TWC Time Warner Cable

By Shalini Ramachandran and John D. McKinnon 

Federal regulators are poised to approve Charter Communications Inc.'s $55 billion acquisition of Time Warner Cable Inc., but they will force the merged company to live up to stringent obligations that don't apply to its bigger rivals.

Under a deal with the U.S. Justice Department and Federal Communications Commission, Charter agreed to abandon for seven years several common industry practices that the government feared could threaten the growth of rival online video providers such as Netflix Inc. and Hulu. The company agreed not to impose data caps or charge broadband Internet customers based on data usage, practices that have riled customers.

Charter will also be required to build out its broadband access to two million homes, which would compel it to compete against other cable companies in some markets, according to a person familiar with the matter. That would be a significant move for an industry that has divvied itself up geographically.

The conditions, which were outlined by the Justice Department and FCC on Monday, shackle the combined company from threatening the emerging streaming video economy at a time when consumers are increasingly dependent on broadband access in their everyday lives for services and entertainment. Yet, many homes have limited choice in Internet providers, leaving them at the mercy of local companies' pricing and speeds.

Gene Kimmelman, chief executive of consumer interest group Public Knowledge, said the conditions were "a clear signal to the content industry and entertainment companies that the enforcement agencies are giving them a green light to grow online video and experiment as a direct competitor to cable, and they will prevent cable from interfering."

From imposing utility-style "net neutrality" rules to recently pushing to open up the market for set-top boxes, the White House and the current FCC regime led by Chairman Tom Wheeler have sought to break down the barriers for new competitors to take on cable TV providers, siding with the likes of Netflix and Alphabet Inc.'s Google. That has led to intense opposition from the cable industry. For example, when the FCC proposed rules for stimulating competition in the cable set-top box market, the industry lobby kicked into high gear.

Charter will be required to extend cable lines to compete against other cable companies. Cable operators historically haven't competed against each other in the same geographic areas, though they have had a fierce rivalry with phone companies for Internet customers. The cable industry has long resisted efforts to make its firms compete head-to-head. But the Charter deal could provide a template for changing that, at least incrementally.

One million of those homes in the build-out will be in markets where Charter will compete with another Internet provider offering the FCC's definition of "broadband" at 25 megabits per second or more. Charter would be able to acquire other providers to achieve expansion in up to 250,000 homes, provided the acquired firm wasn't planning to upgrade its service.

The company also wouldn't be able to charge companies such as Netflix for so-called interconnection deals that govern traffic handoffs between networks. When regulators approved AT&T Inc.'s deal to buy DirecTV last year, they didn't impose a similar ban on interconnection fees.

"The cumulative impact of these conditions will be to provide additional protection for new forms of video programming services offered over the Internet," Mr. Wheeler said.

Charter's settlement with the Justice Department also bans the cable company for seven years from imposing contract provisions that would limit media companies in any way from licensing their programming to rival online video providers.

Big pay-TV distributors have long used "most-favored nation" and similar clauses to make sure they get the best deals from TV programmers. Most-favored nation clauses essentially compel a network to offer a distributor similar terms as its comparably-sized distribution competitors, such as a cheaper rate or streaming rights.

Noting that Time Warner Cable had been "the industry leader" in seeking such restrictive clauses, the Justice Department said Charter wouldn't be able to enforce those provisions, retaliate against programmers for licensing to online entrants, or avail itself of such clauses in rival distributors' contracts.

Regulators will require Charter to retain an independent monitor to ensure its compliance with the conditions. That is a distinction from when Comcast Corp. won approval to buy NBCUniversal in 2011, when no such requirement was made by the government. AT&T's DirecTV deal did require such a monitor, however.

Mr. Wheeler circulated a draft order to the four other FCC commissioners, and the matter is expected to be voted on in coming days. The Justice Department reached a settlement with the companies.

Both Charter and Time Warner Cable on Monday said they were optimistic the deal would be completed soon.

In practice, the seven-year limit could be shortened by federal regulators after five years, if economic conditions have changed sufficiently.

The merger will create the second-biggest broadband provider in the country, after Comcast, and the third-largest pay TV company, serving more than 17 million video customers, trailing only AT&T and Comcast. As part of the transaction, Charter also agreed to acquire smaller operator Bright House Networks for about $10.4 billion.

Charter swooped in to buy Time Warner Cable last year after Comcast's planned takeover of the company collapsed when regulators were prepared to block the deal. Officials said they couldn't see a combination of conditions that would have sufficiently addressed the threat to competition.

At the time, Mr. Wheeler said the Comcast-Time Warner Cable deal would have posed "an unacceptable risk" to competition and innovation, particularly for online video providers, while the Justice Department expressed concern that an enlarged Comcast would have been "an unavoidable gatekeeper" for Internet-based services.

Write to Shalini Ramachandran at shalini.ramachandran@wsj.com and John D. McKinnon at john.mckinnon@wsj.com

(END) Dow Jones Newswires

April 26, 2016 02:48 ET (06:48 GMT)

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