Is Comcast-Time Warner Cable really unthinkable? Maybe not

Rumors have been flying around over the weekend that Comcast is looking to buy Time Warner Cable outright or as part of a deal with Charter Communications. While such a deal would likely be heavily scrutinized by regulators, it still may have a chance of passing muster if the companies are willing to make some serious concessions to appease policy makers.

So far neither company is commenting on the rumors. But if such a deal were to be announced, it would expand Comcast's cable empire to serving a whopping 33 million customers across the country, adding huge metro markets like New York and Los Angeles to Comcast's already large footprint. Comcast already serves major markets such as Chicago; Boston; Washington, D.C.; Philadelphia; Detroit; Houston; and Denver.

Because a combined Comcast-Time Warner Cable company would be so huge, there has been talk that Comcast may partner with smaller cable operator Charter Communications to split up the customers and territory as a way to win regulatory approval. In such a scenario, Comcast would likely get the big metro markets of New York, Dallas, and Los Angeles, while Charter would take smaller markets such as North Carolina, Maine, and parts of Ohio.

Consumer advocates have already begun voicing opposition to such a deal and say it would harm consumer interests. Harold Feld of Public Knowledge said that such a tie-up would be "unthinkable" since it would concentrate even more power and subscribers under Comcast, which is already the largest cable operator in the nation.

Indeed, federal regulators would no doubt look very closely at such a deal with or without Charter's involvement. But equities analyst Paul Gallant of Guggenheim Securities thinks the deal may have a chance of passing muster, so long as Comcast and Time Warner are willing to live with conditions imposed by regulators. In a research note sent to investors, Gallant said that the companies would likely face more resistance from the Federal Communications Commission, rather than the Department of Justice.

Gallant reasoned that since Comcast and Time Warner don't compete with one another directly in any single market, an antitrust argument to block the merger is less likely. An obvious but important starting point: Comcast and Time Warner Cable do not compete with each other. Gallant points out that this fact alone makes a Comcast-Time Warner Cable merger different from an antitrust perspective than other communication deals, such as AT&T's proposed merger with T-Mobile. That merger, which would have combined direct competitors in the wireless market, was rejected by the Justice Department and the FCC two years ago.

But because Comcast is already the largest cable operator in the US, and it would be buying the second-largest cable operator, the merger could affect the public interest. And that would be something the FCC would consider.

"Over the past 20 years, Republican and Democratic DOJs have basically stopped challenging vertical mergers because courts were increasingly unwilling to accept government claims that they violated the antitrust laws," Gallant writes. "So the FCC will be even more central in a possible Comcast-TWC deal because its 'public interest' review is broader than pure antitrust analysis."

In addition to combining communication networks, a tie-up between Comcast and Time Warner would strengthen Comcast's control in the media world. And this, Gallant argues, is likely to be the piece of the deal that will ruffle the most feathers in Washington rather than the network consolidation.

"Media consolidation tends to strike a deeper chord in Washington than telecom consolidation because of the cultural and public opinion effects of media companies," he said.

Through its acquisition of NBC Universal in 2011, Comcast is already a large owner of media content. And as the largest paid TV provider in the US, it's also the largest buyer of such content. As a result, there are already concerns that Comcast is not working as aggressively as it could to negotiate lower content prices for the industry overall, since it can use its NBC content to win favorable access, while also benefiting from higher prices among other TV providers.

What's more, increasing Comcast's footprint from 21 percent to 33 percent of all US pay TV homes in the nation, which is what would happen if Comcast merged with Time Warner Cable, would give Comcast more incentive to use its NBC content more strategically against other TV operators, such as Verizon and AT&T, Gallant explains.

Still, he argues that these regulatory concerns may not necessarily kill a potential deal. Instead, he suggests that federal regulators may use these concerns to negotiate conditions that could establish or extend public policy initiatives. For instance, regulators may try to impose more Net neutrality conditions as a way to promote competition from Net-based video providers. This might include giving Internet over-the-top video distributors, like Amazon or Netflix, the same rights to buy NBC content as other paid TV providers. The agency could require Comcast-Time Warner to comply with all Net neutrality regulations regardless of the outcome in any court decisions that may chip away at the regulation.

Gallant also said that the regulatory risk is improved if Comcast teams up with Charter.

"We see regulatory concerns with any transaction that materially expands Comcast/NBCU's footprint," he said. "But our instinct is that the regulatory concerns would be lower if Comcast only proposed buying half of TWC simply because, from the FCC/DOJ's perspective, the risk-reward balance probably improves. The agencies could still advance pro-competition policies via conditions, but with less downside risk given the smaller geographic area brought under Comcast/TWC's control."