Comcast-Time Warner Cable merger is no longer viewed as inevitable

It is unclear whether the U.S. Department of Justice and FCC will approve the Comcast-TWC merger

Comcast Corp.'s bold move to buy rival Time Warner Cable in a $45-billion deal once seemed inevitable.

Wall Street figured combining the nation's two largest cable operators wouldn't have much problem clearing regulatory hurdles. Both companies operate in different parts of the country, and wouldn't be seen as anti-competitive. Subscribers, including 1.8 million in the Los Angeles region, would have the same number of choices for pay-TV as they currently do.

But that was 11 months ago — and a lot has changed.

Now, it is unclear whether the U.S. Department of Justice and the Federal Communications Commission will give Comcast their blessing.

"They've had a lot of trouble, more than they thought they would — and rightly so," said Gene Kimmelman, a former top lawyer in the Justice Department's antitrust division who now leads advocacy group Public Knowledge, which opposes the Comcast-TWC merger.

Here's the rub for Kimmelman and others: The new Comcast would be the nation's dominant supplier of high-speed Internet service. The company would boast 30 million customers in major cities such as Los Angeles, New York, Chicago, Philadelphia, Denver, Dallas, San Francisco and Seattle.

Streaming service Netflix, satellite giant Dish Network, lawmakers and others have voiced concerns that Comcast could use this grip to stifle development of the Internet video business. In a sense, Comcast would have an incentive to beat back online challengers to its core business of bundling cable TV channels.

Meanwhile, a parade of major TV network executives have privately met with federal investigators, outlining their worries about a bulked-up Comcast, according to people involved in the meetings who were unauthorized to speak publicly. They fear Comcast would use its size and influence to undercut how much programmers such as CBS, Viacom and Discovery are paid for their channels.

Comcast, for its part, maintains the regulatory review of its acquisition is proceeding on schedule.

The FCC, which must decide whether the deal serves the public interest, has until March 30 to make a decision. The Department of Justice is also in the process of reviewing whether the deal would be anti-competitive.

"We believe it is too early to come to any conclusions about which way regulators are leaning," said D'Arcy Rudnay, Comcast's chief communications officer. "We continue to believe this is a pro-competitive deal in the public interest and that we are on-track for the approval process to conclude early this year."

The landscape has changed dramatically since the Comcast-Time Warner Cable deal was announced last February.

Comcast's acquisition was originally viewed as a combination of huge cable TV providers. But opponents have painted Comcast as a potential gatekeeper of the Internet, raising the stakes as regulators wrestle over how best to regulate the Internet.

And there have been many developments in the digital and streaming video space.

Netflix reached 39 million subscribers in the U.S. and Amazon.com is spending millions of dollars on original content to bolster its streaming service. Programmers, including HBO and ESPN, have changed their strategy to sell their channels to consumers who don't subscribe to pay TV — essentially providing an alternative to the cable bundle.

Satellite television provider Dish Network this week rolled out its own Internet-delivered programming service called Sling TV, a $20-a-month option that includes ESPN as one of its channels.

"The combination of Comcast and Time-Warner Cable would threaten these over-the-top services," said Jeff Blum, Dish's deputy general counsel. "All of us are united in our position that a Comcast-TWC merger would present substantial harm."

President Obama also jumped into the debate, saying that ensuring a free and open Internet would be a priority in his last two years in office.

Obama stunned the cable industry in November when he prodded the FCC to begin regulating the Internet as it would a public utility — a proposal that the cable industry is expected to resist. Then, this month, the president encouraged cities to offer their own low-cost broadband Internet service that would compete with entrenched cable interests.

"Some big companies are doing everything they can to keep out competitors," Obama said at an event in Iowa.

The federal government's review of the Comcast merger is only one part of its mission to figure out how best to regulate the Internet.

The FCC has been consumed with another aspect of that issue — so-called net neutrality, which requires Internet service providers to treat all traffic equally. The agency next month will unveil its solution, and wrestle over whether to regulate Internet service providers as utilities.

Comcast has agreed to abide by the principles of net neutrality.

Industry executives expect the FCC won't take up the Comcast-Time Warner Cable merger, or a second blockbuster combination between AT&T and El Segundo-based DirecTV, until after it grapples with the Internet rules.

The FCC and Justice Department declined to comment on their reviews.

Whether Comcast is judged to have too much control also depends on the definition of high-speed Internet service.

The FCC chairman has proposed raising the threshold of what constitutes high-speed Internet service to encourage cable companies to upgrade their systems and reach more consumers.

Watching high-quality video on the Internet depends on having a service with enough bandwidth to handle data-heavy transmissions. Comcast is one of the few companies that offers Internet service with enough capacity to handle the load.

If the FCC raises the threshold, Comcast might end up with an even greater market share than it currently has — which could be considered anticompetitive.

To be sure, dozens of groups also support the proposed Comcast merger, including the Los Angeles Area Chamber of Commerce, Orange County Business Council, the L.A. County Economic Development Council and the National Urban League. Television networks including Ovation, Hallmark Channel and Starz also support the deal.

Comcast never considered the deal a slam-dunk.

The company structured the acquisition so there would be no break-up fee if the deal falls apart. This would shield Comcast from any financial penalties if the government opposed the combination — or attached too many conditions.

If that were to happen, Time Warner Cable could again be in play.

Charter Communications would probably make another run at Time Warner Cable, analysts said. It was Charter's advances a year ago that prompted Time Warner Cable executives to approach Comcast to buy it instead.

Los Angeles is one of the markets most affected by the proposed merger. Nearly 1.8 million homes, which now receive their pay-TV and Internet service from Time Warner Cable or Charter Communications, would become customers of Comcast.

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