Policy

The Adelphia Deadlock

2/03/2006 7:08 PM Eastern

Washington— Comcast Corp. and Time Warner Inc. could be forced to renounce exclusive sports-programming deals and pledge to keep their high-speed Internet lines open to all forms of Web content and commerce before federal regulators allow them to acquire the assets of Adelphia Communications Corp.

The reason, according to analysts and executives familiar with the state of proceedings on the divvying up of Adelphia assets between the nation’s two largest cable operators, is a Federal Communications Commission that is divided along political and ideological lines.

FCC chairman Kevin Martin, a Republican appointee of President Bush, is trying to run the five-member agency without a GOP majority. He and fellow Republican commissioner Deborah Taylor Tate will be hard-pressed to approve the Adelphia deal without the consent of at least one FCC Democrat, either Michael Copps or Jonathan Adelstein.

Deal Time: How the 'Shot Clock’ Has Worked
The FCC attempts to finish a merger review within 180 days. But its 180-day shot clock is informal, not binding. At times, the agency will stop the clock if it has sought additional documents from a merger party or to wait for the Justice Department or Federal Trade Commission to act.
Merger/year Days under FCC Review Days clock stopped Total
AOL-Time Warner
2000-01
179 111 290
EchoStar-DirecTV
2001-02
157 138 295
Comcast-AT&T Broadband
2002
188 42 230
Comcast-Time Warner-Adelphia
2005-06
(as of Feb. 1, 2005)
242 0 242
Source: Federal Communications Commission

“Until we get a fifth commissioner, conditions are a foregone conclusion. The only question is what the conditions will require,” said Scott Cleland, a media and telecommunications analyst with Precursor Inc.

The Federal Trade Commission, which passes judgment on antitrust issues, approved the sale of Adelphia assets for $12.7 billion in cash and 16% of Time Warner Cable’s shares last Tuesday. But by law, the FCC — which determines whether transfers of communications companies’ assets are in the public interest — must still give the nod to the Adelphia split-up.

In this case, the review is being conducted by the FCC’s Media Bureau staff. An aide to one FCC member said that as of last week, the bureau’s staff had not yet sent any recommendations to commissoners.

Direct-broadcast satellite providers DirecTV Inc. and EchoStar Communications Corp., who compete with Comcast and Time Warner Cable, are seeking merger conditions related to sports programming. And public-interest groups represented by the Media Access Project, a Washington, D.C.-based public interest law firm, are seeking assurances that the cable companies won’t play favorites among Web services that want to use their networks to reach homes and businesses.

Last fall, Martin had to yield to a raft of conditions demanded by Copps and Adelstein in order to finish work on SBC Communications Inc.’s takeover of AT&T Corp. and the merger of Verizon Communications Inc. with MCI Inc.

Both phone companies agreed to comply, for two years, with FCC “network neutrality” principles — policies that allow Web companies to offer video, music, news and other services over broadband facilities without interference from cable and phone company network owners that enjoy gatekeeper status.

Foes of the Adelphia merger are hoping for a repeat performance — that Copps and Adelstein will hold up the merger until Comcast and Time Warner voluntarily renounce any exclusive program-carriage deals and, like the two Baby Bells, agree to network-neutrality principles.

“This the time for the FCC to make a stand, particularly Copps and Adelstein,” said Jeff Chester, president of the Center for Digital Democracy, a group asking the agency to reject the Adelphia merger. “If these guys want this transaction approved, they need Copps and Adelstein, and public-interest groups are at their point of maximum leverage, theoretically.”

Conditioning Exercise
Who wants what before the FCC approves the Adelphia deal:
SOURCE:Multichannel News Research
Demand: Ban Comcast and Time Warner from holding exclusive rights to programming from regional sports networks
Who wants it: DirecTV and EchoStar
Why: Concerned about program parity
Outlook: Unlikely program-access rules will change
Demand: Require Comcast and Time Warner to enter arbitration to settle any license-fee disputes if sports network programming is offered to competitors
Who wants it: DirecTV and EchoStar
Why: Concerned about rate-gouging
Outlook: Possible
Demand: Require Comcast and Time Warner to carry channels with limited reach
Who wants it: The America Channel
Why: Network can’t get carriage from two largest cable operators
Outlook: Unlikely
Demand: Require Comcast and Time Warner to sell programming from affiliated parties to their competitors on an a la carte basis
Who wants it: EchoStar
Why: Seeking to end the wholesale bundling of networks
Outlook: Unlikely
Demand: Mandate adherence to FCC’s network-neutrality principles
Who wants it: Various public-interest groups
Why: Concerned about competition and free speech
Outlook: Possible

The breakup of Adelphia has been before the FTC and FCC for eight months, a long time for a merger review (See “Deal Time,” p. 13). But last Tuesday, the GOP-controlled FTC approved the Adelphia merger without conditions.

In examining the sports programming issue, the FTC’s Bureau of Competition determined the Adelphia merger would not diminish DirecTV and EchoStar’s access to regional sports programming controlled by Comcast and Time Warner, nor would it lead to higher programming costs.

The proposed transactions “are unlikely to make the hypothesized foreclosure or cost-raising strategies profitable for either Comcast or Time Warner,” FTC Republicans Deborah Platt Majoras, William E. Kovacic and J. Thomas Rosch said in a joint statement.

“We are gratified by this action. We believe these transactions have substantial benefits for American consumers, and look forward to the timely completion of the FCC’s review process,” Comcast spokesman Tim Fitzpatrick said.

When the FCC party-line voting logjam will end can’t be predicted. The White House declined to confirm reports that President Bush had agreed to nominate Robert McDowell, an executive with a small phone company trade association in D.C., to fill the commission’s GOP vacancy.

Last April, Time Warner and Comcast agreed to purchase Adelphia’s 5.2 million subscribers in a transaction that included multiple systems swaps designed to beef up the clusters of subscribers each has in different regions of the country.

Although Adelphia has lost about 200,000 basic video subscribers since April, Comcast is expected to exit the deal with about 23.3 million subscribers, while Time Warner Cable will count 14.3 million customers. That will make them the No. 1 and No. 3 pay-TV providers in the country.

DirecTV and EchoStar’s Dish Network, which will rank as the second- and fourth-largest pay-TV providers, are pressuring the FCC to put conditions on the manner in which their cable competitors are allowed to distribute programming.

CONDITIONAL PROGRAMMING

The two satellite-TV giants — which combine to serve about 27 million subscribers — fear that Time Warner and Comcast will use their dominant position in top local markets to secure sports and other programming deals that satellite either can’t get or can get only on lopsided economic terms.

“I think the point that we are trying to make is that once they gain dominance in a market, they either withhold the programming from us completely, or they charge us what we consider discriminatory rates,” said DirecTV vice president of government relations Susan Eid.

The Los Angeles market is an example of how the Adelphia deal will realign a local pay TV footprint.

Time Warner will pick up 500,000 subscribers from Comcast in Los Angeles, giving Time Warner 70% of the market’s 2.7 million pay TV subscribers. The direct-broadcast satellite carriers argue that Time Warner offers so much local size that even unaffiliated programmers — especially sports networks — will be easily tempted either to freeze out satellite providers or demand license fees much higher than what cable pays.

“There is something magnetic about sports programming. It is must-have programming for customers in many places,” said David Moskowitz, EchoStar’s general counsel and executive vice president.

At a Senate Commerce Committee hearing last week, Comcast vice president Joe Waz said the satellite carriers have exaggerated the importance of sports programming. Although DirecTV and EchoStar insist their inability to carry Comcast SportsNet, the Comcast-owned regional sports network in Philadelphia, has cost them subscribers, Waz said those statements were not consistent with the facts.

“In Philadelphia, DirecTV and Dish Network have a market share of about 12%. That’s higher than Boston, higher than Springfield [Mass.], higher than New Haven [Conn.], almost as high as Baltimore [and] higher than several other major urban markets,” Waz said. “So there has to be something else at work besides the absence of sports programming on DirecTV in that market to account for those numbers.”

DirecTV and EchoStar have asked the FCC to address their concerns by banning Comcast and Time Warner from maintaining exclusive deals with regional sports networks and to impose compulsory arbitration if the satellite carriers believe they are being gouged on license fees.

In a solo move, EchoStar made another demand late last year: the FCC should require Comcast and Time Warner to wholesale all their programming services, such as Comcast’s The Golf Channel, to satellite on a la carte basis.

Even before announcement of the Adelphia merger, DirecTV and EchoStar complained that Comcast refused to sell them its Philadelphia sports network, the pay-TV home of the National Hockey League’s Philadelphia Flyers, the National Basketball Association’s 76ers and Major League Baseball’s Phillies. Comcast owns the Flyers and 76ers.

In this dispute, Comcast has had the law on its side. Under section 628 of the Cable Television Consumer Protection and Competition Act of 1992, cable operators are required to provide their satellite-delivered networks to any pay TV distributor. Since Comcast SportsNet Philadelphia is delivered terrestrially, Comcast said the section did not apply. The FCC agreed in a ruling affirmed by the U.S. Court of Appeals for the D.C. Circuit in June 2002.

Nevertheless, DirecTV and EchoStar want the Adelphia deal conditioned on gaining access to CSN Philadelphia and other exclusive sports channels. Intervention is necessary, the satellite firms insisted, because the Phildelphia model is spreading to places like Charlotte, N.C., where Time Warner Cable has sole rights to Bobcats NBA games on its turf.

“Philadelphia is the poster child,” DirecTV executive vice president of programming Dan Fawcett told the Senate panel.

Comcast and Time Warner counter that exclusive deals are the exception, not the rule. They also point out that DirecTV’s exclusive deal to distribute the National Football League’s “NFL Sunday Ticket” package of out-of-market games is an example of giving a satellite provider a clear edge over cable.

“The single most valuable — and exclusive — sports package today is the NFL Sunday Ticket, and it is not available on cable. Comcast’s content, in contrast, is widely available to competitors at nondiscriminatory prices and terms and that will not change as a result of the Adelphia transactions,” Comcast executive vice president David Cohen said.

SMALL WHACKS

Small players have taken whacks at the big cable deal. The America Channel (TAC), a network that plans to launch later this year on Verizon Communications Inc.’s FiOS TV video platform, now operating in three states, has failed to secure a carriage deal with Comcast or Time Warner. TAC CEO Doron Gorshein has turned to the FCC for help, saying that gaining either Comcast or Time Warner as a customer is crucial for any new network’s survival.

Waz told the Senate panel that TAC’s claims were false.

“There are so many competitive alternative distribution outlets available today that a carriage agreement with Comcast is not essential to viability,” Waz said.

Gorshein claims that no pay TV network has attained 20 million subscribers without carriage from Comcast or Time Warner, even though, theoretically, TAC could exceed the 20 million threshold based solely on satellite carriage.

“There is no precedent in the market for channels getting to 20 million subscribers without Comcast and Time Warner,” Gorshein countered. “Empirically, you can’t point to one channel that reached 20 million subscribers without at least one of them.”

NEUTRALIZING THE NET

Cable last year won the last Internet battle over the idea of “open access.” In that, they won the right to ban competing providers of Internet access, such as EarthLink Inc., from using their cable networks to serve customers.

Now, Web companies such as Google Inc., eBay Inc., Amazon.com Inc. and Vonage Holdings Corp., are mounting an effort to pre-empt any attempt by cable and phone companies to impede their access to broadband subscribers.

Egged on by public-interest groups, Copps and Adelstein are expected to push for network-neutrality conditions in the Adelphia deal. In a recent C-SPAN interview, Copps said: “I don’t think [the Internet] was ever supposed to be a gated community. This was supposed to be an open, thriving, come-one, come-all kind of network.”

Cable companies say codification of “network neutrality” is a cure in search of a disease, because no one has documented that a cable company has abused its gatekeeper position. Comcast has 8.1 million Internet subscribers; Time Warner Cable, 4.6 million.

“Our customers can use any legal service or application they choose on the Internet, and the market for high-speed Internet services is hotly competitive,” Comcast’s Cohen said.

Two telephone companies, AT&T Inc. and BellSouth Corp., have touted pay-to-play business models that, for example, would force Google to pony up cash to assure that search results and other services it provides get the fastest, most-reliable delivery to Internet users.

In November, AT&T chairman Edward Whitacre told Business Week: “They use my lines for free — and that’s bull. For a Google or a Yahoo! or a Vonage or anybody to expect to use these pipes for free is nuts!’’

Chris Murray, Vonage’s vice president of government affairs, said the voice-over-Internet services company hasn’t been actively lobbying the FCC on the Adelphia merger because cable operators haven’t threatened to block rivals that don’t pony up cash for access to their pipes.

Nonetheless, he said, “we see a need for action now on net neutrality, [even though cable companies are] not asking to hold applications hostage until they pay access fees.”

September