A Television Deal for the Digital Age

How to worry about the Comcast-NBC Universal merger
January 4, 2011

Update: Two days before Christmas, Julius Genachowski, the chairman of the Federal Communications Commission, recommended approval of the Comcast-NBC Universal merger. The draft order, which still requires majority approval by the five-member FCC, includes a condition that will in some form require Comcast to provide NBC Universal programs to online-only competitors, like Google TV and Hulu, according to a source familiar with the document. The Justice Department, which also must approve the transaction, worked closely with the FCC and will likely follow its lead. The pre-holiday timing of the announcement undoubtedly deflected attention from the chairman’s decision, which consumer groups may oppose, but it also came in advance of a new Republican majority in the House of Representatives, which may object to the conditions placed on Comcast.

Those in the know say you don’t need a television to watch TV anymore. All you need is an Internet connection and a screen. Missed last night’s episode of 30 Rock? No worries. Log on to Hulu and watch it on your laptop. Once you’ve done that, it’s just a small step to drop your cable or satellite subscription and save a bunch of money, right? Not so fast. Watching your fill of free TV online isn’t so easy, especially if you want to see this week’s episode of Glee at the same time as your cable-connected friends or view special events like the Super Bowl. And Comcast’s plan to acquire a majority stake in NBC Universal—marrying the king of distribution with a household name in programming—is likely to make free Internet TV trickier, not easier.

The Federal Communications Commission and the Department of Justice are closely reviewing the proposed merger because the combined company could play a major role in shaping the future of Internet TV competition.

Brian Roberts, Comcast’s chairman and chief executive, told Wall Street analysts when the deal was announced in December 2009 that the venture would make Comcast “strategically complete.” He said the transaction is pro-consumer because it will allow the company to “become a leader in the development and distribution of multiplatform ‘anytime, anywhere’ media that American consumers are demanding.”

Not everyone believes that Comcast’s prime motivation is to make its customers happy.

Where’s the Competition?

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Comcast’s roots are firmly intertwined with its cable brethren, a tight-knit, largely interdependent group of companies that own and distribute content. Cable and satellite companies, like Comcast and DirecTV, make their money by charging subscribers for access to their distribution networks. They then take a big chunk of that money and use it to negotiate with content companies, including ABC network owner Walt Disney Company, Time Warner, and Viacom, for the rights to carry the programmers’ broadcast and cable channels. The content creators make money by collecting these fees from cable companies and also from advertising.

It is a largely closed system that has been difficult for competitors to break into—more competition would hopefully mean lower prices for subscribers and better service in an industry that is not exactly known for it.

Some had hoped that the Internet would give rise to companies that would challenge the all-powerful cable industry, following in the footsteps of online avengers who took down record companies and news media empires.

Logic dictates that if viewers can watch what they want via their Internet connection, it makes no sense to keep paying for both broadband and cable or satellite service. But Comcast in 2009 collected more than $19 billion in revenue from cable TV service and nearly $8 billion in revenue on its broadband service. It is number one in both categories, with more than twenty-two million TV subscribers and more than 16 million Internet subscribers. The company wants to keep both revenue streams, and to grow them.

One way to do that is to keep competition in check. Comcast would be in a unique position to do just that, especially because, by adding NBC Universal to its holdings, Comcast will become one of the nation’s largest television programmers, too—the only company to have such a large position in programming, cable, and Internet distribution. Because it will control not only what content gets produced but also how it is distributed, the powerhouse will be in an unrivaled position to resist competition from Internet TV wannabes. Merger opponents are concerned that the company could disrupt competitors’ content flowing over its broadband connections, meaning it could make Comcast-produced shows easier to watch over its online network than shows produced by others. It could also refuse to provide its content to online competitors—thus depriving them of any lifeblood—and it could extend its practice of requiring customers who want to watch popular shows online to prove they are subscribers to their local cable service.

Federal regulators will undoubtedly attach conditions aimed at preserving competition and protecting the public interest in return for approval of the deal. Meanwhile, Comcast is conspicuously vague about its plans for Internet TV.

“Because this a very new business and neither we nor anyone else has figured out how best to deliver video online to consumers, it would be premature to set in stone any plans with respect to putting content online in any particular fashion,” said Comcast spokeswoman Sena Fitzmaurice.

Translation: don’t hold your breath waiting for Comcast to welcome an Internet utopia of free-flowing, no-charge television content. “It’s not that Comcast thinks it can kill online video. They’re not stupid like the recording industry was,” said Harold Feld, legal director with the Washington, D. C., digital advocacy group Public Knowledge. “What they want to do is manage the terms under which we’re going to change so that they can continue to make the tons of money they’re making right now selling their cable service.”

The Wide World of Internet TV

Neither Comcast nor NBC is an Internet neophyte. They haven’t waited for the online barbarians to reach their gates; rather, each controls a user-friendly path for its content to migrate to the Web.

In addition to shows available on its own NBC.com, NBC partnered with News Corp. to create Hulu in March 2007, with Disney joining in April 2009. The ad-supported website opened to the public in March 2008 and now dominates the free Internet TV world, allowing anyone with a broadband connection to choose from among 2,600 current prime-time television shows for viewing. Hulu’s offerings are extensive, but not all shows are available on the site and, for many TV series, only a few recent episodes are available for free. Comcast will assume NBC Universal’s 27 percent ownership in Hulu if the deal goes through unscathed by regulators.

Comcast, for its part, joined with Time Warner in June 2009 to create a system called “TV Everywhere” that streams television shows to customers over the Internet—as long as they keep paying their monthly cable bill. It started when Time Warner agreed to allow Comcast cable customers online access to shows from Time Warner networks TBS and TNT. Today, a Comcast subscriber enters a code into a website to access cable shows that are not available for free online. The selection of shows available to stream over the Internet corresponds with the subscriber’s cable package, making sure one isn’t able to access a program online that hasn’t been paid for with cable subscription.

Although management has been guarded about what will happen with online video after the merger, “lots of broadcast content” would go to Hulu and “cable content” would go on TV Everywhere, said Steve Burke, a Comcast executive and the new chief of NBC Universal. Burke was addressing Wall Street analysts the day the deal was announced.

Critics say Comcast will make NBC content less accessible, not more available.

“Comcast will build extensive moats around their content,” predicted Susan Crawford, former special assistant to President Obama for science, technology and innovation policy, who is writing a book about the deal. “I can tell you confidently in the future you will need a cable subscription from Comcast to access online any cable channels that would otherwise be bundled by Comcast.”

Comcast’s Fitzmaurice insisted that the deal “will not in any way limit competition in the fragmented and dynamic marketplace for online video content.” Comcast’s goal is to bring “more, not less” content to consumers across platforms.

Comcast has been buying full-page ads in The Washington Post trying to convince customers that the merger, and the TV Everywhere model, is good for them. Subscribers will be able to access a wide range of programming anywhere there is an Internet connection. Watching television will become a seamless experience as subscribers move from one device to another.

But that seamless experience starts to run into snags if viewers want to get their Internet TV from someone other than Comcast. Upstart Internet TV providers trying to compete with this juggernaut have already met with limited success—even some of the biggest companies in the country have been stymied in trying to break into the television business.

Google TV, for example, launched service in late 2010. Its programming partners include Turner Broadcasting, HBO and Netflix. But not one of the four major networks is available on the service.

Apple TV, a $99 device that delivers movies for as little as $3.99 and television shows for 99 cents apiece, has also met with resistance. NBC Universal does not make its content available to Apple TV customers, though ABC and Fox do. Steve Jobs, Apple’s chief executive, hopes the rest of the networks will “see the light” and start offering their content.

Netflix has become extremely successful, first at streaming movies, but now also streaming broadcast television content—although its menu of available shows is somewhat limited. An Internet backbone company that distributes Netflix’s online streams of television content, Level 3 Communications, launched a public battle against Comcast in December, accusing it of requiring Level 3 to pay unfair fees to Comcast to ensure its streams reach its customers. Comcast denies it is competing unfairly, but the battle is sensitive because federal regulators are grappling with how to craft rules to ensure all Internet content is treated fairly. This isn’t the first time Comcast has been accused of disrupting the content of a competitor. (More on that later.)

At least some TV lovers are betting that despite Comcast and the cable industry’s might, these new Internet TV ventures will allow them to cut their cable cords and save some money. Research firm SNL Kagan estimates that the number of households that will substitute online TV for traditional cable and satellite providers will grow from 1.5 million at the end of 2009 to 8.1 million households by 2014. Indeed, Comcast lost 275,000 cable TV subscribers in 2010’s third quarter.

But others are not so sure that many will cut the cord. Susan Whiting, vice chair of Nielsen Company, the television rating service, told Congress in July that “at the present time” viewers appear to be using the Internet to add to rather than replace their usual viewing platforms. If she’s right, that would make the family that runs Comcast very happy.

Keeping It in the Family

While Comcast is the nation’s largest provider of cable TV and broadband services, it is still very much a family operation. It was founded by Ralph J. Roberts, now ninety, who, with two other investors in 1963, purchased a 1,200-subscriber cable television system in Tupelo, Mississippi. Today he carries the title of chairman emeritus.

His son, Brian Roberts, currently serves as chairman and chief executive, having joined the company in 1981, fresh out of the University of Pennsylvania’s Wharton School of Finance. Roberts, fifty-one, has served as chief executive since November 2002 and chairman since May 2004 and is credited with building a mid-tier cable company into the titan it is today. Shares of the Fortune 100 company trade publicly, but Roberts owns a third of the company’s voting stock, giving him by far the most control of any investor.

Roberts runs the Comcast empire from a sleek, glass-sheathed tower in downtown Philadelphia. In published profiles he is described as a polished and low-key dealmaker who is also a relentless, hard-ball negotiator, adept at sidestepping the spotlight. He has said NBC’s The Office is one of his favorite TV shows.

An accomplished squash player, triathlete, and father of three, Roberts is active in Philadelphia philanthropy. He was paid more than $27 million in total compensation in 2009, ranking him forty-seventh on Forbes’s list of executive pay.

If he seals this deal, Roberts will step beyond the cable guys and into the flashier world of media titans.

Too Much Control?

Comcast’s proposed deal unfolds in three stages. First, it calls for General Electric Company to buy the 20 percent of NBC Universal it doesn’t already own. Comcast would then pay GE $6.5 billion for a 51 percent stake in a new joint venture containing NBC Universal and Comcast’s cable networks and online properties. GE has an option to sell its stake in the venture to Comcast within seven years, giving Roberts 100 percent control.

Consumer advocates say the deal is bad because it will make it harder for new competitors to challenge cable and satellite television providers. Mark Cooper, research director at the Consumer Federation of America, told Congress in February that the cable industry is a “cartel” that will be “strengthened and extended to the Internet” if the merger is approved.

The merged company “touches every part of the media landscape,” said Crawford, the former Obama adviser who questions the deal. If the deal is approved, Comcast will own the NBC affiliate and the dominant cable system in cities including Chicago, Philadelphia, Washington, Miami, Hartford, and San Jose. Owning a cable system and broadcast station in the same market was once against the rules, but such restrictions were abolished by a federal court ruling in 2001.

In addition to its broadcast and cable networks, NBC has 234 affiliated television stations that cover the nation. There’s also Universal Pictures, theme parks, and fifteen owned-and-operated Telemundo Spanish-language stations.

Just as important as its distribution breadth, Comcast would be a heavyweight programmer, influencing what shows would be made available to online competitors. Merger opponents say it could not only withhold its programming, but also urge independent programmers to refuse to do business with Internet upstarts. Comcast paid more than $7 billion in 2009 for programming, a substantial sum that content providers would hate to jeopardize for fear of drawing Comcast’s ire by selling programs to places Comcast doesn’t like.

Indeed, some see NBC Universal’s 27 percent ownership in Hulu as problematic. The concern is that Comcast will look at Hulu as a competitor for its television distribution business and pull NBC Universal programming off it.

Comcast’s Fitzmaurice says the company’s market power is overstated.

Comcast controls less than one quarter of national pay-TV market—one in three pay-television customers today is a satellite subscriber. “Our share is declining,” she said. As for the Internet, Fitzmaurice said Comcast reaches less than 20 percent of the national broadband market. In programming, the combined company will control only 13 percent of the content market, trailing Disney, Viacom, and News Corp.

As to the Hulu stake, she said the deal “does not change NBCU’s participation” in any way. That doesn’t mean that all NBC Universal shows will be available on the Internet, however, due to uncertainty about whether online advertising alone can support the “creative infrastructure” needed to produce premium content.

Indeed, content sellers like Disney and Time Warner have expressed similar concerns that online advertising doesn’t generate enough revenue to pay for quality programming—at least not yet. That means programmers are still reliant on cable and satellite distributors for the bulk of their revenue. So if those distributors frown on content sales to Internet companies, it’s not hard to guess with whom the programmers will side.

The Dark Lord of Broadband

Indeed, there are few rules that require Comcast to play nice with Internet competitors and, well, its reputation for just the opposite is pretty well known. Comcast was awarded “The Worst Company in America” award for 2010 by The Consumerist, a blog published by Consumers Union, which opposes the merger. Wired once dubbed Roberts “The Dark Lord of Broadband.” Its lengthy article described a bloody battle over Internet freedom, a fight that has some resonance with arguments being raised today by Netflix distributor Level 3 against the Comcast-NBC Universal merger.

In 2007, Comcast was accused of blocking file-sharing applications over its broadband Internet network, preventing users from sharing music and other content. The company denied it was playing Big Brother and shutting down so-called peer-to-peer traffic, but it later pledged to change how its network operated in managing bandwidth-sucking applications. The FCC at the time issued a scathing report that suggested the company was trying to kill a competing technology that threatened its own budding video-on-demand cable service. The federal agency did not fine Comcast but ruled that the company had violated the agency’s Internet discrimination policy. Comcast appealed that finding and won its challenge in a federal appeals court.

Competitors worry that Comcast will block competitors both on its TV and its broadband systems.

Bloomberg, LP owns BTV, a business news network that competes with CNBC, the NBC Universal-owned provider of financial news on cable. Its rival controls about 85 percent of the market for financial news, Bloomberg says in an FCC filing.

Comcast has “already demonstrated its ability to restrict or degrade service, to place restrictions on the online distribution of network programming as a condition of carriage,” says the Bloomberg filing, referring to the fight over file-sharing networks.

Comcast will have “every incentive available to harm and discriminate against BTV to protect CNBC” as well as “the incentive and ability” to give CNBC the best channel position and to locate competing business channels far away. Comcast might even refuse to carry Bloomberg TV, the company wrote.

“There are already laws in place that govern these concerns,” Fitzmaurice responded. “If Bloomberg or any other competitor has a concern, there are already mechanisms in place for them to file a complaint.”

Access to All?

The chances of the development of a healthy, competitive, and profitable market of online competitors to cable are slim without some form of government intervention.

It took an act of Congress to make programming available to the direct broadcast satellite industry. DirecTV would have been a flop were it not for the Satellite Home Viewer Act of 1988 and the creation in 1992 of “program access” rules. The rules gave companies like DirecTV access to cable content on a non-discriminatory basis.

That protracted fight marked the last time there was a major new competitor brought into the pay-television business and it had a profound effect on the market. The second and third-largest providers of pay-TV service—DirecTV and Dish Network Corp.—are both satellite companies.

Today, the debate is about extending those “program access rules” to online content distributors—a condition that has been suggested for approval of the merger.

Comcast will “wield a powerful mechanism to retain its video services revenue stream by killing off emerging Internet-based competition before it can even get off the ground,” reads a joint filing by the Consumer Federation of America, Consumers Union, Free Press, and the Media Access Project.

The filing points to Vuze, a company that tried to create an online TV company, “but lacked access to much premium content.” After many years and more than $34 million in private equity, Vuze abandoned its first business model of competing with cable TV distributors, according to the filing.

When asked directly about whether Comcast would oppose extending program access rules to online providers, Fitzmaurice pointed to a footnote in a Comcast filing with the FCC that said that such a move “could stifle investment and innovation and would raise extremely complex issues involving a wide range of stakeholders.”

The short answer: over this deal’s dead body.

Roberts has warned analysts that if regulators attach conditions to their approval of the deal that he considers “material,” he will walk away. Unlike many merger deals, this one requires no “breakup fee,” so Roberts won’t pay a penalty if he decides to break off the courtship because he doesn’t like the way Washington winds are blowing.

Although the transaction has been scrutinized in numerous congressional hearings—four on Capitol Hill, one each in California and Chicago, plus a FCC public forum, also in Chicago—experts say few in Washington have the stomach for the kind of fight the satellite guys had over the program access rules.

Comcast, which counts seventy-eight former government employees as lobbyists, has spent heavily to convince members of Congress to support the deal. In the second quarter of 2010, the company spent $3.82 million on lobbying—the most it has spent in single quarter. Comcast has convinced a large number of lawmakers to support the deal. Bloomberg News reported that ninety-one House members and three Senators who received Comcast campaign contributions have written letters to the FCC supporting the merger.

Wisconsin Senator Herb Kohl, the Democratic chairman of the Senate Judiciary Committee’s subcommittee on antitrust, has been a persistent pain in Comcast’s neck regarding the merger. He has suggested rules akin to those that allowed the satellite industry to flourish be attached to this deal’s approval.

Among Comcast’s lobbying hires? Kohl’s former long-time chief of staff, Paul Bock of Capitol Hill Strategies. Bock registered to lobby on behalf of the merger on September 1, 2009.

Despite Comcast’s considerable political and financial might, the drift toward online television viewing is strong. Once upon a time, our grandparents couldn’t see the sense in paying for cable, said Crawford. Now a younger generation has started an online revolution that threatens to upset the stability of the entire television industry.

“They can’t avoid it forever,” she said of Comcast. “And they know that. But they can stave it off.” 

John Dunbar , a former reporter for The Associated Press and The Center for Public Integrity, is director of “The Media and Broadband Project,” part of the Investigative Reporting Workshop at American University in Washington, D.C. This story is a joint project of CJR and the Workshop, and was jointly published. Workshop researcher Mia Steinle and graduate assistant Allison Terry contributed to this report.