Most people assume the Federal Communications Commission denied the merger between Comcast (CMCSA 1.57%) and Time Warner Cable (NYSE: TWC) because it did not want one cable/Internet provider to control that large a piece of the market. It also did not help that Comcast suffered a series of very public customer service gaffes during the period the deal was being reviewed.
The FCC was under pressure from the public to, if not outright say no, at least place heavy restrictions on the deal. And this is from a public that usually does not collectively notice these sorts of mergers.
In the wake of the Comcast/TWC deal collapsing, Charter Communications (CHTR 2.04%) has stepped in and agreed to acquire Time Warner Cable in a $55 billion deal. That deal seems, on the surface, like it stands a better chance of being approved for two reasons. First, it creates a second cable company/ISP with a customer base that rivals Comcast's. Second, Charter -- though it has its own customer-service issues -- is not Comcast.
That's a popular public view of how the FCC will handle this transaction, but it's not really an accurate one. Approval is possible, even edging toward likely, but it's by no means a sure thing.
Here's the good news (for the companies)
For Charter and Time Warner Cable, the good news is that the FCC has not entirely ruled out mergers and consolidation in the cable space. The agency has done that in the past when it put the kibosh on a Sprint/T-Mobile merger by making it clear that it wanted the country to retain four major wireless carriers.
That is not the case here, as Chairman Tom Wheeler has specifically reached out to Time Warner Cable CEO Rob Marcus and Charter CEO Tom Rutledge to tell them that, "they shouldn't assume the agency is against any and all future cable deals," The Wall Street Journal reported. Basically, Wheeler told the two executives that the FCC was not convinced the Comcast/TWC merger was in the public interest, but that does not mean all cable transactions will be considered the same way.
Open a door, close a window
While Wheeler clearly left the door open for the deal to be approved, he also gave the reason why it may not be. It's still possible for the FCC to decide that this new hookup does not benefit the public.
It was clear in the case of the Comcast deal that, allowing it to acquire Time Warner Cable would create an entity that was too large to compete with. As you can see on the chart below, a combined Comcast/TWC would dwarf its nearest rival, while a mashup with Charter would still put the joined entity below Comcast.
| Pay-TV Providers | Subscribers at End of 1Q 2015 |
Net Adds in 1Q 2015 |
Net Adds in 1Q 2014 |
| Cable Companies | |||
| Comcast | 22,375,000 | (8,000) | 24,000 |
| Time Warner | 11,025,000 | 33,000 | (34,000) |
| Charter | 4,288,000 | (5,000) | 13,000 |
| Cablevision | 2,653,000 | (28,000) | (14,000) |
| Suddenlink | 1,132,000 | (6,400) | 2,400 |
| Mediacom | 891,000 | 1,000 | (8,000) |
| Cable ONE | 421,333 | (29,884) | (14,331) |
| Other major private companies* | 6,435,000 | (15,000) | (20,000) |
| Total Top Cable | 49,220,333 | (58,284) | (50,931) |
Source: Leichtman Research Group.
That's a mark in favor of the merger, but the FCC under Wheeler has shown a willingness to listen to the public. It's possible that the now quiet masses could take issue with this merger because it still makes two companies that are not well liked bigger and more powerful.
When it comes to subscription-based television services, Time Warner Cable ranks at the bottom of the list for customer satisfaction, according to the recently released American Consumer Satisfaction Index report for 2015. The company dropped by 9% from last year to score a 51 -- well below the category average of 63. Charter comes in right at that average, improving 5% over the previous year.
That makes Charter a better-liked company than Comcast, which scored a 54; but being average in the lowest-rated ACSI category is a hollow victory. Neither TWC nor Charter has an adoring public behind it, and that could ultimately doom this deal.
Be on your best behavior
At first, the FCC seemed inclined to approve the Comcast deal; but the company proved unable to keep itself out of the news for the wrong reasons. While the deal was being considered, it kept making very public missteps, including a customer service phone call that went viral in which a well-known technology editor was berated for asking to cancel his service.
The negative attention from that scandal and a handful of others reminded the public that it did not want Comcast getting any bigger. That ultimately forced the FCC to take action.
For Charter to succeed with its merger efforts with Time Warner Cable, it needs to keep its nose clean. If it can avoid publicity, and look like just another cable company -- not a particularly lousy one in an especially disliked field -- then the deal should happen. If, however, it gets in the news for calling its customers names on their bills -- as both Comcast and Time Warner Cable did -- well, then, this deal could end up cancelled by the FCC.
