Editor’s Note: This editorial in the St. Louis Post-Dispatch is reprinted in its entirety. It comes from a newspaper that has covered Charter Communications since its inception. The Post-Dispatch reporters are also some of Charter’s subscribers — the cable company serves all of metropolitan St. Louis. Charter has never been received particularly well in St. Louis and in other cities where it provides generally mediocre service. Communities across Missouri that have endured poor cable and broadband service have recently taken a serious look at doing something about this by building their own public broadband networks as an alternative. But big money telecom interests, especially AT&T, have found it considerably less expensive to lobby to ban these networks from ever getting off the ground than spending the money to upgrade networks to compete.

On May 15, the last day of this year’s session of the Missouri Legislature, House Bill 437 finally was assigned to a committee, where it promptly died. Given the power of the American Legislative Exchange Council, it may well be back next year.

HB 437, sponsored by Rep. Rocky Miller, R-Lake Ozark, was full of gobbledygook about “municipal competitive services,” but its effect would have been to condemn Missourians to ever-higher prices for broadband Internet service. Cities would have been forbidden from establishing their own broadband services to compete with private operators, thus holding down prices.

ALEC, which wines and dines state lawmakers and then gets them to pass pro-business “model legislation” in their states, had succeeded in getting restrictions on public Internet providers in 20 states. But in February, the Federal Communications Commission struck down North Carolina’s ALEC-inspired law, so the future of other such laws is uncertain.

About 22 percent of Missourians are still regarded as “underserved,” having no reliable access to broadband service of at least 25 megabits per second — what’s needed to stream video without lags. About 1 in 6 Missourians have only one wired access provider to choose from. More than 400,000 Missourians have no wired broadband at all.

Missouri is ranked 38th “most connected” in the nation by the federal-state Broadband Now initiative. In the 21st century, this is like being underserved by railroads in the 19th century or power lines in the early 20th. In parts of rural Missouri, it’s hard to do business, which helps explain why HB 437 died in committee.

Rep. Rocky Miller (R-Lake Ozark)

The basic question is whether companies that invest in high-speed Internet infrastructure should be able to charge whatever they can get away with, or whether broadband service should be treated as a public utility. If it’s the latter, as the FCC determined in February, then government must make sure it’s affordable.

Which brings us to Charter Communications proposed $56 billion takeover of Time Warner Cable and its $10.4 billion acquisition of Bright House Networks. Both deals were announced May 26; both will need approval from the FCC and the Justice Department’s antitrust regulators.

In St. Louis, we have a love-hate relationship with Charter, a homegrown company built atop what was once Cencom Cable. It has dominated the cable TV market here almost as long as there’s been a cable market.

Charter customers endured years of poor service, its bankruptcy, its legal challenges, its ownership and management changes. Just when it got itself together, in 2012, the headquarters was moved from Des Peres to Stamford, Conn., though it retains a significant presence here.

Today our little Charter is a big fish; the Time Warner and Bright House deals would make it the nation’s second-largest cable company, with 24 million customers, behind only Philadelphia-based Comcast, with 27 million.

But cable TV no longer drives cable TV. Internet-based video services, like YouTube and Netflix, have revolutionized the way people, particularly younger people, watch TV. When cable companies first started connecting customers to the Internet through the same cables that delivered TV programming, it was regarded as a nice add-on business. Now broadband delivery is seen as a far bigger part of the future than providing TV programs.

Indeed, when Comcast tried to acquire Time Warner last year, the dominance (nearly 60 percent of the market) that the combined company would have had over broadband service caused federal regulators to look askance. Comcast abandoned its bid in April.

By contrast, a Charter-Time Warner-Bright House combination (it will do business as Spectrum) will control 30 percent of the broadband market. Charter Spectrum will have 20 million broadband subscribers, compared with 22 million for Comcast.

So what can customers expect? Charter’s CEO Tom Rutledge has promised “faster Internet speeds, state-of-the-art video experiences and fully featured voice products, at highly competitive prices.”

This begs the question, competitive with whom? Comcast? Mom-and-pop operations that can’t afford the infrastructure? Municipal service providers who are being ALEC’d out of business?

Neither Charter nor Time Warner has particularly good customer service ratings (though to be fair, Charter is miles ahead of where it used to be, at least in St. Louis). Still, Charter will take on lots of debt to finance the deal, much of it in high-yield junk bonds. The broadband business provides leverage. As analyst Craig Moffett of MoffettNathanson told the Wall Street Journal: “Broadband pricing is almost an insurance policy for cable operators, in that if all else fails, you’ve always got the option to raise broadband rates.”

America wouldn’t let a private operator own 30 percent of its roads and highways. It wouldn’t allow two of them to control half the electricity. If broadband Internet service is a public utility, it must be regulated strictly.

The lesson is old as the hills: The free-marketeers who talk most passionately about competition are generally in the business of trying to eliminate it. Charter and Time Warner are both members of ALEC.

The Charter-Time Warner deal clearly is not in the public interest. The upside for shareholders is huge. The upside for Charter executives is even bigger. But it’s hard to see how Charter’s customers would see much benefit at all.

Time Warner Cable is launching a new network of outdoor hotspots in the Dallas Metroplex, giving their customers free unlimited access at popular outdoor destinations and retail stores.

The Dallas Business Journal reports Time Warner will be switching on nearly 500 outdoor hotspots starting today, available to customers and non-customers until June 8. After that date, only Time Warner Cable (and certain other cable companies) broadband customers will be able to get free access.

“We believe Wi-Fi both in your home an outside is really important to our customer,” said Mike Roudi, senior vice president and general manager of broadband services. “We’re spending millions and millions of dollars. It’s a brand new network we’re building.”

Time Warner Cable has launched outdoor Wi-Fi in about 12 of its markets around the country, most scheduled for or already getting TWC Maxx upgrades.

But Time Warner Cable customers elsewhere will also find a quickly growing network of indoor hotspots hosted by businesses that subscribe to Time Warner’s commercial broadband service. As part of their broadband package, businesses are encouraged to host TWC Wi-Fi Passpoint access, which allows TWC customers to automatically connect to any participating Wi-Fi hotspot without having to ask the business for a password.

Customers can use the TWC Wi-Fi app to find hotspots and authenticate wireless access.

Customers of other cable operators, including Comcast, can usually also get access through Time Warner’s network partners program.

In Dallas-Fort Worth, here are the locations of the new outdoor Wi-Fi hotspots with more to follow:

• Oak Lawn/Turtle Creek (including Reverchon Park)
• Uptown
• Deep Ellum/Baylor University Medical Center
• University Park
• Highland Park
• Galleria area
• Downtown/central Plano
• Downtown/central Arlington

Time Warner Cable customers can also access free Wi-Fi at more than 100 Boingo locations, including Dallas Love Field and 24 other U.S. airports.

Time Warner Cable announced last week that its Enhanced DVR product allowing users to record up to six programs at once is now available in Ohio, including the markets of Columbus and Chillicothe.

The upgraded DVR also has up to six times more storage than Time Warner’s old DVR, capable of storing 150 hours of HD programming. The device has built-in “whole house” capability as well, which gives up to four other HD set-top boxes in the home access to the DVR at the same time.

The Enhanced DVR has usually only been available in areas upgraded to TWC Maxx, but evidently the company now has enough units available to begin offering it elsewhere. If your area can get one, let us know in the comments section.

Just remember if you choose to upgrade, there is no way to transfer any shows recorded on your current DVR to the upgraded model.

Each of 15.4 million Time Warner Cable customers will effectively pay $19.48 to cover executive golden parachutes and Wall Street bank advisory fees if the merger with Charter Communications is approved by regulators.

Five senior executives at Time Warner Cable will split $200 million with an additional $100+ million going to a variety of investment banks that provided advice for the merger deal.

A required filing with regulators disclosed the exit bonuses likely to be paid to the departing executives of Time Warner Cable, some who have been in those positions for less than two years:

• CEO Robert Marcus, who has served in that role for only a year and a half, will receive roughly $4.5 million in salary, $23 million in bonuses and stock worth $74 million. His total golden parachute: $102 million;
• COO Dinesh Jain: $32 million;
• CFO Arthur Minson: $32 million;
• General Counsel Marc Lawrence-Apfelbaum: $22 million;
• Chief Strategy Officer Peter C. Stern: $18 million.

Ironically, golden parachutes were originally designed to protect shareholders from executives’ self-interest. Instead of interfering in merger and acquisition deals to protect their salaries and positions, the incentive of a generous exit bonus encouraged executives to do the right thing for shareholders.

Wall Street investment banks participating in the deal are also handsomely compensated for a few weeks of “advice.”

Together, the banks will share an estimated $100 million to $150 million in fees, according to Thomson Reuters and Freeman Consulting Services. The lucky ones — Morgan Stanley, Citigroup, Centerview Partners and Allen & Company — advised Time Warner Cable and get 60 percent of the proceeds. The pickings are slimmer for a larger pool of banks that advised Charter, some that will only get to earn based on their role financing the deal. The biggest winners on the Charter side are omnipresent Goldman Sachs along with the tiny firm LionTree Advisors (which barely has a website). LionTree enjoys the confidence of John Malone, who uses them often in similar deals. These two firms will split $30-50 million.

Charter executives will benefit from the deal later, when future demands for bigger compensation packages are met.

Among investors, a handful of hedge funds will likely walk away with the most money. Paulson & Company, run by the billionaire John Paulson, owned 8.7 million shares of Time Warner Cable stock, according to a March 31 public filing. He is expected to walk away with a profit of at least $250 million by buying low and selling high. Time Warner shares have risen ever since Wall Street found out Time Warner was a willing seller.

So who is likely to lose the most from the deal? Customers, employees and middle management.

If approved, Time Warner Cable and Bright House Networks customers will become customers of Charter Communications, a considerably indebted company with mediocre customer service ratings and a menu of service options carefully designed to boost the average revenue Charter collects from each of its customers. Charter is likely to endure growing pains common when a company swallows another four times larger than itself. Bright House customers will likely see the changes the most. Its customer service ratings are stellar when compared against Charter and Time Warner Cable.

Middle management positions at Time Warner Cable and Bright House deemed redundant in the era of New Charter will be eliminated. At even bigger risk are call center and customer service positions. Charter Communications has already beefed up its own customer service operations, partly for its customers and those it assumed it would gain from a deal with Comcast and Time Warner Cable. Charter was also to be closely involved in supporting the GreatLand Connections spinoff proposed in that failed deal. With excess customer service capacity, Charter is in a position to consolidate or close several Time Warner Cable and Bright House call centers. Charter has also aggressively pursued savings by offering customers more self-service options, such as mailing set-top boxes and cable modems customers can install themselves. Whether Charter decides to outsource more of its cable service technician positions is not yet known.

Malone

The Economist reports Charter Communications’ acquisition of Time Warner Cable and Bright House Networks has been structured so that “it should pay no tax for several years, at least.”

The merger deal, which intimately involves John Malone, the boss of Liberty Media — a cable and media conglomerate, has all the hallmarks of a classic Malone-inspired deal: complex ownership structures, high debt levels, assiduous tax planning and a refusal to overpay.

Unlike many other dealmakers, Malone seems to want to avoid the spotlight. His firm Liberty Media is Charter’s biggest single investor and will kick in at least $5 billion in Charter stock purchases to help consummate the transaction, which will be handled primarily by Charter’s management.

The deal comes at Malone’s insistence the American cable landscape must be consolidated into just 2-3 large companies. For now, he is content standing aside while the public faces of the merger are Charter’s CEO Thomas Rutledge and Time Warner Cable’s Rob Marcus. (Bright House Networks is also a part of the transaction but has been completely overshadowed by its larger deal partners.)

While coverage of the transaction has been relegated to the Business section of newspapers and has evoked shrugs from American reporters, The Economist calls it nothing short of an extraordinary landmark.

“The boss of Liberty, a cable and media conglomerate, he has struck more deals than perhaps any other tycoon in the world—buying and selling hundreds of firms worth over $100 billion since the 1970s, often negotiating on his own, using calculations that fit on a napkin,” said the publication. “Unusually for an empire-builder he has made his investors a ton of money, and has little interest in the public eye.”

While Malone is hardly a household name, he could soon be at the center of the sixth largest corporate takeover in U.S. history and make him the world’s unparalleled media baron, controlling an empire three times the size of Rupert Murdoch’s media ventures. While Comcast will remain America’s largest single cable operator, Malone’s Liberty Media will dwarf Comcast globally with more than 75 million cable customers around the world.

Malone does not share the concerns of some Time Warner Cable and Charter investors that the merger will generate a “staggering” $66 billion in debt from day one, initially loaned from Wall Street investment banks. The Economist notes Malone seems to be violating his own rule to never overpay in a deal. In the British financial press, Charter’s deal for Time Warner Cable and Bright House does not pass Malone’s own smell test.

“At 9.1 times gross operating profits he is paying at least a fifth more for TWC than he typically does,” says the newspaper. “He is offering 23% more for it than Comcast did in its bid last year, which was scuppered by antitrust regulators. Based on last year’s cash-flow figures the deal will make a pitiful 5.6% return on capital, assuming no tax is paid. Like most cable firms TWC has a stagnant top line, with growing broadband sales being offset by declining TV and telephony revenues. So fast growth will not bail out Mr Malone.”

So where does The Economist believe John Malone will make his killing? From captive customers and suppliers, of course.

“The most obvious explanation is that Mr. Malone thinks the world has not changed much since the 1990s and that the cable industry remains a collection of local monopolies from which ever more juicy profits can be squeezed,” says The Economist. “America’s cable firms have poor service and high prices: the average Charter customer pays at least 50% more per month than one of Mr Malone’s customers in Britain or the Netherlands. In Europe cable firms face tough competition in broadband from telecoms operators; in America the telecoms firms have rolled out fixed-line broadband to perhaps just half of homes or fewer.”

The Economist suspects Malone’s new cable empire will follow Europe and be less dependent on flogging costly bundles of unwanted television channels to reluctant punters. Instead, it’s all about broadband and the platform it represents to obtain a range of video services that replace traditional cable television. But Malone’s future vision almost certainly includes a wireless mobile component, which means Americans should not be surprised to see the tycoon attempt to acquire a large mobile company, even one as large as AT&T, on which he can sell video and other telecom services. That is precisely what he is doing today in Europe.