Comcast Merger Moves Forward, But Cable Giant Still Complains

Comcast is infamous for its callous customer service attitude, for its monopolistic business practices, and for what some might call aloose commitment to promises made in merger proceedings. For these reasons, and many others, Comcast is known as the most hated company in America.

Just when you thought the cable giant couldn't sink any lower in the eyes of American consumers, Comcast pulls another, well, Comcastic move. The company just scored a crucial regulatoryapproval of its proposed merger with cable rival Time Warner Cable . Alas, the win wasn't enough to turn Comcast's frown upside down. Instead, Comcast is complaining that the approval came with too many "unrealistic" conditions.

The merger action in question is a proposed approval of Comcast's Time Warner deal from the Public Utilities Commission of California. Administrative Law Judge David Gamson granted permission to transfer business assets and licenses between Comcast, Time Warner, and Charter in order to close the Californian portion of the $45 billion megadeal.

What's the problem? Citing legal frameworks on matters such as antitrust policy, public interest, and economic benefits to Californian taxpayers, the decision described a bleak competitive landscape.

After the proposed merger, and assuming that the Federal Communications Commission's proposed redefinition of broadband service also passes muster, only 23% of Comcast's service households would have any competition at all. That includes less than 1% of passed Californian households with access to (count 'em) two non-Comcast broadband alternatives.For those unfamiliar with the term, a "passed household" in the cable industry is a potential customer with network cables pulled out to its neighborhood and ready to sign up for service.

It's all business as usual in the heavily gerrymandered American broadband markets, but the California commission doesn't want to make it worse. So the judge added 24 conditions to the approval, chosen to mitigate the problems noted above.

Chiefly, Comcast would have to expand its low-cost Internet Essentials program to at least 45% of eligible families in the statewithin two years of the merger. Among other housekeeping items, Comcast would also be required to improve its customer service operations, expand its broadband coverage to underserved territories, offer the best of Time Warner Cable's and Comcast's services across its entire Californian market area, and improve its diversity profile.

Internet Essentials The big one is the demand to promote a low-cost, low-speed service for low-income households. And that's where Comcast kicked back the hardest.

To qualify for the Internet Essentials program, consumers must first be eligible for reduced-cost or free school lunches. In California, that means living no more than 30% above the federal poverty level. According to data from the California Department of Education, 58% of households statewide qualify for at least some school lunch assistance. If the proposed Internet Essentials adoption levels were in force today, Comcast would have to show 1.2 million customers under that program. After the Time Warner merger, the much larger company would need to produce 2.7 million Internet Essentials subscribers within two years.

For some families, pennies talk louder than dollars. Can Comcast afford to ignore these voices?

That will take some heavy lifting. Comcast recently said that only 46,250 Californian households were taking advantage of this low-cost program. That's less than 2% of currently eligible households, and a rounding error when you heap Time Warner Cable's 6 million California households (and 3 million potential Internet Essentials users) on top of that tiny uptake.

I'm giving Comcast a bit of a hard time with these figures. These statistics only apply to families with school-age children, given the school lunch requirement. So Comcast actually serves a somewhat larger percentage of all eligible Californian households.

But that's actually part of the problem. Many low-income families that could use a cheap Internet connection don't have kids in school, so they can't even hope to get this service today. Comcast only introduced Internet Essentials to help push through its gigantic buyout of media powerhouse NBCUniversal in 2011. Regulators approved the idea without looking too closely at Comcast's qualification criteria, letting the company make it difficult to obtain the low-cost service. Even so, Comcast hasn't exactly set its Internet Essentials adoptions rates on fire.

What's not to love? The CaliforniaPublic Utilities Commissionis asking Comcast to put its shoulder into promoting and selling a low-cost, low-margin program to customers of often questionable credit quality. That is cost and effort on top of risk, not to mention making the company deliver on NBC-related promises made many years earlier.

Comcast hates the very idea. In his official statement on the Public Utilities Commission's decision, Chief Diversity Officer David Cohen held up the Internet Essentials adoption requirement as a prime example of "unrealistic" conditions.

"For example, some of the penetration rates and time frames suggested by the conditions are simply unattainable under market conditions, especially with populations that have been slowest to adopt broadband," Cohen wrote. "Deeper broadband penetration among all populations is a goal we share, and one we've worked very hard on for the nearly two decades we've been marketing broadband." Yet, for all the marketing billions invested, Comcast has only penetrated about 40% of all in-market homes across the nation.

Look, I get it. Cohen has a responsibility to push back against regulatory demands of any kind. Anything less would be a disservice to shareholders. After all, the company has optimized its operations and processes for maximum profits, and management wants to keep it that way. So when regulators and consumers seek changes, it's bound to be bad for the bottom line. Hence, Cohen wants this list of requirements to go away -- particularly the costly and difficult requirement to actually serve low-income families.

That being said, pushing back this hard simply creates another PR nightmare, and Comcast has enough of those already. In this case, fighting back may undermine Comcast's chances of closing the Time Warner Cable merger at all.

You gotta be kidding No, really. The deal is already in regulatory trouble. Far from a slam-dunk approval, Time Warner Cable might in fact walk away from this event without Comcast in tow. Cohen's angry protest only throws more fuel on that fire, since it makes Comcast look unconcerned about the needs of low-income families.

A more sensitive approach might have explained the economic difficulty of saturating a market made up of very price-sensitive customers. Cohen could have spent more effort on opening doors to work out the nitty-gritty details without looking like a penny-pinching grinch in the process. You'd expect that much from a diversity officer, right?

But no. We're getting more of the consumer-insensitive Comcast that already made it the most hated company in America. This works as long as the company faces no competition to speak of, which is certainly the case today. Approving the Time Warner Cable deal would only fortify Comcast's monopoly-like market powers, where many customers stay on board only because there's nowhere else to go.

I don't envy Cohen's position. There's really no way he could serve Comcast's profit-oriented interests without undermining the merger deal, and vice cersa. The company's business model looks rock-solid as long as Comcast can stay clear of serious competition, but that can't last forever. Therefore, Comcast shareholders are headed toward an inevitable cliff.

The final drop might be years away, but the slope has been lurking for years even in the face of rising share prices.

In the long run, this house of cards must come tumbling down -- with or without Time Warner Cable under Comcast's belt.

The article Comcast Merger Moves Forward, But Cable Giant Still Complains originally appeared on

Anders Bylund has no position in any stocks mentioned. Come to think of it, he'd absolutely hate to own any of these dinosaurs on the verge of extinction. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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