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The $45 Billion Question: Will Comcast Deal Put a Chokehold on the Internet?

May 8 (Bloomberg) -- Comcast and Time Warner Cable executives testify before the House Judiciary Committee today. But just how massive would this media merger be? Senior West Coast Correspondent Jon Erlichman breaks down the $45 billion deal.

Comcast Corp.’s (CMCSA) purchase of Time Warner Cable Inc. (TWC) should be blocked by U.S. regulators because the combined entity will be too big and may abuse its market power, said the leader of a company that carries one-fifth of the world’s Web traffic.

Comcast has demanded payment for delivering uninterrupted Internet content to subscribers, Cogent (CCOI) Communications Group Inc. Chief Executive Officer Dave Schaeffer told lawmakers at a hearing today in Washington. The companies previously exchanged Web traffic over the two-way data highway at no cost to each other, he said.

“As Comcast’s market power continued to increase, as consumers have less choice, they actually started to demand payments for connectivity,” Schaeffer said. “A larger Comcast will demand ever greater payments.”

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Schaeffer told the House Judiciary Committee’s antitrust subcommittee that Netflix Inc. (NFLX) was “forced” to pay Comcast to connect to its network because the nation’s largest cable provider refused to augment capacity leading to congestion at interconnection points, Schaeffer said.

“That’s not a free market,” he said. “That’s an abuse of market power.”

Schaeffer and other critics of the merger testified as the Justice Department and Federal Communications Commission consider Comcast’s $45.2 billion proposal in February to acquire Time Warner Cable. The deal would combine the two largest U.S. cable companies and give the enlarged Comcast about 30 million subscribers.

Photographer: Joe Raedle/Getty Images

Cables and routers at a Comcast distribution center where the Comcast regional video, high speed data and voice are piped out to customers in Pompano Beach, Florida. Close

Cables and routers at a Comcast distribution center where the Comcast regional video,... Read More

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Photographer: Joe Raedle/Getty Images

Cables and routers at a Comcast distribution center where the Comcast regional video, high speed data and voice are piped out to customers in Pompano Beach, Florida.

‘Netflix’s Idea’

Comcast Executive Vice President David Cohen denied Schaeffer’s assertion. Comcast didn’t force Netflix into the agreement, he told lawmakers. Netflix wanted to cut out the “middleman” and deal directly with Comcast, he said.

“That was Netflix’s idea,” Cohen said. “They came to us.”

Allen Grunes, a former lawyer with the Justice Department’s antitrust division who is now at GeyerGorey LLP, told lawmakers that Comcast’s acquisition of Time Warner Cable would give the combined company the incentive to withhold programming from rivals and the ability to limit competition from online distributors like Netflix.

“This merger is very likely illegal,” Grunes said.

Consumer Benefits

Cohen defended the merger as providing the company the scale needed to make investments leading to more reliable service and faster Internet speeds for consumers. It will also spur competition from companies like AT&T Inc., he said.

“The ultimate beneficiary of this enhanced competition and greater investment is the American consumer,” Cohen said.

Photographer: Joe Raedle/Getty Images

A Comcast office on Feb. 13, 2014 in Pompano Beach, Florida. Close

A Comcast office on Feb. 13, 2014 in Pompano Beach, Florida.

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Photographer: Joe Raedle/Getty Images

A Comcast office on Feb. 13, 2014 in Pompano Beach, Florida.

The issues raised at the hearing may influence regulators reviewing the deal to put conditions on the transaction.

If U.S. regulators approve the acquisition, they may demand the combined company submit to arbitration for “particularly problematic” disputes with bulk Internet carriers such as Cogent, Paul Gallant, Washington-based managing director for Guggenheim Partners, said in an interview. “I wouldn’t expect it to derail the merger.”

Netflix, the largest subscription streaming service, agreed this year to pay Verizon Communications Inc. and Comcast to improve the quality and reliability of its video service for consumers. Netflix said in an April letter to shareholders that it opposes the merger because the combined company would gain leverage “to charge arbitrary interconnection tolls for access to their customers.”

Budding Opposition

Cogent, based in Washington, joins Netflix, of Los Gatos, California, among the few companies publicly opposing the deal. Cogent sells Internet access to companies for Web-based services and it connects with high-speed Internet services, like Comcast, to reach consumers.

Schaeffer in an interview called the acquisition “bad for consumers as well as bad for the Internet.”

The Time Warner Cable acquisition would give market-leader Comcast a presence in 19 of the 20 largest cities. After the merger, Philadelphia-based Comcast would provide access to 33 percent of U.S. subscribers to broadband, or high-speed Internet service over a wire, according to figures compiled by SNL Kagan.

Others who testified today included Time Warner Cable Chief Executive Officer Robert Marcus; Patrick Gottsch, the founder of Rural Media Group Inc., and Matthew Polka, the president and chief executive officer of the American Cable Association.

Independent Programmers

The combined Comcast and Time Warner Cable will have greater strength to foreclose competition from independent programmers, Gottsch told lawmakers. Comcast dropped Rural Media’s RFD-TV in Colorado and New Mexico after its merger with NBCUniversal, he said.

“We can only speculate that RFD-TV has become competitive with Comcast’s affiliated programming,” Gottsch said in his testimony.

Cohen and Marcus said in testimony submitted to the panel that Comcast has for two decades worked cooperatively with Internet traffic -- or backbone -- providers.

“This transaction will not affect the interconnection market or change how the Internet backbone works,” Cohen and Marcus said in their testimony.

Level 3

Level 3 Communications Inc. (LVLT), a Web traffic provider based in Broomfield, Colorado, said in a May 5 blog posting it faces congestion where it joins the networks of five U.S. broadband companies, which it didn’t identify.

Joseph Cavender, Level 3’s vice president for federal affairs, last month urged the FCC to consider requiring that Internet service providers not be allowed to charge “for the privilege of reaching the ISP’s end users.”

“Large consumer ISPs are refusing to augment their interconnection capacity to improve performance unless Level 3 pays arbitrary access tolls,” Cavender said in an April 28 filing at the FCC. “In other words, they are breaking the Internet, and harming their own customers, in an attempt to extract access tolls.”

Eric Mangan, a spokesman for New York-based Time Warner Cable, said in an interview, “We do not throttle Internet traffic. We’re committed to providing customers with the best service possible, including unfettered access to the Web content and service of their choice.”

Open Internet

A court threw out FCC rules designed to ensure Web traffic is handled fairly, and the agency is to cast a preliminary vote on new rules next week.

The question of how networks exchange Internet traffic isn’t part of the proposal, FCC Chairman Tom Wheeler said in an April 29 blog post.

“Up until now it’s been relatively difficult to get opponents of the merger to come forth,” Bert Foer, president of the Washington-based American Antitrust Institute that opposes the deal, said in an interview. More companies may come out in opposition as they realize what’s at stake, Foer said.

“There are very serious antitrust considerations here,” Foer said. “If you can’t get into the pipeline on fair terms, then you don’t get to the public. And if it becomes much more expensive to get into the pipeline, then smaller edge producers get driven out.”

To contact the reporters on this story: Todd Shields in Washington at tshields3@bloomberg.net; David McLaughlin in Washington at dmclaughlin9@bloomberg.net

To contact the editors responsible for this story: Romaine Bostick at rbostick@bloomberg.net; Bernard Kohn at bkohn2@bloomberg.net Elizabeth Wasserman

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