Net neutrality and Netflix help quash Comcast merger bid

Mike Snider | USA TODAY

Fourteen months ago, an air of inevitability surrounded Comcast's announced bid to acquire competitor Time Warner Cable for $45 billion.

That was then, before public opinion against the deal surged and federal regulators developed grave doubts.

Early Friday, the Philadelphia-based cable and Internet giant dropped its bid when it became evident that federal regulators would not approve the deal.

"It wasn't going to happen. That was the judgment that we heard and the government had reached," Comcast CEO Brian Roberts said Friday on CNBC. "We have to live with it and respect that and move on."

Roberts spoke Monday with Federal Communications Commission chairman Tom Wheeler, according to documents filed with the agency.

By that time, Roberts likely knew that the deal was in deep trouble. A few days earlier, on April 17, Bloomberg News reported that Justice Department staff attorneys were expected to recommend that the merger be blocked.

And two days after Roberts talked to Wheeler, The Wall Street Journal reported that the FCC planned to shovel the deal to an administrative law judge.

Such a hearing designation order "is usually a bad sign," said IBISWorld technology analyst Sarah Kahn. Four years ago, AT&T dropped its attempt to merge with T-Mobile after the FCC chairman recommended sending the matter to an administrative judge. The Justice Department also sued to prevent the merger.

Comcast swallowing up Time Warner Cable was just too big for regulators to allow, Kahn said. "It would have made a huge company that would control much of a sign amount of cable TV and broadband Internet," she said.

Combined Comcast and Time Warner Cable would have given control of more than 50% of the home broadband market -- and dominance in 19 of the 20 largest media markets, says Todd O'Boyle, program director at Common Cause, a government watchdog group. "That is anti-competitive by anybody's definition," he said.

Already aroused by months of vocal support for the FCC's net neutrality rules, public opinion turned against, the merger. After the FCC approved its rules in February, "this was in many ways the second round," O'Boyle said.

More than 800,000 individuals submitted comments to the FCC about Comcast's deal, according to Common Cause. "Regulators had never approved a merger over this much public opposition," O'Boyle said. "There was nobody that really wanted this. Nobody thought this was a good deal except Comcast and Time Warner Cable."

The Justice Department agreed that the larger Comcast would have created "an unavoidable gatekeeper for Internet-based services."

The companies' decision to abandon the deal "is the best outcome for American consumers," Attorney General Eric Holder said in a statement.

But BTIG analyst Rich Greenfield says that Comcast could have doomed its merger bid about the same time it announced it --by allowing Netflix traffic to slow and forcing the company to pay to ensure a good experience for its subscribers. "They should have just paid it themselves to upgrade and nobody would have worried about the health of the net," he said. That got consumers interested and drew their ire.

"That put this issue on the tip of Americans' tongues," he said on CNBC on Friday. "Nobody knew what Internet neutrality meant. Nobody knew why you should be worried about an open Internet."

Roberts called the FCC's net neutrality decision "controversial rulemaking" and said "we do respect that customers want certain openness. ... We have always said we are for that."

As for the merger, he said that company had stipulated there would be no breakup fee should it not go through. "We knew this at the beginning and that's why we structured the deal in such a way that would allow us if necessary to reach this conclusion."

He stopped short of addressing what future deals might lie ahead. But Forrester research analyst James McQuivey sees potential as long as Comcast embraces the changes.

"Programmers are signaling they intend to break up the model, which they've done by supporting Sling TV and others," he said. "That is now the competitive field that Comcast needs to set its sights on, not the mucky and overregulated business of putting cables in the ground and obsolete set-top boxes in people's homes."