Comcast has abandoned its $45 billion bid for Time Warner Cable, a deal that would have made the nation's largest cable giant even bigger. "Today, we move on," Comcast chair and CEO Brian L. Roberts said in a short statement. "Of course, we would have liked to bring our great products to new cities, but we structured this deal so that if the government didn't agree, we could walk away."
The failure of the deal represents a major blow to the firm, which has lobbied hard for the last year to get the deal approved by federal regulators.
A central issue in the debate over the merger is whether Comcast poses a threat to the growth of new, internet-based video services that compete with Comcast's old-fashioned cable television service. Critics have pointed out that Comcast has a history of making business decisions that hobble streaming services like Netflix.
According to media reports, regulators at the Department of Justice and the Federal Communications Commission found these arguments persuasive enough that they were planning to try to stop the deal. The failure of the deal is the latest sign of a more hostile regulatory climate for large telecommunications mergers.
Comcast said the deal wouldn't harm competition
Comcast and Time Warner Cable are the largest and second-largest cable companies, respectively, in the United States. Comcast has more than 20 million subscribers in both the television and internet markets. Time Warner Cable had more than 10 million of each. Combining them would have produced by far the largest cable company in the world.
Comcast's argument for approving the deal was simple: because Comcast and Time Warner Cable operate in different markets, the transaction would not reduce customers' options for cable or internet service. Therefore, the cable giants said, the deal couldn't reduce competition or harm consumers.
Comcast also promised an array of goodies for the public if the merger was approved. Comcast runs a program called Internet Essentials that provides low-cost internet access to 1.8 million low-income Americans; Comcast promised to expand the program to low-income customers in Time Warner's areas of service. Comcast also promised to increase programming diversity, such as the addition of four new minority-owned networks to the Comcast channel lineup.
This was a game plan that had worked for Comcast before. Comcast's 2009 proposal to acquire NBC sailed through the regulatory process after the company sweetened the pot with a number of concessions that won the support of influential interest groups.
Critics said the merger would give Comcast too much power over content companies
While it's true that Comcast and Time Warner Cable don't compete with each other in the consumer market, critics pointed out that this wasn't the only market in which these cable giants operate. Comcast and Time Warner Cable have to buy content from major content providers, and they negotiate interconnection agreements with other internet companies.
And in these kinds of negotiations, size matters. Content companies like Disney and Viacom can play one cable company off another, but the larger a cable provider is, the harder this is. As the largest cable company and the owner of NBC Universal, Comcast already has a lot of power in the market for paid video content. Adding Time Warner's 10 million subscribers would give Comcast even more power.
The same point applies online, as we saw in last year's dispute between Comcast and Netflix. Comcast refused to upgrade connections that carry Netflix video content, leading to declining streaming quality. As a result, Netflix was forced to pay a toll for access to Comcast's customers. Only a company with a large number of cable subscribers would be able to take this kind of hard line.
Merger conditions don't always work
Even if regulators have concerns about a deal, that won't necessarily lead to it being blocked. Often, officials can attach conditions to a merger to prevent particular competitive harms while allowing the overall deal to go forward. That's exactly what the feds did during Comcast's merger with NBC Universal, which was approved in 2011.
But critics say this approach didn't work very well. For example, that merger gave Comcast a stake in the internet streaming service Hulu. Regulators worried that Comcast might view Hulu's online streaming service as a competitive threat to its own cable TV service. So as a condition of that merger, federal regulators made Comcast promise not to influence how Hulu was managed.
Yet the Wall Street Journal reports that in 2013, Comcast helped persuade Disney and Fox not to sell their video service, Hulu, to a Comcast rival — DirecTV and AT&T were both considered potential buyers, according to the Journal. Comcast reportedly promised Disney and Fox that it would help make Hulu "the nationwide streaming video platform for the cable TV industry." That promise helped persuade Disney and Fox that the service could succeed as an independent operation.
"Whether Comcast technically violated the condition or not, the story illustrates both the power of Comcast already and the inability of conditions to adequately address that power," wrote merger critic Harold Feld in a Thursday blog post. According to the Wall Street Journal, "Hulu’s aborted sale process is among the issues that have captured the interest" of government regulators considering Comcast's latest merger.
Regulators have gotten more skeptical of big telecom mergers
For more than a decade, federal regulators routinely approved mergers that made the nation's telecommunications companies larger and larger. The eight companies created by the 1984 breakup of AT&T have consolidated into three large companies — AT&T, Verizon, and CenturyLink. Comcast and Time Warner are themselves the product of a series of cable mergers during the 2000s, and as we've already mentioned, regulators waved through Comcast's acquisition of NBC Universal in 2011.
But since then, the regulatory climate has become increasingly hostile toward big telecommunications mergers. In 2011, AT&T Mobility, the nation's second-largest wireless provider abandoned its effort to acquire T-Mobile, the fourth largest, after it encountered opposition from regulators.
Comcast and Time Warner Cable are really unpopular
Meanwhile, cable companies in general and Comcast and Time Warner Cable in particular have become less popular. Last year Comcast and Time Warner Cable were ranked the two least popular broadband and TV providers in a consumer survey. One reason might be the many media stories about Comcast's terrible customer service.
Growing public hostility toward Comcast probably contributed to the grassroots lobbying campaign for stronger network neutrality regulations, which the FCC approved in February. And those same political forces have made it easier for officials at the FCC and the Justice Department to take a hard line in their review of Comcast's merger.
Those same political headwinds will likely make it more difficult for other mergers to get approval. Charter's proposal to acquire another cable company, Bright House Networks, was contingent on approval of the Comcast deal, so that deal will fall apart if Comcast throws in the towel. And other big telecom companies thinking about merging will think twice given the growing skepticism of federal regulators.