Everything you need to know about the proposed $45B Comcast-Time Warner merger

Late Wednesday night, word leaked that Comcast was planning to make a friendly bid for fellow cable company Time Warner, and on Thursday morning that deal was confirmed with an announcement from the companies involved. In case you are trying to get up to speed on what the impact of the deal might be and whether it is likely to succeed, here’s a rundown of the major points:

What’s happening?

Comcast describes the deal in this way: “The agreement is a friendly, stock-for-stock transaction in which Comcast will acquire 100 percent of Time Warner Cable’s 284.9 million shares outstanding for shares of CMCSA amounting to approximately $45.2 billion in equity value. Each Time Warner Cable share will be exchanged for 2.875 shares of CMCSA, equal to Time Warner Cable shareholders owning approximately 23 percent of Comcast’s common stock.”
Quartz has summed up the rationale behind the proposed merger with one sentence and six charts, including this one:
As Om points out, this deal isn’t really about cable — it’s about broadband and owning the pipes:

“You can see broadband is not only a much faster growing business, it also has higher gross margins and comes with much fewer headaches — such as paying through the nose for programming. Broadband also comes with one more thing — a virtual monopoly.”

Stacey described the problem with this kind of merger in a post last year: “So the cable industry, if it can consolidate, gets access to the most important pipe coming into people’s homes (after power and water) and the fewer cable companies there are, the more unified the rate structure might appear.”

How is Comcast pitching this deal?

Comcast says the transaction “creates multiple pro-consumer and pro-competitive benefits, including for small and medium-sized businesses,” and adds that through the merger, “more American consumers will benefit from technological innovations, including a superior video experience, higher broadband speeds, and the fastest in-home Wi-Fi.” It says it will also be “better able to offer advanced services like high-performance point-to-point and multi-point Ethernet services and cloud-based managed services to enterprises.”

As Laura noted in a post at Gigaom, Comcast is essentially arguing that the existence of broadband competitors such as Google Fiber, and of net-based content producers like Netflix and Hulu (of which Comcast is a co-owner), justifies the government approving this deal:

“In today’s market, with national telephone and satellite competitors growing substantially, with Google having launched its 1 GB Google Fiber offering in a number of markets across the country, and consumers having more choice of pay TV providers than ever before, Comcast believes that there can be no justification for denying the company the additional scale that will help it compete more effectively.”

Does the deal raise red flags?

Some argue that the combination of two large cable companies isn’t something to be concerned about, since their networks don’t overlap and therefore they don’t compete anyway. As Peter Kafka at Re/code puts it:

“Here’s the big idea that’s supposed to get the deal approved in the coming months: It’s okay for a giant cable company to buy another giant cable company, because cable companies don’t compete. Assuming the deal goes through, it’s not going to reduce my (limited) choices. I’m just going to start writing checks to Comcast instead.”

In the New Yorker, writer Ken Auletta argues that the merger is really a sign of how weak Comcast and Time Warner are, thanks in part to cord cutting and the internet: “Nearly everyone hates ‘the cable guy,’ as the TV ad proclaims. They hate him for his perceived power. Yet these days, the cable guy — or the people he works for, in any case — is more vulnerable than ever.” Profit margins are plummeting, says Auletta, and new platforms like Netflix are gaining subscribers. “Comcast may be the strongest cable guy of them all, but even with Time Warner Cable in its possession, it’s still vulnerable.”

A columnist at Forbes makes a similar point, saying: “Nonsensically, everyone is reporting this as a merger between “the two largest cable companies” as if that kind of scaremongering makes it seem akin to the deal where AT&T tried to buy T-Mobile (combining the first and fourth largest mobile carriers). But in the real world, you never choose between Time Warner and Comcast, since they don’t have any overlapping markets.”

What are critics of the deal saying?

Susan Crawford, a professor in intellectual property at Harvard Law School and a fellow at the Roosevelt Institute, says in a post at Bloomberg View that the deal is “bad for America.” The reason it is scary, she says is that “for the vast majority of businesses in 19 of the 20 largest metropolitan areas in the country, their only choice for a high-capacity wired connection will be Comcast.” If regulators don’t want to stop the merger, she argues, then they should allow regions and municipalities to build their own alternative fiber networks.

“We can’t allow our future to be captured by the short-term cash flow desires of Comcast’s investors. We’re all the people of Fort Lee, New Jersey, trying to get on the George Washington Bridge. There’s a bully narrowing our access to the world whose interests aren’t aligned with ours. What we need is for that bridge to be maintained, for traffic to flow and for the bully to get punched in the nose.”

Craig Aaron of Free Press says the deal would give Comcast “control of more than a third of the U.S. pay-TV market and more than half of the U.S. triple-play market for video, voice and Internet service,” giving it what he calls “unprecedented market power over consumers and an unprecedented ability to exert its influence over any channels or businesses that want to reach Comcast’s customers.”

“No one woke up this morning wishing their cable company was bigger or had more control over what they could watch or download. But that — along with higher bills — is the reality they’ll face tomorrow unless the Department of Justice and the FCC do their jobs and block this merger. Stopping this kind of deal is exactly why we have antitrust laws.”

At The Verge, Bryan Bishop says that Comcast’s purchase of Time Warner Cable “would essentially rip away the already perishingly tiny hope of new competition ever emerging in the cable landscape, taking what’s been a constant frustration for consumers and cementing it into a permanent state of affairs.”
Stacey pointed out in 2012 all the ways in which Comcast has been stifling new internet-based services, including by throttling peer-to-peer traffic, using data caps and other methods: “This market has incredible distortions thanks to a variety of ownership structures, business models and how much control they have over the deliver of content into the home. And no one has more power and is taking as active a stance in this business as Comcast.”

What are regulators likely to do?

Obviously, as the WSJ points out, this deal is going to spark substantial regulatory debate, despite the fact that the two companies’ cable networks don’t have a lot of overlap. Gene Kimmelman, chief executive of Public Knowledge and a former official with the Justice Department’s antitrust division, said: “This transaction is dangerous for broadband competition and would likely inflate consumer prices. Antitrust officials and regulators need to scrutinize this deal carefully and prevent harm to consumers and the competitive process.”

Comcast is promoting the deal as positive in part because it has committed to honoring its net neutrality agreement with the FCC — and says it will extend that to Time Warner’s network — even though the rules governing net neutrality were effectively suspended with a recent court ruling. One concern about the combined entity will be whether it will have too much leverage over content providers: last year, Time Warner subscribers in New York and other markets lost access to CBS programming during a dispute over access fees.
Jeff took a look at the regulatory aspects of the proposed deal in a post here at Gigaom, in which he points out that the merger will be subject to review by both the FCC — which will try to determine whether it is in “the public interest” — and by the Justice Department, which will be looking at antitrust regulations.

What are the odds the deal goes ahead?

Some argue that earlier decisions by the FCC show that the agency doesn’t have the stomach to deny a company like Comcast, and so will likely force some concessions or agreements and leave it at that. Allen Grunes, an antitrust lawyer with GeyerGorey LLP, told the Wall Street Journal: “There’s very little political will right now in the U.S. to keep pipes and content separate, or to limit the national reach of a cable company like Comcast. My guess is that if Comcast is able to make some serious and enforceable commitments to the FCC, the deal will go through.” Others aren’t so sure, however:

Stacey says that even though the combination of the two giant companies would be a “bad idea for consumers, innovation and even U.S. broadband,” it is also likely to go through: “Legislative decisions made decades ago to ensure broadband competition have made the Comcast deal today feel almost inevitable. The big question now is what will the government do to ensure the nation keeps forging ahead with better broadband, innovative services and happy consumers.”
Peter Weber at The Week, however, doesn’t think the deal has a hope of being approved, saying: “The deal isn’t going to happen. Not in any recognizable form. I don’t know if Comcast really thinks this deal will sail through, or if it’s just trying to scuttle the efforts by Charter to buy Time Warner. But someone in the Obama administration will surely stop this train. My money’s on Wheeler.”

Are there any benefits to the proposed deal?

The Verge says there is one possible benefit to a merger: “A cable company with true nationwide reach could cut the kind of deal that would change that, providing enough subscribers to make a next-generation TV product viable and create enough market pressure to bring its competitors to the table and sign on to similar arrangements. It’s the kind of deal that could turn a new Apple TV into a set-top box that would let you watch live television.”
StockTwits founder Howard Lindzon, meanwhile, says one beneficiary of such a deal would be Google, since it would suddenly look a whole lot less scary and monopolistic by comparison: “Google is the story tomorrow. The Comcast/Time Warner deal only raises the evil tolerance ceiling for Google. That’s still the real long term problem for Cable.” For more on who the potential winners and losers from the deal are, check out this post from Stacey.

Post and thumbnail images courtesy of Shutterstock / Jakub Krechowicz and Quartz