Comcast’s Plan to Ram Through the Time-Warner Merger

It argues that low-income customers will benefit from “Internet Essentials.” But regulators aren’t buying it.

It looks as if the titanic $45.2 billion merger between Comcast and Time Warner Cable is likely to be blocked at the federal level. Bloomberg is reporting that staff attorneys at the Department of Justice are building their case against the deal. (This is reminiscent of rumblings that I wrote about last December.) It isn’t over until it’s over, and the law enforcement officers at DOJ are far too principled to leak. All the same, the deal is unquestionably in trouble.

Comcast’s problems aren’t limited to the antitrust concerns the DOJ might have about this giant combination. Those worries are weighty enough; there is certainly ample evidence supporting the antitrust case against the merger. This starts with the fact that a post-merger Comcast would control a dominant share of the nation’s the high-speed Internet access marketplace (particularly for speeds of 25 Mbps or more, where the vast majority of Americans have no choice other than their local cable monopoly). That would give Comcast unprecedented control over the way Americans access the Internet. And — even with the FCC’s recent Open Internet rules in place — that control would give the company the ability to harm the development of online businesses.

Indeed, Comcast would have innumerable opportunities to squeeze online companies. Every element of the Comcast network provides an opportunity for control and rent-seeking — interconnection points (see Jammed), CDN hookups, access to subscribers over the “last mile” of the network, and control over set-top boxes (see The Big Lock-In). And if that’s not enough, Comcast can use data caps and other pricing mechanisms to make life miserable for online businesses that aren’t willing to play along. It’s all one big digital pipe controlled by Comcast; there are plenty of dials for the company to turn.

Here’s more trouble for the cable giant: to complete the merger, Comcast not only has to has to get approval from the apparently skeptical DOJ, but also from the FCC and state authorities. That’s because those telecom regulators approve license transfers that will need to be made as part of the deal. (Time Warner Cable holds licenses issued by the FCC for a variety of wireless functions, all of which would be transferred to Comcast; local authorities have power over pay TV franchises, now held by TWC, that would also be transferred.)

When it comes to the telecom regulators, Comcast has to prove the merger actually benefits the public interest in some way. Any way. This is not easy.

California, as usual, leads the way in providing color for the otherwise grey face of telecom policy. Although many other states have struck deals in exchange for letting the merger through, California Public Utilities Commission (CPUC) Commissioner Mike Florio recently released a proposed decision recommending that the CPUC block the merger. It makes for gripping reading.

If the Comcast/Time Warner Cable merger goes through, Florio writes, the size of Comcast’s footprint in California will more than double. Once the dust settles, about 84 percent of California households will be served by Comcast, and for speeds over 25 Mbps Comcast will have a monopoly in about 78 percent of California census blocks — with only one competitor in almost all the rest. Comcast’s ability in California to shape all information marketplaces according to its own desires will be completely unconstrained. (Same concerns on the East Coast, by the way — a post-merger Comcast would have a belt of power extending from the mid-Atlantic to Maine, where media and government powers live.)

Comcast has a blizzard of responses to Florio’s concerns: it will migrate existing TWC customers onto better digital networks, it will make its nationwide WiFi network available to TWC subscribers, it will save $1.5 billion in operating efficiencies year after year, and it will achieve economies of scale that will allow it to build out its network faster.

But Comcast’s biggest tool of persuasion has been a program it calls “Internet Essentials,” originally used to convince the FCC that the company’s 2011 merger with NBCU was a good idea. It involves extending low cost access to schools and people who can’t afford Comcast’s high rates. Comcast sees Internet Essentials as kind of a feel-good weight that will tilt the scales of justice in its favor: when the merger goes through, the company promises, more schools and low-income residents throughout California will qualify for the $9.95 monthly rate for 5 Mbps Internet access made possible by this program.

The fact is that Comcast doesn’t have many choices when it comes to identifying the benefits of the Time Warner Cable merger. All those operating efficiencies won’t necessarily result in lower prices or better customer service, given the complete absence of competitive pressure in the world in which Comcast operates. In fact, Comcast Executive Vice President David L. Cohen has publicly stated that if there are big cost savings, Comcast isn’t necessarily going to share them with customers. “We’re certainly not promising that customer bills are going to go down or even increase less rapidly,” Cohen said. (Give him points for frankness, at least.)

In light of this reality, Comcast has to plug Internet Essentials every chance it gets. And it does, particularly in ads that Washingtonians (or California regulators) are likely to see. Watching Comcast tout the program, you’d think that Internet Essentials was the Second Coming of benevolence, on a par with the decision by Andrew Carnegie to build libraries across America in the early 1900s.

A typical quote, this one from Comcast’s Investor Relations site:

We also have committed to bring our nationally acclaimed, low-income broadband adoption program, Internet Essentials, into TWC markets. Already, in less than three years, we’ve connected over 1.2 million low-income Americans to broadband in Comcast markets across the country. We can’t wait to bring it to TWC cities like LA, Dallas, Charlotte, and New York City, making this opportunity available to millions more families and helping reduce the unacceptable digital divide in the country.

Sound good? Well, not so much. The Florio draft decision carefully lays out the other side of the story. Internet Essentials doesn’t come out as a shining exemplar of anything — other than, perhaps, a customer acquisition program masquerading as a philanthropic gesture.

For starters, only low-income families with school-age children are eligible for the program. It does nothing to close the digital divide for other underserved groups like the elderly, the disabled, and low-income childless adults. Plus, it’s hard to apply: the California Emerging Technology Fund says that it takes two or three months for applications to arrive. No existing Comcast customers are eligible — no matter how “low-income” you are, you can’t decide to reduce your bill by applying for Internet Essentials instead. (Families have been told to drop their Comcast service for 90 days and then try signing up — a terrible hardship for anyone.)

It hasn’t been a popular program in California, where somewhere between just 11 and 15% of eligible families have signed up, depending on how you count. (Comcast makes it virtually impossible to figure this out; it doesn’t release data that would allow this calculation to be made reliably, so everyone squirrels around trying to reverse-engineer the numbers Comcast does make public.)

That’s not all. The service is decidedly third-rate; the FCC says that 25 Mbps is the standard for high-speed Internet access these days, but Internet Essentials sends 5 Mbps into households. And what happens when your child graduates from school? That’s right: your eligibility vanishes. And you are likely to be converted into a “regular” Comcast customer, having become accustomed to the dignity of reliable Internet access at home. In other contexts, this is called “up-selling.”

Florio’s filing reports that just 46,000 California households are part of the Internet Essentials program — leaving 87 percent of the eligible population out. At the same time, Comcast racked up 88 million media impressions and 242,000 public service announcements marketing the program. Good at PR, bad at closing the digital divide.

The Comcast/TWC deal is not, primarily, about the character or ethical nature of the companies involved. They’re in the business of making money. Comcast designed Internet Essentials so as to ensure it wouldn’t cannibalize their mainstream services. But to make even more profit from the increased scale a Comcast/Time Warner Cable combination would produce, the company needs to convince the country that this merger is good for the rest of us. And that would be hard for anyone to do.

Even Comcast.

Follow Backchannel: Twitter | Facebook