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Will Comcast and Time Warner be AT&T and T-Mobile redux?

If regulators borked the $39 billion merger of the No. 2 and No. 4 wireless carriers, is the $45 billion combo of the two biggest cable companies doomed? The competitive dangers are very different.

The headquarters of Comcast, the country's biggest cable provider that Thursday agreed to merge with the next biggest, Time Warner Cable, in a $45 billion deal.
Getty Images

When regulators look at Comcast's deal to buy Time Warner Cable, will they see NBC Universal or T-Mobile?

In 2011, regulators in Washington gave Comcast the go-ahead to buy the rest of media conglomerate NBC Universal from General Electric that it didn't already own, after the No. 1 cable provider agreed to abide by conditions, like preserving Net neutrality, for a seven-year period.

That same year, AT&T announced its plans to acquire T-Mobile USA from Deutsche Telekom in a deal valued at $39 billion. Regulators in Washington took a clear stance on that megamerger: The Justice Department sued to block it, and AT&T abandoned it before the year was out.

On the surface, a $45 billion proposal to combine the country's biggest cable providers smacks of the scuttled AT&T and T-Mobile combination -- a gigantic deal that would create a bigger giant at the top of an industry's pyramid. But Comcast and Time Warner Cable's path to approval looks more like NBC Universal's, and Time Warner customers may find themselves writing checks to Comcast instead.

There are "different kinds of competitive danger here from the AT&T-T-Mobile deal," said Gene Kimmelman, a director at the New America Foundation who served for three years as chief counsel for Competition Policy at the Justice Department's Antitrust Division. "They were direct competitors."

Not head-to-head
Comcast and Time Warner's key argument is that they don't directly compete, and thus wouldn't upset any antitrust concerns.

They have no overlap in any ZIP code in the US, and nowhere will a consumer lose a competitive choice should the two companies become one, David L. Cohen, Comcast's executive vice president, said during calls discussing the deal.

The country's top 50 television markets, and Comcast and Time Warner's presence in them. Comcast

For decades, cable operators set up exclusive regional franchises with local counties and cities, creating a patchwork of mini monopolies across the country. Officially, the Cable Television Consumer Protection and Competition Act ended that in 1992, but the towering barriers to entering another cable operator's fiefdom have resulted in little increase in cable competition in individual markets.

It's the polar opposite of the AT&T and T-Mobile landscape. AT&T was T-Mobile's head-on rival in nearly everywhere T-Mobile was present.

Cable companies, too, are facing bleak competitive trends. The emergence of national pay-TV competitors like Dish, DirecTV, and fiber-optic services from Verizon and AT&T, not to mention online upstarts like Netflix, have pounded cable's video subscribers for years. Until the most recent quarter, Comcast reported six years of shrinking video customer rolls. Though its user base finally ticked up at the end of last year, the company expected 2014 would fail to continue the growth.

The Time Warner-Comcast dynamic is also missing the maverick of T-Mobile that regulators were so eager to preserve. The Department of Justice and the Federal Communications Commission are likely patting themselves on the back after rejecting the 2011 merger, which forced T-Mobile to get more aggressive with service plans and pricing, ultimately pressuring its rivals.

There is no such standout in cable. Though Comcast is widely regarded as having the most advanced technology among cable operators, the companies' pricing and services are, on the whole, quite similar.

This lack of direct competition between Comcast and Time Warner means a challenge to the Comcast-TWC combination isn't likely to come from the Justice Department's antitrust division. A Justice Department representative declined to comment, while the FCC didn't respond to a message seeking comment.

The 30 percent cap
To pre-empt antitrust hand-wringing over the deal, Comcast has promised to keep its hands off 3 million of Time Warner Cable's 11 million subscribers. The company hasn't indicated which markets it will divest itself of, though they'll most likely be sold to Charter Communications, the cable rival that had been attempting a hostile takeover of Time Warner. That will raise Comcast's total subscribers to about 30 million, which will keep the combined company's video market share below an erstwhile 30 percent cap the FCC once set as the threshold for one company to control.

"When you look at the deal, it may sound scary," said Cohen, Comcast's executive vice president, who handles government and regulatory affairs. "But when you parse it...30 percent, that's always been the flashpoint for the government to be concerned."

That percentage is still huge: It's twice that of the No. 3 pay-TV provider Dish and 50 percent greater than No. 2 DirecTV. But the competitive backlash likely won't be based around the 30 percent market share figure, but around 66 percent -- that's roughly the percentage of homes that Time Warner-Comcast will have access to if combined.

The companies argue that scale like that will be a boon for their own cost savings and for providing more innovation to more people, but consumer advocates and programmers lambasted the disadvantages of such a concentration of power.

A map of Comcast and Time Warner footprints. If the companies combine, all these markets save a few would come under the control of one cable company. Mosaik Solutions

Public Knowledge, a consumer watchdog group, warned of creating a "bully in the schoolyard" and noted the dangers of putting a large proportion of our nation's communications infrastructure in one provider's hand. Another, Free Press, called it a "disaster for consumers" that should be unthinkable "in an already uncompetitive market with high prices that keep going up and up."

Though it's hard to come up with historical precedents for monolithic mergers that end up lowering prices for consumers, Comcast and Time Warner can argue that joining forces will give them a much stronger position to combat increases in content costs that they blame for the continual uptick in cable bills.

But the FCC's approach to media deals in the past has been guided by a desire to maintain a diversity of voices. As the scrutiny of the deal ratchets up, programmers are sure to argue that the takeover will make one company powerful enough to turn carriage negotiations into a bargain over the life or death of their programming. With Comcast-Time Warner holding so many consumers, media companies may be faced with either capitulating to the cable giant or seeing their programming wither, which could stifle diversity.

Change at the FCC
The FCC dealt the final blow to the AT&T and T-Mobile deal -- AT&T abandoned the bid after then-Chairman Julius Genachowski added his opposition to that of the Justice Department -- but the situation at the commission has changed.

CNET/Marguerite Reardon

For one, there's a new sheriff in town, and he used be fighting on the same side as Comcast and Time Warner. In October, Tom Wheeler was confirmed as the next chairman of the FCC. He's a venture capitalist and fund-raiser for President Barack Obama, but before that he was a lobbyist for the cable industry: He was chief executive of the National Cable Television Association from 1979 and 1984, followed by a longer stint representing wireless operators as head of the Cellular Telecommunications and Internet Association.

To be fair, Wheeler isn't cut from the cloth of cronyism. Public Knowledge, for example, issued a statement as Wheeler was being confirmed, anticipating him to be "an independent, proactive chairman who will not allow the FCC to become irrelevant."

The Comcast-Time Warner Cable proposal is the first major acquisition that Wheeler will review. So soon in his tenure, Wheeler has not been forced to show his hand, but he indicated in 2011 in a personal blog post that the FCC's opposition to the AT&T and T-Mobile deal missed the opportunity to impose new regulations on wireless providers in exchange for approving the consolidation.

Indeed, mergers like the mammoth one proposed Thursday give the FCC the chance to alter policy without forcing it to implement regulation for the entire industry. The FCC can devise a set of conditions that it argues protects the public interest that companies would otherwise balk at if they weren't getting a transformational acquisition in return. Such concessions helped Comcast succeed in buying out NBC Universal. It agreed to a laundry list of FCC conditions, as well as what's known as a consent decree with the Justice Department, that among other protections ensured standalone broadband Internet access at "reasonable prices" and prohibited Comcast from throttling its broadband service to disadvantage rival online video operators like Netflix.

Read: Is Comcast-Time Warner Cable really unthinkable? Maybe not

Comcast has already said that combining with Time Warner Cable would extend the protections of the NBC Universal deal to TWC's markets automatically. Most of those conditions are set to expire in 2018.

The deal comes weeks after the FCC's Open Internet rules were thrown out by a US court of appeals. Regulators may use this nation-blanketing acquisition as its way to impose more Net neutrality and promote competition from Net-based video providers. In much the same way that the conditions of the NBC Universal-Comcast have preserved Open Internet rules at Comcast regardless of what the court said last month, the FCC could intensify protections for a greater pool of customers by approving the Time Warner takeover conditionally, without having to worry about courts chipping away at them.

And if Comcast's success with the NBC Universal takeover tells us one thing, it's that the company can find friendly ears in Washington.