Charter-Time Warner Cable-Bright House Networks Mergers: Overview and Issues
In May 2015, Charter Communications, Inc. announced that it reached agreements with Time Warner Cable Inc. (TWC) to merge the two...
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Overview

In May 2015, Charter Communications, Inc. announced that it reached agreements with Time Warner Cable Inc. (TWC) to merge the two companies in a deal valued at $78.7 billion, including the assumption of debt, and with Advance/Newhouse Partnership to acquire Bright House Networks (BHN) for $10.4 billion. The combination of Charter, TWC, and BHN would create a single entity providing cable television and broadband access service to 23.9 million customers in 41 states, making it the nation's second-largest cable television operator and broadband access provider.1 At the federal level, the U.S. Department of Justice (DOJ) and the Federal Communications Commission (FCC) must approve the transactions before they can close.2 If the deal is not approved by regulatory authorities, Charter will pay TWC a breakup fee of $2 billion. Charter, TWC, and BHN filed an application for FCC approval in June 2015.3

As regulatory authorities begin their review of the proposed transactions, four key issues may merit analysis:

1. Members of Charter's board of directors also serve on the boards of several companies that create television programming, such as cable networks Discovery and Starz and film and television studio Lions Gate. These interlinks could potentially enable Charter to impede competition in the distribution of video programming. Charter's increased national market share after the proposed transactions would give it more leverage in negotiations with television programming creators.

2. John Malone, a major investor in Charter, controls a significant stake in Charter's competitor, DIRECTV. AT&T, a major provider of telephone, video, and broadband service, is in the process of acquiring DIRECTV, which would make it the largest U.S. distributor of video programming. Federal regulators have approved the transaction. That transaction, if completed, could result in Malone becoming a substantial shareholder in AT&T. Regulators may be concerned that Malone's influence over the combined AT&T-DIRECTV and the merged Charter could thwart competition among video distributors to acquire programming from creators and to sell programming to consumers.

3. TWC has various joint ventures and partnerships with Comcast Corporation, the largest cable television and broadband access provider in the United States. Regulators may be concerned that the merger would result in close relations between Comcast and Charter, potentially reducing competition to acquire programming from creators and among broadband access providers distributing programming from online video distributors.

4. Authorities may seek to investigate the reliability of Charter's claim that a key benefit of the transactions is Charter's commitment to investing in TWC's and BHN's products and services. The companies claim that the merged firm's wider national footprint and reduction in overhead costs will enable it to invest more than the three firms could on their own.4 However, Charter is expected to assume in excess of $24 billion of debt to finance the transaction.5 The FCC may be concerned that the debt could limit Charter's ability to fulfil its commitments to improve service quality and availability.

To provide context for the analysis of these issues, this report describes recent trends in the television industry, the events leading up to the proposed transactions, and the criteria and process of regulatory review.

Television Industry Background

The television industry comprises many players. These players assume several distinct roles:

Content owners produce or control the copyright to video programming. Examples of content owners include television studios, movie studios, sports teams, and broadcast stations that produce local news programs.

Aggregators/packagers pay the content owners for the right to use their programming. Examples of aggregators and packagers include broadcast television networks, cable networks, and broadcast television stations.

Distributors purchase video programming from aggregators/packagers, content owners, or other distributors and sell it to paying subscribers. Congress has defined a class of multichannel video programming distributors (MVPDs) that have certain rights and obligations under the law. These include cable operators, satellite operators, and some traditional telephone companies that own and operate their own distribution facilities. The FCC is considering expanding the definition of MVPDs to include companies that distribute certain types of video programming over the Internet.6

Many companies fall into more than one of these categories, and some have multiple operations within a category. For example, all of the leading broadcast television networks also own cable networks and broadcast stations and produce content. In addition, while TWC and BHN are two separate distributors, BHN currently relies on TWC to negotiate programming agreements.7

Because of this complex structure, many companies in the television industry are in frequent negotiation with one another for the right to transmit programming or to retransmit broadcast signals. In some cases, these negotiations are governed by federal law, as when MVPDs negotiate with broadcast television stations for the right to carry broadcast signals.8 In other instances, negotiations over the right to broadcast or resell programming are based on market forces and reciprocal relationships, without government-imposed strictures.

Table 1describes the involvement of several media companies in various parts of the television industry.

Technology-Driven Changes

Within the past decade, several companies have begun offering consumers the opportunity to view television programs, movies, and sports online. These companies license programming from content owners and rely on Internet service providers (ISPs) to distribute the programming to viewers. The FCC has called these firms online video distributors (OVDs).9 They fall into three general categories:10

1. Electronic sell-through and rental OVDs charge consumers a one-time fee to download a television program or movie for viewing for an indefinite or limited time period. These services are generally owned by retailers, including Apple, Amazon, and Walmart. They usually offer a limited selection of recent and popular movies and television series that are in high demand from consumers. This product is similar to the pay-per-view services offered by MVPDs.

2. Subscription OVDs charge consumers monthly or annual fees for unlimited access to video programming. Subscription OVDs share attributes of broadcast and cable networks as well as MVPDs. Hulu Plus is co-owned by three major broadcast networks (ABC, FOX, and NBC), which in turn are subsidiaries of major entertainment conglomerates. The other two major subscription OVDs are Netflix and Amazon Prime Instant. In 2015, however, several studios, networks, and MVPDs launched or announced plans to launch their own OVDs.11 Subscription OVDs compete with the "TV Everywhere" services offered by MVPDs. The TV Everywhere services allow MVPD subscribers to view cable channels on computers and mobile devices, as well as on television sets.

3. Advertising-supported OVDs include advertising along with the programming and do not charge consumers directly. They are generally owned and operated by television networks and studios. Two major advertising-supported OVDs are Hulu and Sony Corporation's Crackle.

Competition Between MVPDs and OVDs

In order to operate, OVDs need both the ability to negotiate for programming and the ability to interconnect with retail Internet service providers (also known as broadband access providers) to enable the delivery of programming to subscribers. Some programming and most broadband access providers are controlled by companies that also operate as MVPDs. The structure of the television industry, as described in Table 1, plays an increasingly important role in determining how MVPDs and OVDs compete with each other. The proposed Charter transactions, by altering the television industry's structure, could affect competition as well.

Competition for Access to Programming

MVPDs and OVDs may distinguish themselves by offering customers exclusive access to original programming, or exclusive access to programming during certain time periods. For example, subscription OVDs and MVPDs are battling over the right to offer their customers exclusive access to all of the episodes in a current season of a television program. (This is known in the television industry as "in-season stacking rights.")12 Netflix reportedly demanded a discount for the online rights to the 21st Century Fox studio's television drama Empire, claiming that the studio devalued the program by providing MVPDs with in-season stacking rights. Hulu, which is partly owned by the studio and its affiliated broadcast network, reportedly stepped in by exceeding Netflix's original offer. Networks are increasingly choosing to license programming from co-owned studios rather than outside providers, in order to maximize revenues from licensing programs to MVPDs' video on demand (VOD) services and to OVD services.13

The FCC, pursuant to the 1992 Cable Act, has rules in place governing the behavior of cable operators and cable networks that have common ownership or control. The FCC rules prohibit cable operators from exercising "undue influence" over the decisions of affiliated cable and broadcast networks concerning the sale of programming (program access rules).14 The rules also bar cable and broadcast networks affiliated with cable operators from discriminating against unaffiliated MVPDs with respect to the prices, terms, and conditions for sale of programming (program carriage rules).15

These rules do not apply to television or movie studios owned by cable operators, and they do not guarantee program access or nondiscriminatory treatment to on-demand services offered by cable providers or OVDs. In 2014, the FCC proposed extending these rules to benefit certain OVDs.16 FCC Chairman Tom Wheeler stated that he expected the FCC to issue final rules about this proposal in the fall of 2015.17

Interconnecting with Broadband Access Providers

To deliver their programming to consumers, OVDs have different options for interconnecting with services that provide broadband access to the public, also known as retail ISPs. Several use specialized transit providers, known as wholesale ISPs, as intermediaries. Others generate sufficient traffic to make it economically feasible for them to bypass the intermediaries by using content delivery networks (CDNs), which store ("cache") copies of the videos and deliver them to broadband access providers as close as possible to viewers' locations.18 Netflix owns and operates its own CDN.19 MVPDs also use their own proprietary CDNs to store programming for services such as video on demand.20

All transit providers and CDNs must interconnect with broadband access providers to reach individual homes and businesses. The charges and conditions imposed by the broadband access providers for this interconnection have been the subject of considerable debate, particularly because broadband access providers and MVPDs are often the same entities.21 In some cases, companies try to deal with this by "settlement-free Internet peering," a relationship in which they reciprocally provide access to each other's customers without charging each other a fee.22 However, if either party perceives the value derived from peering to be unequal, it may deny peering or suggest an alternative paid arrangement. There is no standard way to calculate the value derived from peering. For example, Netflix claims that by charging Netflix a fee to connect its CDN, broadband access providers are extracting arbitrary tolls.23 Some broadband access providers, however, claim that Netflix wants to avoid paying its fair share for the cost of delivering video over the Internet by claiming it is entitled to settlement-free peering.24

In 2015 the FCC adopted its Open Internet rules,25 which

ban blocking, throttling, and paid prioritization by mobile and fixed broadband access services that sell Internet access to consumers;

create a general conduct standard that broadband access services cannot harm consumers or services (including OVDs) that rely on the Internet to reach consumers, and give the FCC the authority to address questionable practices on a case-by-case basis; and

give the FCC authority to hear complaints and take enforcement action on a case-by-case basis if it deems the interconnection activities of broadband providers to be unjust and unreasonable.

With limited exceptions, the rules went into effect on June 12, 2015.26 Various trade groups and selected individual providers have filed appeals to the courts challenging the rules' legality.27

Consumption Trends

The structure of and competition within the industry are changing alongside viewers' habits. About 99% of the nation's 121 million households watch some form of television. The percentage of households subscribing to an MVPD service has fallen from a peak of 87.7% in 2009 to 83.6% in 2015, the lowest figure since 2005.28 As Figure 1illustrates, the cable and satellite industries have lost video subscribers both to telephone companies that offer video service and to OVDs.

Even as cable operators have lost video subscribers, however, they continue to gain broadband access subscribers. As Figure 2 illustrates, the number of broadband access subscribers has grown steadily between 2007 and 2015. About 94 million households and 6 million small- and medium-size businesses subscribe to broadband access services as of 2015. Of the total number of broadband access subscribers, about 58% rely on cable providers and 37% rely on telephone companies (telcos). Thus, about 95% rely on wireline technology for broadband access service to connect to the Internet, 3% of subscribers rely exclusively on wireless providers for broadband access service, and 2% rely on satellite providers.

In addition to facing weaker demand for video subscriptions, MVPDs have seen the cost of programming rise relative to revenues from these subscriptions (Figure 3). Although MVPDs bear franchise and regulatory fees, as well as marketing and operating expenses, programming is their single largest expense.29 MVPDs have attempted to pass those costs along to consumers; the consumer price index for cable and satellite television services has risen almost 13% since the start of 2011, compared with 7% for consumer prices overall.30 The increase in prices may be one factor leading viewers either to forgo video service or to downgrade to less expensive packages. In response, several MVPDs have begun to offer less expensive packages of video programming. For example, Dish Network, a satellite provider, offers the online video service Sling TV for $20 per month31 and Verizon offers consumers a base a la carte package of 35 channels for $55 per month.32 In addition, Comcast announced in July 2015 that it will launch a $15-per-month online streaming service consisting of broadcast stations, HBO, on-demand movies, and a digital video recorder.33

Charter-TWC-BHN Transactions Background

MVPDs have responded to these challenges to their business models by, among other things, undertaking mergers and acquisitions. Major transactions announced in 2014 and 2015 include AT&T's proposed acquisition of DIRECTV34 and Frontier Communications Corporation's proposed acquisition of Verizon's video, broadband access, and voice services within the states of California, Florida, and Texas.35 DOJ declined to challenge the Frontier-Verizon transaction36 and the AT&T-DIRECTV transaction.37 The FCC approved the AT&T-DIRECTV transaction38 and is reviewing the Frontier-Verizon transaction.

Charter's proposed merger with Time Warner Cable (TWC) and acquisition of Bright House Networks (BHN) in May 2015 is the culmination of a series of attempts by both Charter and Comcast to merge with TWC, beginning in 2013. In May 2013, Liberty Media purchased 27.3% of the stock of Charter for $2.6 billion.39 At the time, Liberty Media's chairman and founder John Malone predicted that OVDs would upend MVPDs' traditional video services, and claimed that cable operators' broadband access services uniquely positioned them to take advantage of the trend.40 He also stated that cable operators needed to consolidate and cooperate in order to achieve the required national scale necessary to compete with Netflix and other OVDs: "The fewer big players, the easier it is to get alignment."41

In June 2013, Liberty Media CEO Greg Maffei reportedly met with then-TWC CEO Glenn Britt to discuss a possible merger between TWC and Charter.42 In January 2014, Charter made a formal offer directly to TWC's shareholders in a hostile bid. In February 2014, TWC entered into a merger agreement with Comcast for a higher price.43

Comcast's merger agreement with TWC did not specify whether Comcast would take over TWC's services agreements with Bright House Networks (BHN), another cable operator. Through the service agreements, TWC typically negotiates programming agreements and provides Internet connections beyond BHN's local systems.44 In early 2014, Charter and BHN began to discuss the possibility of a strategic transaction.45

In April 2014, Comcast reached an agreement with Charter Communications Inc. that would have entailed a spin-off of some of Comcast's systems, a purchase of some of Charter's systems, and an asset exchange. The parties terminated the agreements in April 2015 after it appeared that the merger would fail to win regulatory approval.46 The U.S. Department of Justice stated that "it had significant concerns that the merger would make Comcast an unavoidable gatekeeper for Internet-based services that rely on a broadband connection to reach consumers."47 FCC Chairman Tom Wheeler stated that

an online video market is emerging that offers new business models and greater consumer choice. The proposed merger would have posed an unacceptable risk to competition and innovation especially given the growing importance of high-speed broadband to online video and innovative new services.48

In November 2014, Liberty Media Corporation created a new entity, Liberty Broadband, by spinning off its voting interest in Charter Communications, a wireless geolocation service company called TruePosition, and a minority equity investment in Time Warner Cable.49

In May 2015, Charter Communications Inc. announced that it reached agreements with TWC to merge the two companies in a deal valued at $78.7 billion, including the assumption of debt, and with Advance/Newhouse Partnership to acquire BHN for $10.4 billion.

Regulatory Review

Although both the Department of Justice and the Federal Trade Commission have reviewed mergers between cable operators, only the DOJ has jurisdiction over mergers involving "common carriers."50 In 2006, the FCC affirmed its authority to apply the public interest standard when reviewing licenses and authorizations involved in cable television operations, claiming that the licenses and authorizations and are both significant and material.51

Charter, TWC, and BHN have hundreds of licenses and authorizations that require FCC approval for transfer of control to the post-merger Charter under Sections 310(d) and 214(a) of the Communications Act.52 The DOJ is reviewing whether the proposed Charter-TWC-BHN transactions have the potential for substantial anticompetitive impact.

Criteria for Analysis and Process

Antitrust Review: The DOJ

The principal law governing mergers, acquisitions, and joint ventures is Section 7 of the Clayton Antitrust Act of 1914 (15 U.S.C. Â§18). The parties may not close their deal until the waiting period outlined in the Hart-Scott-Rodino Antitrust Improvements Act of 197653 has passed, or until the government has granted early termination of the waiting period. Under the Hart-Scott-Rodino Act, the parties must submit copies of any documents that have been prepared in connection with the transaction and that analyze the transaction with respect to competition, markets, and expansion into other geographic markets.54 Thus, the DOJ immediately has access to highly confidential internal documents that analyze the transaction's impact on competition.

While the DOJ may disclose information gathered in its review to any duly authorized committee or subcommittee of Congress, it may not disclose the information to the public. Information the DOJ gathers in the course of merger investigations is exempt from Freedom of Information Act disclosure requirements.55 The parties may, however, consent to allowing the DOJ to share information with the FCC and state attorneys general and to coordinate their reviews by signing waivers.56 The DOJ bears the burden of proof to demonstrate that the proposed transactions might be anticompetitive. It may allow the deal to go forward unchallenged, enter into a negotiated consent agreement with the companies that includes provisions to maintain competition, or seek to stop the transaction by filing for a preliminary injunction in federal court.

Public Interest Review: FCC

The FCC has jurisdiction over transactions involving transfers of control of electromagnetic spectrum licenses. Pursuant to this jurisdiction, it reviews virtually all mergers involving cable, satellite, telephone, radio, and television operations. Under Section 214 of the Communications Act of 1934, the FCC must affirm that "neither the present nor future public convenience and necessity will be adversely affected" before a transaction may be approved.57 The FCC also reviews applications for wireless licenses, including those used to provide broadband, satellite, broadcast television, and broadcast radio services. Section 310(d) of the Communications Act of 1934 (47 U.S.C. Â§310(d)) prohibits the transfer, assignment, or disposition of any construction permit or license of a broadcast station unless the FCC determines that the public interest, convenience, and necessity will be served.

Transactions that present complex legal, economic, or other public interest issues likely to elicit a significant amount of public comment, are subject to review by the FCC's commissioners.58

Congress has several opportunities to weigh in on the FCC's merger review process, as illustrated in the FCC's decision regarding Comcast's acquisition of NBC Universal in 2010. Based on CRS analysis of the FCC's electronic comment filing database, 51 Representatives and 15 Senators filed comments.59 In addition, the FCC cited one of the applicant's commitments in a congressional hearing about the transaction, as a basis for analyzing a potential harm of the transaction.60 Finally, the FCC incorporated an agreement between the applicants and Representative Bobby Rush under which, among other commitments, Comcast agreed to carry at least 10 new independently owned and operated cable networks for at least eight years as a condition of the acquisition's approval.61

The FCC's merger review process differs from the Hart-Scott-Rodino process in several ways:

Rather than taking the merger applicants to court to block a deal, the FCC itself decides whether a deal may proceed.

The FCC, as an independent regulatory agency, is bound by the Administrative Procedure Act (5 U.S.C. Â§Â§551-559), which is designed to develop a public record upon which interested parties may comment and participate.62 The FCC must disclose who comments on the proposed transactions and what the commenters say, and must address the commenters' concerns in its final decision. Members of the public may file official petitions to deny or "informal comments" seeking conditions or voicing their support.

While the FCC may impose deadlines for public comments on the merger, its self-imposed 180-day period for reaching a decision is a guideline and is not legally binding.63

The parties, not the agency, have the burden of demonstrating that the proposed transactions would be in the public interest based on a preponderance of evidence.

The FCC's review of merger applications involves a balancing test, in which the commission weighs the transaction's potential public interest harms against the potential public benefits. The FCC counts as benefits several broad aims of the communications laws, including accelerating private-sector deployment of advanced services, ensuring a diversity of information sources and services to the public, managing spectrum in the public interest, and assessing whether the transaction will affect the quality of communications services or will result in the provision of new or additional services to consumers.64 In contrast to the antitrust agencies, the FCC considers whether a transaction will enhance, rather than merely preserve, existing competition, and often takes a more expansive view of potential and future competition in analyzing that issue. Benefits must be merger-specific and verifiable. In addition, the benefits must flow to consumers.

At the conclusion of the review, the FCC staff makes recommendations to the five commissioners, including a draft order. Ultimately, the commissioners meet and vote whether to approve the proposed transaction with or without conditions, or designate a merger for a hearing before an administrative law judge.65 If such a hearing is ordered, people and entities who file petitions to deny the transaction become parties to the proceeding and may participate fully. Full participation may include seeking access to confidential information, seeking reconsideration of FCC decisions, and filing appeals of the FCC's final decision to the U.S. Court of Appeals. 66

Potential Issues for Analysis

Under the terms of the proposed Charter-TWC-BHN transaction, Liberty Broadband would have the right to vote up to 25.01% of the stock of Charter after the merger. Liberty Broadband may nominate up to three directors and Advance/Newhouse may nominate up to two directors to Charter's 13-member board. If Advance/Newhouse reduces its ownership stake in Charter, Liberty Broadband's stake cannot exceed 35%.67

In analyzing MVPD mergers and acquisitions, the FCC investigates whether MVPDs have "attributable interests" in cable or broadcast networksâthat is, whether firms have the ability to exercise control over other firms through arrangements short of outright ownership.68 To assess whether such interests exists, the FCC generally uses three principal criteria. One is whether one firm is able to exercise actual working control over another.69 Another is whether individuals controlling 5% or more of the stock of one corporation will also control 5% or more of the stock of another. Sharing officers or directors is also deemed an attributable interest, unless the duties and responsibilities of the officer or director involved are wholly unrelated to the media subsidiary, and the subsidiary submits a certification properly documenting this fact to the FCC.

In previous merger transactions involving MVPDs, programming networks, and studios, the FCC imposed conditions to fortify its program access and program carriage rules. When it reviewed Liberty Media Corporation's acquisition of DIRECTV from News Corporation in 2008, the commission attributed John Malone's investments in cable programming networks to DIRECTV for the purpose of applying program access conditions.70 When the FCC reviewed Comcast's merger with the NBC Universal in 2010, the FCC considered Comcast's interests in movie and television studios as well as broadcast and cable networks, and for the first time extended program access conditions to OVDs.71 DOJ imposed similar conditions on Comcast.72 The agencies may embark on a similar analysis in considering Charter's proposed transactions.

Against this background, three key issues related to potential harms to competition in the television industry may merit analysis in the regulatory review process:

1. Whether John Malone, through his companies' ownership interests in Charter, television networks, and studios, would enable Charter to interfere in the negotiations for access to programming between these studios and networks and Charter's competitors.

2. The degree to which John Malone, through his ownership of non-voting DIRECTV stock, could thwart competition among MVPDs acquiring programming from creators and selling programming to consumers.

3. The extent to which Charter, by assuming control of TWC's joint ventures and partnerships with Comcast, could curb competition among MVPDs acquiring programming from creators, as well broadband access providers distributing programming from OVDs.

In addition, the agencies may evaluate whether Charter's proposed commitments would be sufficient to mitigate potential harms.

Applicability of Program Access/Program Carriage Rules to Cable Networks

Liberty Media began in 1991 as a portfolio of investments in cable networks that had been owned by a large cable operator, Telecommunications Inc., which has subsequently gone out of business.73

Today, John Malone, through the various Liberty affiliates, has interests in a television and movie studio (Lions Gate), cable networks (Starz and Discovery), and MVPDs (Charter and DIRECTV). The proposed transactions would increase his control over the broadband access market, as well as the video services market. John Malone is the largest voting shareholder of Starz, holding about 32.1% of the voting power.74 He also has a 29% voting stake in Discovery75 and a 3.4% stake in Lionsgate, the parent company of the Lions Gate studio.

Because of his holdings in Discovery, Starz, and Charter Communications, as well as his positions on the companies' boards of directors, Malone's interests count as attributable under the FCC's rules. In addition, the Advanced/Newhouse Programming Partnership has a 32.81% interest in Discovery Communications, Inc. and three designees on Discovery's board of directors, including Advance/Newhouse's CEO, thereby making Discovery an attributable interest of BHN.76

The DOJ and FCC, as part of their review, may request that Charter identify all such programming networks. In addition, the agencies may wish to request that Charter submit all agreements between John Malone, Liberty, or any of their affiliates and the applicants that parties filed with the Security and Exchange Commission as part of their merger agreement.77 Doing so would enable the agencies to identify the extent to which the program access and program carriage rules apply to the Starz networks or other cable networks in which Malone has interests.

Applicability of VOD and OVD Merger Conditions to Studios

The agencies may also consider extending program access conditions to television and movie studios that license television programs and movies for distribution online or on an on-demand basis, as they did when Comcast purchased the film and television studios of NBC Universal.78

As part of their review, the agencies could ask for Charter to provide a list of all studios and other content owners (e.g., sports teams) in which Malone has stock interests and/or holds a board seat. In addition, to learn more about Malone's incentives with the licensing of programming for OVD and video-on-demand services, they could request correspondence between Malone, Charter, TWC, and BNH related to the licensing of content from the Lions Gate studios, the Atlanta Braves baseball team, and any other content owners.

Malone's Influence over Charter and DIRECTV

In December 2006, News Corp. and Liberty Media reached an agreement to exchange Liberty's voting stake in the company for News Corp.'s stake in DIRECTV and three regional sports networks. In 2008, the FCC approved News Corp.'s application to transfer control of DIRECTV to Liberty Media, subject to conditions. Among those conditions, the FCC required Liberty Media to sever all attributable interests (e.g., voting stock and membership on the board of directors) connecting DIRECTV to Liberty's cable systems in Puerto Rico, in order to maintain MVPD competition in that region.79

In 2010, Malone and two other executives of Liberty Media resigned from the board of DIRECTV and Malone reduced his voting interest in DIRECTV from 24.3% to 3%, in exchange for non-voting stock.80 As part of Malone's 2010 agreement with DIRECTV, Malone and DIRECTV agreed not to take action that would cause Malone to have an attributable interest in DIRECTV, including a prohibition on Malone or his family from acquiring ownership of 5% or more of DIRECTV's stock.81 According to press reports, however, as of 2013, Malone was the largest individual investor in DIRECTV, with a 5% stake in the company.82

When the FCC approved Liberty Media's acquisition of DIRECTV, it stated the following:

We note that determining whether a particular interest is attributable is a fact-intensive inquiry, and, even where an interest may appear non-attributable under the bright-line attribution rules, the Commission retains the discretion to review individual cases that present unusual issues. Such would be the case where there are combined interests that are so extensive that they raise an issue of significant influence notwithstanding the fact that the interests do not come within the parameters of a particular attribution rule.83

In light of AT&T's pending merger with DIRECTV, the regulatory agencies might examine the degree to which Malone still exercises influence over AT&T, despite not having de facto control pursuant to the FCC's cable attribution rules. Influence over the merged Charter, as well as the combined AT&T-DIRECTV, could potentially enable Malone to reduce competition among MVPDs. The FCC did not ask DIRECTV to provide information about Malone's influence in its review of the proposed AT&T-DIRECTV merger.84

Joint Ventures Among Cable Operators

According to John Malone:

You don't have to consolidate ownership necessarily to benefit from scale. Cooperation in amongst players is an important ingredient in scale.85

To examine whether the proposed transactions could reduce competition by enhancing cooperation among cable operators, the FCC could ask TWC and BHN to supply information about their joint ventures, which currently include Comcast and or other cable operators but exclude Charter. There are several examples of such joint ventures.

Both TWC and BHN have attributable interests in iN Demand LLC, which operates video-on-demand and pay-per-view services.86 Other owners of iN Demand include Comcast and Cox Communications. Through iN Demand, TWC obtains rights to carry movies and events and to sell and/or rent video programming online.87 iN Demand also negotiates on behalf of Comcast with studios for the right to sell electronic copies of movies directly to consumers, enabling Comcast to compete directly with Apple's iTunes and Amazon Prime Instant.88 In addition, iN Demand produces promotional programming on behalf of TWC, BHN, and Cox Communications.89 iN Demand also owns and operates content delivery networks on behalf of its affiliates. By acquiring TWC's and BHN's interests in iN Demand, Charter could potentially facilitate coordination among cable operators with respect to the acquisition and marketing of programming for MVPDs' on-demand services.

TWC, together with Comcast and Cox, owns National Cable Communications (NCC), which sells advertising time to national and regional advertisers on behalf of "virtually every other TV service provider in the country."90 Charter is not among the MVPDs listed. The transactions could potentially increase Charter's ability to facilitate coordination among MVPDs in the sale of advertising.

In December 2011, several cable operators entered into marketing agreements with Verizon Wireless. These agreements allow the companies to sell bundled offerings that include Verizon Wireless services and the cable operators' residential wireline voice, video, and Internet access services in areas where Verizon Wireless's parent company, Verizon Communications Inc., sells DSL Internet access service.91 With the proposed transaction, the incentive and ability of Charter to coordinate its activities with Verizon might increase, given the larger number of cable and Internet access subscribers whom the agreements would affect.

Charter's Commitments/Proposed Benefits

The agencies could investigate whether Charter's proposed commitments would be sufficiently beneficial to mitigate potential harms of the transaction. 92

Among the benefits of the proposed transaction, Charter claims that the transactions would increase TWC's and BHN's incentives to invest in new services, infrastructure, and customer service.93 To verify this claim, the FCC would need to investigate whether TWC and BHN were planning to make such investments independently, absent the proposed transaction. Moreover, the FCC could investigate the extent to which Charter's reliance on secured debt to fund the transactions could limit Charter's ability to spend extensively on improving its products and services.94 If, after the transactions close, Charter's costs are higher than, or revenues are lower than, what it anticipates today, Charter may need to reduce spending on investments or sell off assets in order to repay debt holders.

In July 2015, Charter pledged to the FCC that, as a condition of the agency's approval of the proposed transactions, it would maintain a settlement-free interconnection policy until December 31, 2018.95 According to its revised interconnection policy, Charter will interconnect its network at no charge with OVDs (or other applicants delivering content to Charter's subscribers) under certain conditions. Among the conditions, the applicants must deliver a minimum amount of traffic to Charter as set forth in the agreement. Both Charter and the applicants agree to maintain a certain level of capacity to meet the demand from Charter's broadband access subscribers. Either party may increase capacity at no charge to support the exchange of Internet traffic. Netflix responded by supporting the proposed transactions if the FCC incorporates Charter's new interconnection policy as a condition.96 The FCC may be concerned that Charter's debt could compromise its ability to fulfil commitments to provide sufficient capacity to deliver online video and other services to its broadband subscribers.

In its public interest statement, Charter committed to abide by the FCC's 2015 Open Internet Order, as well as additional constraints on its behavior, for three years after the close of the transaction. Among those commitments, it pledged that the merged firm would not block or throttle Internet traffic or engage in paid prioritization, whether or not the FCC's Open Internet order is upheld in court. It also agreed to submit interconnection disputes to the FCC, and to refrain from engaging in data usage caps or usage-based billing.97

Appendix. Estimated Market Shares Pre- and Post- Potential Transactions

Cable operators, direct-broadcast satellite (DBS) operators, and telcos all offer video and broadband access services. Consumers can get video services from all three types of operators, but generally rely on cable operators and telcos for broadband access services. The geographic areas in which these types of firms operate vary. The largest cable operators generally do not compete directly with each other at the retail level. Instead, they operate in non-overlapping geographic regions. DBS operators are available throughout the United States. Telcos compete directly with the DBS and cable operators.98 The local market shares of each company indicate the extent to which these companies compete with one another for subscribers.

MVPDs' national market shares indicate the relative bargaining power the MVPDs have when negotiating with studios and networks to deliver programming to video subscribers. Broadband access providers' national market shares indicate the relative bargaining power the broadband access providers have when negotiating with wholesale transit providers and CDNs over charges for delivering programming to broadband access subscribers under interconnection agreements.

Table A-1and Table A-2 describe the national market shares of MVPDs using subscriber numbers from March 30, 2015, before and after the closing of the potential transactions described in "Charter-TWC-BHN Transactions Background." Table A-3 and Table A-4 describe the national market shares of the wireline broadband access service providers using subscriber numbers from March 30, 2015, before and after the closing of the potential transactions described above. This information is based on CRS analysis of data from the market research firm SNL Kagan.