Monday, March 07, 2016

FCC Should Resist Regulatory Conditions Unrelated to Charter Merger

The FCC is reviewing Charter Communication's proposed acquisition of Time Warner Cable and Bright House Networks. March 4 marked day 160 on the Commission's informal 180-day merger review shot clock. If the merger is approved, it potentially will enable accelerated upgrades to digital video services and faster deployment of high-speed broadband services. The merger may also enhance competition for enterprise broadband services and provide cable subscribers with improved video device offerings.

Along with the merger's potential benefits, Charter/TWC/BHN poses only remote potential for harm. Certain market competitors have criticized the merger based on speculative ill effects regarding the availability of online video services and independently manufactured set-top boxes. Yet those criticisms lack solid foundation in fact. Nor do these criticisms have any direct connection to the merger. They involve broader questions about the video marketplace and FCC policy. These market-wide policy questions, to the extent they deserve closer attention, should be reserved for general proceedings, not merger reviews.

Like so many mergers before it, the Charter/TWC/BHN proposal is the subject of a stream of news commentaries and interest group press releases. Also like other mergers, Charter/TWC/BHN is the target of intense lobbying, reflected in ex parte filings to the Commission. Quite often, market competitors that are not a party to the transaction seek to persuade the Commission to impose regulatory conditions on its approval.

A claim repeated in news stories and ex parte filings by market competitors is that Charter/TWC/BHN would adversely affect availability of online video distributor (OVD) services. But there is less than meets the eye here. None of the merging entities have significant ownership in video programming networks. Charter/TWC/BHN simply wouldn't have video programming network content to withhold from OVD services. Nor is there reason to think Charter/TWC/BHN would have particularly strong incentives to impair their own broadband subscribers' access to OVD services. Even if Charter/TWC/BHN has an interest in protecting its video service from OVD competition, there is no good reason to think that interest would lead it to impair legal Internet traffic for its broadband subscribers. This would harm Charter/TWC/BHN's good will with its subscribers and thereby undermine return-on-investment in its broadband networks.

Still another claim has been made that Charter/TWC/BHN would stop making its video service accessible to consumers with TiVo or other set-top box devices. But it is also far-fetched to think Charter/TWC/BHN would stop allowing access to its video services through independently manufactured CableCARD-enabled set-top boxes. For starters, all major cable providers offer their own subscribers CableCARD-enabled set-top boxes. Major cable providers have made available to subscribers for leasing about 55 million such devices. Charter has provided about 5.7 million CableCARD-enabled devices to its own subscribers. That number far exceeds the 55,000 CableCARDs that Charter has supplied to subscribers using independently manufactured devices.

Charter/TWC/BHN has said it intends to deploy Charter's Worldbox set-top box device to its expanded footprint once the merger is concluded. Unlike CableCARD devices, Worldbox has downloadable security capabilities. Charter’s Worldbox would offer consumers in Charter/TWC/BHN's footprint the benefit of a cloud-interfacing device that is likely far superior to CableCARD-enabled devices many lease today. Such a device marks an important marketplace development toward apps-centric delivery of video content. In a 2013 waiver order, the Commission recognized the benefits of Worldbox in accelerating deployment of downloadable security in video devices.

By the same reasoning, Charter/TWC/BHN's deployment of Worldbox constitutes an important public benefit to consumers. And for its part, Charter/TWC/BHN would likely enjoy equipment cost savings from deployment of Worldboxes. Even so, it would be to Charter/TWC/BHN's detriment to block video accessibility to CableCARD-enabled devices. Rendering CableCARD devices useless for its video network would mean significantly reducing – if not destroying – the value of its own equipment.  

Even assuming these claims regarding OVD services and set-top boxes by those questioning the merger give cause for concern, they are not specific to the merger. That is, it does not appear that Charter/TWC/BHN would actually increase the risk of harms being alleged. There is nothing inherent in the merger that would make impairment of OVD services more likely if the Commission grants approval. Claims about OVD impairment could just as easily be made against any video service provider. Similarly, concerns about continued CableCARD compatibility could be raised with respect to any cable provider. In reality, these claimed problems with Charter/TWC/BHN are iterations of larger beefs held by various competitors or interest groups about the communications marketplace or communications policy.

Generalized concerns about the broadband and video markets should be the subject of generic industry-wide proceedings. And if necessary, those concerns may be addressed through market-wide rulemakings. Where a merger gives rise to a unique set of harms or potential harms, those may be targeted with a merger-specific remedy. But general concerns and issues should not be pigeonholed into merger review proceedings involving only two or three market participants.

It is unfair for merging parties to be singled out by the Commission for special regulatory burdens based on market-wide concerns. This is especially so when other market participants do not receive similar regulatory treatment. For the Commission to use the merger review process to achieve broader regulatory goals not specific to the merger is an evasion of rulemaking procedures. The Commission also risks exceeding its authority by imposing regulatory conditions on merging parties that have no express basis in the Communications Act.

Indeed, the Commission has already initiated industry-wide proceedings dealing with the regulatory treatment of both OVDs and video devices. These issues that implicate the entire video market and FCC policy should be raised in those proceedings – not in the merger review proceeding for Charter/TWC/BHN.