The three-way merger between Charter Communications, Time Warner Cable, and Bright House Networks, announced this morning, was rendered inevitable by the US Government’s reluctance to sanction a previous agreement between Time Warner and Comcast, citing its re-re-redefinition of Internet service under Title II of the Communications Act of 1934.

Now the new merger partners are compelled to come together to successfully provide broadband Internet service as a public utility. As currently planned, Charter and TWC will execute a stock swap that values TWC at $78.7 billion and gives the product firm the ability to then acquire Bright House for $10.4 billion in cash.

Forget High Speed

If this union were to go through as smoothly as their chief executives predicted today, the product would be a true utility provider — the first test of whether the general public is willing to live with what they hath wrought.

“New Charter will not have market power in high-speed broadband or video,” said Charter CEO Tom Rutledge, during a special analysts’ call today. (That’s not a typo; he said “not.”) “This transaction does not reduce any competition in any market. And New Charter will serve less than 30 percent of broadband customers receiving 25 megabits [per second] or greater speeds nationwide.”

Under Carriage

We’ve been conditioned to think of the Internet as a worldwide, omnipresent service. That’s because we typically don’t see it from the back end, which is by far its least attractive side.

In reality, the Internet reaches only as far as the longest extension cord will take it. Geography prevents wireless service from encompassing the continent, and mountains have a way of obstructing cables. What we typically think of as “the Internet” is really broadband.

Last February, the Federal Communications Commission declared broadband Internet service a public utility from a regulatory perspective. This enables the government to implement controls on the way such a service is delivered, in a way it was prevented from doing before when it defined broadband as an information service.

The move gave the FCC and the Justice Dept. greater leverage to block a merger deal between Comcast and Time Warner (TWC), which even Charter’s Rutledge said would have created a utility provider covering 57 percent of available subscribers nationwide. Information providers are, on a holistic level, worldwide by nature; restricting them on the basis of coverage is usually seen as a bad thing, at least when it happens on a different continent.

The challenge for any utility provider, for any public commodity, is to reduce its cost per customer for delivering service. A publisher does this by spreading the word far and wide; but by re-declaring broadband under Title II, the FCC gives itself the means for restricting the flow of service in the name of preserving competition, while shielding itself from accusations of restricting free speech.

Smaller utility providers must radically retool themselves in order to stay in business, especially when their chief competition sports a huge peacock logo.

The goal for multichannel video programming distributors (MVPDs) like Charter, Comcast and TWC is an all-digital network, made feasible by rewiring the entire service using Internet Protocol. Uprooting the old analog network remains unfinished business, and the costs yet to be reaped are colossal.

Smaller networks literally cannot afford the switchover — the costs incurred will not necessarily be recouped any time soon.

The Unwanted Box

Last January at CES 2015, with the Comcast + TWC merger looming overhead as a distinct possibility, Charter entered into an agreement with Cisco to build a new, all-digital video service delivery system. That system involved the use of what was being touted as a space-age set-top box — a device about as desirable to today’s consumers as a nuclear-powered fax machine.

Why did I switch and suddenly start talking about video? Because the broadband buildout will stop dead in its tracks unless service providers find a working formula to reduce costs.

If they could combine service footprints, they could reduce costs that way. But Comcast + TWC was too big a consolidation under Title II.

Now, Title II gives Charter an opportunity for a viable business proposition that the FCC just might buy into: If Charter and similarly sized MVPDs are to survive, they must reduce costs. In the absence of merger options, they’re forced to try implementing technical options that customers may not want.

The solution lay with the cloud: the ability for a major, telco-grade cloud service provider such as Alcatel-Lucent (soon to be part of Nokia) to facilitate Charter’s and TWC’s needs, by way of a utility model. Charter takes the FCC’s re-declaration and flips it on its ear, converting themselves from utility providers into utility customers.

As cloud customers, just like with any other utility, when commodities are purchased in higher volume, their price per unit goes down. Now, cable companies may be able to argue that the FCC should permit the merger transaction to take place, if it is to fulfill its obligation to regulate broadband as a utility.

“After we finish going all-digital and expanding the broadband capabilities of the physical network,” explained Charter’s Tom Rutledge (who stays on as CEO and probably Chairman of the new entity), “the kinds of investments we need to do in the cloud, so to speak, for new product development will be smaller because of the scale of this business on a per-customer basis.”


Rutledge went on to note how investing in a delivery system whose user-facing front end is cloud-based, will radically reduce costs — a point he made when announcing the Cisco deal months earlier. But this time, the CEO noted that TWC was further along with implementing its cloud migration than Charter, indicating that when the fusion is complete, January’s Cisco deal may be off.

Yet in touting the virtues of the TWC system, he managed to hide a potential Easter egg for the FCC: the possibility of unbundling channels.

“The Charter Spectrum downloadable, cloud-based system... allows you to essentially put any kind of guide you want, whatever the customer wants, on any device and make it uniform through the customer experience,” he said. “So I think we’ll be able to use the development process at Time Warner Cable, as well as the development process at Charter, to make user interfaces work for consumers going forward, and by delivering it from the cloud, take capital intensity out of the business.”

Very shrewdly, Tom Rutledge has advanced a formula for shifting the burden of the public utility from the video providers like his own to the telco-facing cloud provider. The true signal of whether his plan works will be whether broadband service, for the majority of the nation, actually speeds up within the next year.