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With New Charter conditions, regulators focus on online video

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With New Charter conditions, regulators focus on online video

New conditions proposed by regulators for 'spendingacquisitions ofTime Warner CableInc. and Bright HouseNetworks LLC could have a big impact on digital channels' access toprogramming in a large swath of the U.S. in the near term, industry observerssaid.

The FCC and the U.S. Department of Justice both took stepsApril 25 that could lead to conditional approve of the mega-transactions, whichwould create the second-largest broadband provider in the country behindComcast Corp. Finalapproval by the DOJ is pending court approval of a proposed settlement of thedepartment's anti-trust concerns; the FCC's proposed order still must win approvalby the full commission.

With conditions focused specifically on how the mergedcompany, referred to as New Charter, would interact with online videodistributors, some said it would seem aimed at impacting how large MVPDs dealwith competition from digital channels without initiating a broad, industrywiderulemaking process. Because of New Charter's size, the conditions wouldimmediately apply to a large segment of U.S. Internet and video distribution.However, the proposed seven-year lifespan for the conditions also would meanthat the rules would eventually cycle out of the rapidly evolving digital videoindustry.

The conditions focus on trying to ensure online videodistributors continue to have fair access to programming. The combined companywould be prohibited from contractually limiting a programmer's ability todistribute content online. The conditions also bar New Charter from imposingdata caps, charging usage-based pricing on broadband users and charginginterconnection fees on online video providers. An independent monitor would beappointed to ensure compliance.

Beyond just programming, the regulations require New Charterto expand services in a way that will inevitably overlap other MVPD markets,forcing competition in an industry where participants typically avoid eachother.

Former FCC commissioner Harold Furchtgott-Roth said hebelieves that the regulators are overreaching by implementing such"heavy-handed" rules on specific companies in the form of mergerconditions.

"It's astounding that they could come up with theseessentially company-specific regulations like this," he said in aninterview.

Further, the former commissioner took issue with theseven-year period, noting that while it does provide a level of flexibilitycompared to traditional rulemaking, merger conditions are usually given ashorter lifespan of about two or three years.

The fact that the DOJ and FCC seemed to collaborate soclosely on the deal also seems "odd," Furchtgott-Roth said.

"There probably is some kind of coordination that goeson, but to have this type of joint statement is very rare," he said.

It comes at a time of increasing pressure on the FCC inpublic statements from the White House, S&P Global Market Intelligenceanalyst Tuna Amobi noted.

"[FCC Chairman] Tom Wheeler and this regime havecertainly shown a willingness to take on some legacy issues, whether that'sTitle II or some of this digital stuff, retransmission, et cetera. I will saythough, it's also taken quite some nudging from President Obama," theanalyst said in an interview.

"It's very doubtful a Republican majority would beimplementing some of these things," Amobi continued, "so it's kind ofa confluence of the political environment as well as the competitive landscape."

But for the most part Amobi was amendable to thearrangement, saying that the FCC realizes many of its existing regulations are"out of tune," so they are taking advantage of merger situations toget ahead of the market. Where Furchtgott-Roth said he believes an unregulatedNew Charter would function fine in a market that is seeing new kinds ofcompetition in the form of digital delivery, Amobi believes these kinds ofsteps are "inevitable."

"It's a new paradigm of competition from streaming, andthose [streaming companies] are no slouches when it comes to lobbying as well.They're a lot more powerful today than they were arguably when the Comcast-NBCUdeal was made. So the FCC, they were almost at somewhat of a crossroads to seemto be consumer friendly and at the same time create a more competitiveclimate," the analyst said.

As for the company itself, Amobi said the regulations mightlimit New Charter's margins to some degree, but Charter is already not known asa company that presses the agenda on many of the conditions. Compared to TimeWarner Cable and Comcast, Charter is not considered to be as "sensitive tocompetition from online video," Amobi said. Thus, the conditions shouldnot weigh too heavily on the company's financials.

While there may be a loss in margin under New Charter asTime Warner Cable meets the conditions, it should not be too drastic, Amobisaid, and, "Ultimately, I think it was a good decision to move ahead tomake this kind of deal."

Why the FCC and DOJ chose to allow the Charter-Time WarnerCable merger under these conditions when they shot down the proposedComcast-Time Warner Cable merger altogether is unclear. Amobi speculated thatComcast's situation was more complicated due to its ownership of and theconditions that applied there. However, Furchtgott-Roth said it is anyone'sguess.

"I think they wanted to kill the Comcast deal. I don'tthink there's anything magic about it," he argued. "All of this iscompletely opaque to the public and it's impossible to know why one deal getsthrough and the other one doesn't."