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Binging and whining after the Charter/Time Warner Cable deal

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Binging and whining after the Charter/Time Warner Cable deal

Opinions expressed inthis piece are solely those of the author and do not represent the views of SNLKagan.

The three-way marriage between Charter Communications Inc., and is allbut a done deal at this point. It is a transformative transaction for the threecompanies involved, as together they will become the nation's second-largestcable operator behind ComcastCorp. But the deal also has broader implications.

Here's a look at the FCC's final on the mega-merger and howthat translates to some potential winners and losers.  

The winners

Bandwidth hogs — As one of its chief conditions forapproving the deal, the FCC has prohibited the new Charter from imposing datacaps or imposing usage-based pricing on its residential broadband services forthe next seven years. That means that new Charter customers can go crazystreaming Amazon.comInc.'s "Mozart in the Jungle" or 's "House ofCards" in 4K on a loop, month after month.

Prior to the merger, Time Warner Cable had introducedvoluntary usage caps, offering 5-GB- and 30-GB-per-month plans for lowerprices. "The goal of usage-based pricing was to offer customers who useless bandwidth … an opportunity to pay less and have an Internet offering thatbetter meets their demands for both usage and price," Time Warner CableCEO Rob Marcus saidin July 2015. Those plans, he emphasized, were about providing more choice andwere not aimed at managing over-the-top video consumption or discouragingcustomers from using other video products. Despite the positive spin, the plansnever seemed to take off with consumers.

Charter, meanwhile, technically had usage caps as recentlyas early 2015, according to StoptheCap.com. Charter specified in its terms andconditions that the caps were determined by the tier of service, starting withthe base plan's 100-GB cap and going up to the 500 GB Ultra plan. ButStoptheCap notedthe caps were almost never enforced and were treated more as "guidelines."

With the new Charter prohibited from imposing caps for thenext seven years, it's hard not to wonder whether other cable operators willfeel pressured to move away from usage-based pricing as well. And a number ofcompanies, large and small, already seem to be taking steps in that direction.

Comcast, for instance, had until recently been pushingforward with testing300-GB caps in a number of cities scattered across a dozen states, charging $10for every 50 GB of data used in excess of the cap.

But in late April, Comcast said it would raise the capsignificantly to 1 TB per month. "A terabyte is an enormous amount ofdata," Comcast Cable Executive Vice President of Consumer Services MarcienJenckes said in an April 27 blogpost. "You can stream about 700 hours of HD video, play 12,000 hoursof online games, and download 60,000 high-res photos in a month."

He noted that the vast majority of Comcast's Internetcustomers never come close to using 1 TB of data. "Our typical customeruses only about 60 gigabytes of data in a month," he said, adding thatonly 1% of Comcast's "super users" ever use more than 1 TB. Thosecustomers will have the option of signing up for an unlimited plan for anadditional $50 a month, or they have the option to purchase additional bucketsof 50 GB for $10 each. The new policy goes into effect in the test markets onJune 1.

Separately, Telephone and Data Systems Inc. unit BendBroadband,which serves Central Oregon, saidMay 9 that it was dropping its monthly data usage caps for customers whosubscribe both to a Bronze or above Internet package and an Essentials or aboveTV package. All told, the company estimated that more than half of its Internetcustomers would no longer be subject to usage caps.

Netflix — Netflix has been complaining aboutinterconnection fees for years. In March 2014, Netflix CEO Reed Hastingsreferred to these fees as Internet tolls, saying they were a major reason whythe U.S. needed stronger, more up-to-date net neutrality rules. "Withoutstrong net neutrality, big ISPs can demand potentially escalating fees for theinterconnection required to deliver high quality service," Hastings wrotein a blogpost.

But Netflix will not have to worry about risinginterconnection fees from the new Charter as one of the FCC's conditionsprohibits the combined company from raising prices on companies that deliverInternet traffic — including online video traffic — requested by its broadbandsubscribers. Moreover, more companies — including transit, content deliverynetworks and edge providers — will be able to qualify for settlement-freeinterconnection.

Earlier this year, Hastings said he thought the Charter dealwas "a tremendous positive for the OTT industry" given theconcessions and conditions attached to it. "Charter has agreed to amultiyear strong net neutrality policy, something no one else has publiclyagreed to," Hastings said during a January . "That means thatwe, Hulu, Amazon and others can compete on an open basis. And so we think itwould be a huge step forward for U.S. policy in terms of OTT."

John Malone — DISH Network Corp. and others had been pushing the FCCto include a condition that limited the power of John Malone's influence at thenew Charter. The media mogul's Liberty Broadband had a 26% stake in Charterprior to the deal and is expected to have an 18% or 19% stake after thetransaction. Through his various other investments, Malone also holdssignificant voting interestsin Discovery CommunicationsInc., Starz, Lions Gate Entertainment Corp. and the variousLiberty Media Corp.entities. DISH argued that Malone will use his influence to turn thecable market into a duopoly controlled by Comcast and Charter. "Malone hasnever disavowed his preference for a fraternity of cable companies workingtogether to thwart competition," Dish said, citing a recent interview inwhich Malone was quoted as saying "The fewer big players, the easier it isto get alignment.'' Despite these arguments, the FCC did not impose anyconditions on new Charter related to Malone or his vast media empire.

FCC Chairman Tom Wheeler — Over the last year, thecommission has seen its Open Internet rules — which prohibit the blocking andthrottling of traffic, ban paid prioritization, and grant the FCC the power toexamine interconnection agreements and sponsored data plans — on a number offronts. The trade group USTelecom filed a lawsuit challenging the legality ofthe rules, calling them "arbitrary and capricious." More recently,the U.S. House of Representatives passed the "No-Rate Regulation ofBroadband Internet Access Act" on April 15, which could potentially gutthe FCC's ability to enforce its net neutrality rules.

The conditions on the merger, however, are set in place andwill not face the same challenges. The chairman can rest easy knowing that atleast where the new Charter is concerned, his policies will remain in place.  

The losers

Smaller cable operators in the new Charter footprint— As one of its conditions for approving deal, the FCC is requiring the newCharter to undertake a build out program that will deploy high-speed broadband— offering download speeds of at least 60 Mbps — to 2 million more homes and/orsmall businesses within a five-year time frame. The devil with this conditionis of course in the details. Of the 2 million customer locations, at least 1million must be in areas served by at least one other provider. In other words,Charter will act as an overbuilder in those markets.

The American Cable Association warns that this conditioncould end up hurting the small cable operators already serving those areas."Such harm to smaller providers and their customers is very likely becausenew Charter, using its significant scale advantages made possible by the FCC'sapproval, will have an economic incentive to choose locations served by smallerproviders because Charter can most easily drive them out of the market, leavingCharter as the only provider," ACA President and CEO Matthew Polka said ina May 10 statement. Headded that the condition will likely lead to further subscriber gains forCharter, thereby increasing the likelihood of a nationwide Comcast-Charterduopoly.

Republican FCC Commissioners Michael O'Rielly and AjitPai — There is almost something Shakespearean about the fight that O'Riellyand Pai have put up against anything remotely connected to Wheeler's OpenInternet rules. It is a tale full of sound and fury, signifying nothing.

Commenting on the FCC's order approving the deal, Pai issueda dissenting statement saying the commission only approved thetransaction so that it could turn it into "a vehicle for advancing itsambitious agenda to micromanage the Internet economy." He pointedspecifically to the conditions that forbid Charter from any usage-based pricingand that dictate certain elements of the new company's interconnectionagreements. "This Order sets the stage for the Commission to target paidpeering and usage-based pricing on an industry-wide basis," Pai warned,adding that he feels "it is certainly not per se unreasonable for an ISP to ask high-bandwidth users toshoulder more of the burden than low-bandwidth users."

As for O'Rielly, he said he had been surprised by many ofthe conditions that Charter itself had offered in connection with the deal."If a company is willing to constrain itself, and even if the Commissionmakes modifications that the company finds agreeable, I am hard pressed to seea need to stop these from going forward, even if I strenuously disagree withthe reasoning, arguments, legal justification, wording, substantive directionor outcome," O'Rielly said in his own dissenting statement."To put it more simply, if a company wants to shoot itself in themetaphorical foot, who am I to stop it from doing so?"

On the other hand, the commissioner expressed concern thatthe conditions on this deal would serve as a precedent for future transactions."Using the same metaphor, a company shooting its own foot becomesextremely problematic to me if it leads to the Commission taking the gun andinflicting similar wounds on other companies."