
asked Joe Clancy to return from a stint as Comcast’s head of security to become
acting head of the Secret Service.
Supporting America’s power-brokers can pay off. For example,
Rahm Emanuel, the mayor of Chicago, publicly expressed his support for the
merger, without mentioning the campaign contributions he received from Mr Cohen
and other Comcast executives. Comcast’s roots are in cable, a business that
depends on local-government relationships, and it knows how to win hearts.
Since 1999 it has given away $145m to organisations in the areas it serves, a
generous act but also a strategic one. It helps explain why organisations that
would appear to have no stake in a national cable deal, such as the Virginia
Holocaust Museum, have supported the bid.
There are grounds to worry that proper scrutiny of the proposed
deal will be impaired because of “regulatory capture”, especially since Comcast
has hired former regulators to advise it and lobby for it. For example,
Meredith Attwell Baker, when an FCC commissioner, voted to approve Comcast’s
bid for NBCUniversal in 2011. Four months later she left to join Comcast (she
has since gone on to work for the wireless-telecoms lobby). “It is such a
revolving door at the FCC and Congress that you can’t keep track of whether
people are cable lobbyists or working in government,” says Marvin Ammori, a
lawyer who represents technology firms. “People might expect that of defence
and pharma, but not of their broadband providers.”
Likewise there are reasons to fear a sort of “journalistic
capture”. Comcast owns two prominent cable-news channels, MSNBC and CNBC, and
two broadcast networks with extensive news programming, NBC and Telemundo.
Their newsrooms, which might otherwise have reported critically on such a big
deal, have been largely silent. One CNBC reporter says he cannot dig into the
story as he normally would, for fear of losing his job.
Reporters who want to investigate the deal struggle to find
anyone who will comment publicly anyway. Since Comcast is already so large, few
television stations want to speak out, because Comcast pays them lots of money
to carry their channels. “It doesn’t make good business sense to argue against
your biggest client,” explains one executive. In order to hear opponents’
honest opinions, the FCC has taken the unusual step of letting them give
testimony in private—something it rarely does in a merger review.
Recently Comcast lashed out at some of its opponents, including
Netflix, an online-video company, and Discovery, which owns television
channels, accusing them of “extortion”. According to Comcast some firms have
come forward seeking gifts in return for supporting the deal, which would have
cost Comcast around $5 billion. This unsavoury favour-trading sometimes happens
during a big merger process, as Comcast knows, given its battle to get the
NBCUniversal deal through.
Some say that Comcast’s decision to criticise its competitors
shows that Mr Cohen may be worried that the deal, which at first looked set to
sail through, is running into trouble. Opponents have been heartened by recent
negative noises from Tom Wheeler (pictured), now the FCC’s boss but formerly a
leading lobbyist. For instance, in a recent speech he noted that already around
three-quarters of Americans have no “competitive choice” when it comes to
high-speed internet.
The outcome of this deal could influence the development of both
the television and internet businesses in America. Comcast argues that there
will be no loss of competition, since it does not compete with TWC in any
market. That is true only because cable companies long ago divided the country
among themselves. This deal highlights that custom: Comcast and a rival,
Charter (which had wanted to buy TWC but was trumped by Comcast) are swapping
subscribers in the places they want, much as they might trade cards in a game.
The rest will be transferred to a newly formed firm, GreatLand Connections.
What matters most to Comcast and to consumers is broadband.
Cable companies have strikingly little competition when it comes to delivering
high-speed internet, because satellite companies do not offer fast internet
speeds and telephone firms cap the amount of data that can be downloaded in
return for the monthly fee. Letting Comcast buy TWC will not eliminate an
existing competitor, but it could deter prospective ones in broadband and
pay-TV, because they know they stand no chance of felling a giant.
Comcast’s power does not end there. If the deal is approved, it
will control 17 of America’s 25 largest advertising markets, dominating the top
ten (see chart). Comcast’s huge customer base will also give it a near-veto
over innovations, such as which new channels can launch and which set-top-box
technologies are adopted.
That Comcast owns some of the biggest television channels
matters too, because of the potential for it to favour these over rival
channels, or to charge other pay-TV operators unreasonable rates for its
channels. Comcast also has an interest in seeing its impressive “cloud-based”
set-top-box become the industry standard, so it can license the technology to
other cable companies. TWC was reportedly close to a deal with Apple to
distribute its set-top TV boxes, but talks stopped when Comcast announced its
bid. They seem unlikely to resume if Comcast takes over TWC.
Comcast, like other pay-TV
operators, is set on preserving the television ecosystem in its present form
for as long as possible, whereas it is in the interest of consumers to see
viable, cheaper alternatives take off. One potential competitor might have been
Hulu, an online-video firm jointly owned by Comcast, 21st Century Fox and
Disney. Comcast came by its stake when it bought NBCUniversal, but as a
condition of that purchase regulators made Comcast agree not to intervene in
Hulu’s operations. However, last year, when Hulu was put up for sale by Disney
and Fox, insiders close to the deal have toldThe Economist that
Comcast executives made it clear to Hulu’s other two owners that they would
prefer not to see it go to AT&T, which, along with Chernin Group, an
entertainment firm, had put in the highest bid.
Comcast denies any intervention. AT&T would have been able
to make Hulu a viable competitor to Comcast’s pay-TV business. Ultimately Hulu
stayed with its owners, who called off the sale.
In all, the reasons to oppose the Comcast-TWC deal are even more
numerous than the number of unwatched channels a cable subscriber is forced to
buy as part of the expensive “bundle”. Americans already pay more for
television and internet than people in other rich countries, for slower
internet speeds. Comcast would become the judge and jury on which new services
and devices survive in the TV and internet businesses. Comcast would have
incentives to favour its own channels and businesses, and policing it
effectively would be a huge and complex job.
Regulators have the choice of approving or rejecting the deal
outright, or approving it with conditions. It is not their only headache. The
FCC also has to consider new “net neutrality” rules on whether broadband
providers can favour certain types of online content or charge certain
companies more for faster delivery. Craig Moffett, an industry analyst, says
the FCC could decide to attach specific net-neutrality conditions to the
Comcast deal, although others think a separate ruling is more likely before a
merger decision is reached. Regulators also have to review AT&T’s proposed
bid for DirecTV, a satellite-TV company, which it has made in direct response
to Comcast’s deal. Other firms will inevitably follow too. In the media
business sequels are all the rage.
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