Comcast-NBCU Deal Less Certain as Opposition Builds

Jeff Zucker, CEO, NBC Universal

Jeff Zucker, CEO, NBC Universal

July 15, 2010 – Comcast and NBC Universal executives are maintaining a show of confidence their merger will be approved notwithstanding signs the approval process has entered choppier waters.

NBC Universal CEO Jeff Zucker, quoted in press coverage of the annual media mogul gathering at Sun Valley in early July, assured reporters the merger is “on track” for closing by year’s end. So far, consensus among analysts and other observers has been the deal will go through, but with additional conditions beyond the self-imposed commitments already made by Comcast.

However, in an anti-trust policy climate that has changed radically under the Obama administration, it remains to be seen how arguments posited by the American Cable Association, DirecTV, Dish Network, consumer interest groups and others will be received at the FCC and the Justice Department, both of which have to approve the deal. So far, Congressional and regulators’ reactions have been muted, with the exception of FCC commissioner Michael Copps, who has characterized his own willingness to vote for the deal as a “steep climb.”

Speaking at the FCC’s July 13 hearing on the merger in Chicago, Copps, as reported by the Philadelphia Inquirer, said, “I cannot and will not accept halfhearted assurances from the industry” related to the public benefits of the merger. In an interview with the Inquirer, he warned that allowing Comcast and NBC Universal to merge could trigger a wave of mergers which would have a net effect of stifling competition and limiting the number of voices in news coverage.

There have been some expressions of misgivings from Congress, including most notably from Washington Democrat Maria Cantwell and Wisconsin Democrat Herb Kohl, a key member of the Senate Juduciary Committee who in May sent a letter urging the Justice Department and the FCC to adopt certain conditions “to avoid the risk of injury to competition and consumers.”

“The stakes for American consumers and competition in the media industry arising out of this transaction, as well as the implications for diversity of information and entertainment, are very high,” Kohl wrote, noting Comcast could withhold programming or raise prices to adversely affect competitors. But Kohl’s proposed conditions, such as requiring Comcast to divest its stake in Hulu and to commit to making programming available on non-discriminatory terms were relatively mild and probably in stride with what the regulators would require if they were to approve the deal.

In testimony prepared for the July 13 FCC hearing, Northwestern University economics professor William Rogerson, who performed the research on which ACA’s filing to the FCC was based, asserted the merger would injure multichannel video programming distributors (MVPDs) that buy just programming from Comcast-NBCU as well as other MVPDs, including many ACA members, that both acquire Comcast-NBCU programming and compete head-to-head for cable subscribers with Comcast.

“The horizontal harm is that combined ownership of NBCU and Comcast programming will increase the joint venture’s market power over programming and allow it to charge higher programming fees,” Rogerson said. “These fee increases will be substantially passed through to subscribers in the form of higher subscription prices.”

ACA describes the Comcast-NBCU merger represents as “an unprecedented combination of the country’s largest cable company and a Big Four broadcast television network.” Together, the organization notes, the two companies will control such key assets as ten NBC-owned TV stations located in many of the biggest markets; 20 cable networks, including No. 1 ranked USA Network; and nine regional sports networks (RSNs). Comcast would control NBC-owned TV stations and the Comcast RSN in six major metropolitan markets, ACA adds.

Using economic models and historical trends, Rogerson’s analysis suggested the joint venture would be able to raise programming fees by 20 percent and “possibly much more” in 60 large and mid-sized TV markets across the country representing 40 percent of U.S. TV households. And it says the combined venture would be able to force the market to accept 18 to 20 percent increases in programming fees charged to big national pay-TV providers such as DirecTV, Dish, Verizon and AT%26T. ACA also asserts Comcast-NBCU could double its retransmission consent take in the six TV markets where NBC O%26Os and Comcast cable operations co-exist.

There’s no proof, of course, that these results would accrue from the merger. The real question is whether regulators are ready to buy into the proposition that existing regulations plus market forces, including self-imposed prudent behavior, comprise sufficient protections against such abuses. Some insiders say the merging companies have sufficient political clout to buck the shift in the anti-trust climate.

Ultimately, it could come down to the types of conditions imposed and whether those conditions are not too draconian to kill the deal with respect to whatever boundaries have been imposed in the terms worked out between Comcast and NBC owner General Electric. Given that broadcasters are campaigning for more freedom to negotiate deals, whatever wariness they may feel over the Comcast intrusion on their turfs appears to be mitigated by their own desires to be part of future deals.

While there was concern among the merging parties that opposition from NBC affiliates could pose a problem, that issue appears to have been resolved. In a filing with the FCC on July 8, the NBC affiliates expressed their concerns, saying that “ownership of a major broadcast network by a major, vertically-integrated MVPD carries inherent risks that must be addressed before such a transaction can be approved.” But the affiliates said they would support the deal provided regulators impose conditions to prevent anti-competitive behavior in sports and retransmission negotiations.

No matter what the ultimate outcome turns out to be, it’s now clear the FCC’s share of the approval process will take longer than the applicants had hoped. In July the Associated Press reported that, because the commission wasn’t satisfied with initial responses to its questions, it was restarting the review process, the upshot being that it was only 45 days into the 180-day review process as of July 13.