FCC

What can Comcast do to win over regulators?

February 14, 2014: 3:15 PM ET

The FCC will be hard-pressed to approve any further consolidation among broadband Internet providers without a guarantee to honor net neutrality rules. Comcast has its work cut out for itself in its proposed acquisition of Time Warner Cable.

By Cyrus Sanati

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FORTUNE -- Comcast's proposed acquisition of rival Time Warner Cable (TWC) is hardly a slam dunk. While executives may eventually get the green light from antitrust regulators over at the Department of Justice (DOJ), they will struggle to do the same with the Federal Communications Commission (FCC).

That's because this deal isn't just about competition in the declining cable television market; rather, it is about consolidation in the growing broadband Internet market. With net neutrality rules no longer in place, the FCC will be hard-pressed to approve any further consolidation among broadband Internet providers without some guarantee that the company would honor net neutrality rules, possibly indefinitely, despite it being thrown out by the courts last year. This, among other concessions, could ultimately prove too costly for Comcast to do the deal, forcing it to walk away.

So what can Comcast (CMCSA) do to win over regulators? It must first convince the Department of Justice that the combination of the nation's largest and second-largest cable companies would do little to impact competition in the cable TV market. Here, Comcast executives are taking a page from the airlines and their recent round of mega-mergers by arguing that their network, while large, doesn't overlap with TWC at all. In fact, neither of them are available in the same zip code. Sure, the combined company's cable will pass by 88 million homes, a third of which are subscribers, but there is already adequate competition in this space from the likes of satellite providers (DISH (DISH) and DirecTV (DTV)), other cable companies (Cablevision (CVC), Charter (CHTR), etc.), and fiber optic cable providers (AT&T (T) U-Verse and Verizon FiOs).

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While that isn't entirely true, it isn't completely off the mark, either. Thanks to the satellite providers, most Americans truly do have a choice when it comes to picking their TV provider. Unless there is some building or line-of-sight restrictions, chances are you have three choices for TV service. If you are lucky, you also have a fourth option, a fiber optic provider, like Verizon's FiOs. But for most Americans, this isn't an option and won't ever be as Verizon (VZ) has halted its expansion to focus on wireless.

But wait, how is it possible that you only get one cable TV option in the first place? The short answer is that when it comes to cable, the government is in favor of consolidation. Indeed, once there were 30,000 cable TV operators while today there are less than a handful of major players. The government signed off on consolidation because it thought it would allow companies to gain the scale to afford massive capital outlays for network upgrades and maintenance.

Comcast is trying to sell this argument to regulators -- being bigger means that it will be able to more efficiently take on major capital projects to upgrade the network. It figures the DOJ probably won't have any issue with the merger based on that logic. And just to be fair, it is willing to divest 3 million of TWC's 11 million households to other cable companies so that the new company will have under 30% of the total U.S. market. That used to be the cable ownership limit, but that is no longer the case. This hat tip to the old regulations could win over many at the DOJ.

But while winning over the DOJ is a necessary part of the game, it is hardly sufficient. To secure this deal, Comcast must also convince the FCC to sign off, which, while not totally impossible, will be a very tall order. And for the FCC, this deal has nothing to do with TV; rather it is all about broadband Internet.

You see, while one can argue there is competition in the cable TV space, it simply isn't the case when it comes to reliable high speed Internet. The FCC is concerned that the new TWC-Comcast juggernaut would ultimately try to monetize its largesse by controlling the flow of data through the Internet -- not just at the consumer level, like many cellular providers do to their customers, but also at the content provider level.

The overturning of net neutrality last year means that cable companies can limit the amount of data companies like Google (GOOG) and Netflix (NFLX) can send through their cables. By restricting downloads or charging for overages, the fear is that Comcast could essentially destroy companies that push a lot of data through the Internet. This is made even more complicated by the fact that Comcast owns NBCUniversal. Imagine if NBC.com could push whatever it wanted through the Internet for free while Netflix and ABC were forced to pay a high toll for the same privilege. It wouldn't be pretty at all.

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So how can Comcast convince the FCC that it isn't trying to hijack the Internet? Well, when it bought NBC a few years back, Comcast won the FCC's blessing by agreeing to adhere to net neutrality rules through at least 2018. On Thursday's conference call, the company said it would extend that policy to TWC, thus bringing net neutrality to millions more Americans. Unfortunately, that isn't going to cut it. For this to deal go through, Comcast will need to either extend that promise to net neutrality by many years or make it permanent if it ever hopes to win FCC approval.

Comcast said Thursday that it expects it will probably take a year to gain regulatory approval. Clearly it anticipates some major pushback. While it is waiting for the government to come around, it will need to convince a whole bunch of people that this deal isn't going to turn the world upside down. Comcast will need to commit to this deal if it is ever going to happen. That level of commitment, though, may ultimately prove to be too much of a burden for any company to bear.

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