Adelphia Transaction Enters Endgame
Adelphia Transaction Enters Endgame
Adelphia Transaction Enters Endgame

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    About a year ago, Comcast, the largest cable company, and Time Warner, the second largest cable company, entered into an agreement to buy the bankrupt Adelphia Cable. The companies have proposed a combination of dividing the Adelphia carcass and swapping systems between themselves to achieve a level of regional dominance unheard of in the cable world.

    The deal cleared the Federal Trade Commission on 3-2 party line vote. But the Federal Communications Commission (FCC) must approve the deal as well. Although analysts initially predicted smooth sailing, the FCC has in fact conducted a rigorous investigation (far more so than FTC).

    As the biggest cable operators, Comcast and Time Warner are also the biggest broadbnad providers. A number of public interest groups (including PK and my employer, Media Access Project have asked the FCC to impose a network neutrality condition on the merger. Last fall, the FCC imposed its “four Broadband freedoms” and a requirement to sell “naked dsl” (i.e., dsl as a stand alone service) on the mergers of Verizon-MCI and SBC-AT&T. We've argued that, at a minimum, the FCC should impose the same conditions on Comcast and Time Warner.

    Why? Because these two companies control more than 50% combined of all cable lines in the United states (post merger). Not only are they the largest broadband providers, but they are also the largest providers of voice-over-IP competition to the telcos. Both Comcast and Time Warner have emphasized the importance of expanding broadband subscription, voice services, and other new IP-based services to continue to increase revenue per subscriber.

    In any rational world, you'd expect the FCC to look at that and say “do you think Comcast or Time Warner might be just a little tempted to use their control over the networks to interfere with rival products and services? Maybe we ought to do something about that.” Sadly, we do not live in a rational world. We have come to view the very idea of regulatory safeguards as abhorrent and an oxymoron. We need incontrovertible proof that a harm exists before we take action — by which time it is usually too late. For example, please note that Netscape ultimately won its antitrust suit against Microsoft. As you can see, this has both completely undid the harm Microsoft's anticompetitive conduct caused and has prevented Microsoft from ever using its dominance of the desktop in an anticompetitive way again. Or, if you prefer a more straightforward analogy, we have food handling rules to prevent food poisoning in advance, rather than leave it to consumers to force resteraunts to stay clean by filing negligence lawsuits.

    So it comes as no surprise that now that FCC Chairman Kevin Martin has started to circulate a proposed Order approving the transfer, it does not contain an network neutrality provision. Martin has said before he thinks we don't need network neutrality rules, and only went along with the network neutrality condition in the Bell mergers because the FCC was split 2 Republicans to 2 Democrats at the time and Martin needed to compromise to get the votes from the Dems.

    On the other hand, we have not lost yet. Martin still needs three votes. The newest Republican Commissioner, Robert McDowell, has shown his willingness to stand up to Martin by refusing to vote with Martin to approve multicast must carry. McDowell used to represent Comptel, the association for competing telephone companies, and therefore may take a more sympathetic view to network neutrality than Martin. Martin has shown his willingness to compromise on this issue in the past, and may well do so here.

    It is also noteworthy that Martin has even proposed one condition, that Comcast and Time Warner make exclusive sports programming available to competing video providers (like satellite providers or the telcos, if they start competing in video). One can safely conclude that Martin is not averse to conditions in principle, even if he doesn't like network neutrality specifically.

    When the Commission will vote out a final order remains unclear. While definitely after July 4, it could come as early as the following week. In the past, Martin has shown a preference for issuing major merger orders at open meetings (although the Commissioners can vote “on circulation” at any time). The next FCC open meeting is scheduled for Thursday July 13. I expect we have until then to get 3 votes for net neutrality.