Earlier this month, just after Comcast dropped its bid for Time Warner Cable in the face of opposition from the FCC and Justice Department, FCC chairman Tom Wheeler separately called TWC CEO Rob Marcus and Charter Communications CEO Tom Rutledge, along with several other senior cable industry executives, to let them know they shouldn’t consider all M&A deals to be off the table just because the agency put the kibosh on Comcast, according to a report in the Wall Street Journal.
On Tuesday, Charter took Wheeler up on that seeming invitation and announced a plan to acquire TWC for $56 billion. Charter also reaffirmed its plan to acquire it smaller rival Bright House Networks for $10.4 billion.
Should those deals go through — and it would be some pretty dirty pool by Wheeler to block them now, after personally signalling his openness to the idea — Charter would move up in weight class to just behind Comcast, with 17.3 million video subscribers, compared with Comcast’s 22.4 million, and 19.4 million broadband subscribers, compared with Comcast’s 22 million.
Should the FCC also give its blessing to AT&T’s pending acquisition of DirecTV, as is widely expected, that deal would create another heavyweight, with a combined 26.4 million pay-TV and broadband subscribers.
It would be a stretch to suggest that Wheeler was literally orchestrating such a complex and expensive set of deals from the eighth floor of the FCC’s headquarter. But the combination of mergers and non-mergers — in which the FCC’s actions played a material role — will nonetheless leave behind a rough parity at the top of the pay-TV/broadband weight scale, among Comcast, AT&T and Charter.
That parity will do little, if anything, to bring more meaningful competition to consumers in the last-mile broadband service business. But it could go a long way to preserving the balance of power between programmers and service providers that was at risk of getting dangerously out-of-whack had the Comcast-Time Warner Cable merger been allowed to pass.
The combined Comcast-TWC would have controlled some 30 million wireline subscribers, with no one else even close to that total. If combined with the rich collection of marquee programming assets Comcast controls through NBC Universal, the merger would have left Comcast in a position almost unilaterally to dictate the future terms of engagement between programmers and service providers.
That discussion is typically framed in terms of how much traditional cable and satellite operators must pay the networks in carriage and retransmission fees. But the real battle going forward, as Wheeler, a former cable TV lobbyist surely understands, will be over the terms of distribution via broadband.
Right now, programmers shoulder none of the costs of the broadband infrastructure used to delivery their content to consumers (unless they choose to, as Netflix does). But they also receive no distribution fees from broadband service providers as they do in the traditional pay-TV business. For their part, broadband service providers shoulder all (or nearly all) of the infrastructure costs, but face none of the margin-devouring (and ever-escalating) content costs they face in the traditional pay-TV business. Each side, naturally, would like to push more of the costs onto the other party and keep more of the revenue themselves.
That dynamic is a source of tension in the over-the-top content business, but it’s also ripe for negotiation between willing buyers and sellers — not just over the price but over the size and structure of the bundle, in- and out-of-home access, fixed and mobile network delivery, data collection and other issues related to multiscreen delivery.
While it may be hard to see cable operators as protectors of the public interest, consumers clearly have a stake in the outcome of those negotiations. But they wouldn’t have if one company had been allowed effectively to foreclose those negotiations before they really get started.