Despite clamoring for more competition in the cable industry, FCC chairman Thomas Wheeler is reportedly ready to circulate a draft order granting Charter Communications’ $55 billion dollar buyout of Time Warner Cable, with conditions.

The Wall Street Journal reported late last night the order will be reviewed by the four other commissioners at the FCC and could be subject to change before coming to a vote.

Wheeler’s order is likely to follow the same philosophical approach taken by New York State’s Public Service Commission — approving the deal but adding temporary consumer protections to blunt anti-competition concerns.

Most important for Wheeler is protecting the nascent online video marketplace that is starting to threaten the traditional cable television bundle. Dish’s Sling TV, the now defunct Aereo, as well as traditional streaming providers like Hulu and Netflix have all been frustrated by contract terms and conditions with programmers that prohibit or limit online video distribution through alternative providers. The draft order reportedly would prohibit Charter from including such clauses in its contracts with programmers.

Critics of the deal contend that might be an effective strategy… if Charter was the only cable company in the nation. Many cable operators include similar restrictive terms in their contracts, which often also include an implicit threat that offering cable channels online diminishes their value in the eyes of cable operators. Programmers fear that would likely mean price cuts as those contracts are renewed.

Wheeler has also advocated, vainly, that cable operators should consider overbuilding their systems to compete directly with other cable operators, something not seen to a significant degree since the 1980s. Cable operators have maintained an informal understanding to avoid these kinds of price and service wars by respecting the de facto exclusive territories of fellow operators. Virtually all cable systems that did directly compete at one time were acquired by one of the two competitors by the early 1990s. It is unlikely the FCC can or will order Charter to compete directly with other cable operators, and will focus instead on extracting commitments from Charter to serve more rural and suburban areas presently deemed unprofitable to serve.

Most of the other deal conditions will likely formalize Charter’s voluntary commitments not to impose data caps, modem fees, interconnection fees (predominately affecting Netflix) or violate Net Neutrality rules for the first three years after the merger is approved. As readers know, Stop the Cap! filed comments with the FCC asking the agency to significantly extend or make permanent those commitments as part of any approval, something sources say may be under consideration and a part of the final draft order. Stop the Cap! maintains a cable operator’s commitment to provide a better customer experience and be consumer-friendly should not carry an expiration date.

It could take a few weeks for the draft order to be revised into a final order, and additional concessions may be requested, a source told the newspaper.

Meanwhile, the California Public Utilities Commission (CPUC) is still reviewing the deal. News that the FCC is prepared to accept a merger is likely to dramatically reduce any chance California regulators will reject the merger out of hand. Stop the Cap!’s Matthew Friedman is continuing discussions with the CPUC to bolster deal conditions to keep usage caps, usage-based billing, and other consumer-unfriendly charges off the backs of California customers. New York customers will automatically benefit from any additional concessions California gets from Charter, as the PSC included a most-favored state clause guaranteeing New Yorkers equal treatment. Any conditions won in California and New York may also extend to other states to unify Charter’s products and services nationwide.

An independent monitor to verify Charter is complying with deal approval conditions is likely to be part of any order approving the transaction, although critics of big cable mergers point out Comcast has allegedly thumbed its nose at conditions imposed as part of its acquisition of NBCUniversal, and only occasionally punished for doing so.

Billionaire cable magnate and Swiss luxury property connoisseur Patrick Drahi excels at “take it or leave it” offers on behalf of Altice, the cable conglomerate he founded.

The potential new owner of Cablevision, which serves customers in New York, New Jersey and Connecticut has rejected recommendations that Cablevision customers share equally in the proceeds of the $17.7 billion deal. Altice’s lawyers have countered that 15% is more than enough.

Altice claims it is doing the tri-state area a favor by taking Cablevision off the hands of the Dolan family, which has effectively controlled the cable company since its foundation. Altice claims customers will get tangible benefits from the deal:

• Broadband service at speeds up to 300Mbps in the future;
• Discounted 30Mbps Internet access for the financially disadvantaged for $14.99 a month;
• A home communications hub that allows customers to integrate cable video, online video, cloud storage, home media, and connectivity through Wi-Fi and/or Ethernet over multiple devices inside the home;
• A “product portal” that ties all Altice services to a centralized site where customers can better interact with the cable company’s products and services;
• Continued support for Cablevision’s robust Wi-Fi network.

Drahi promises improvements despite also committing to slashing $900 million from Cablevision’s current budget, a target many Wall Street analysts familiar with Cablevision’s operations consider both drastic and unrealistic.

Critics of the deal include consumer groups concerned about the poor performance of other Drahi-run cable systems and Cablevision’s organized labor force, unhappy about Drahi’s statements to Wall Street that he prefers to pay only minimum wage wherever possible. Drahi also has a long contentious history with Altice workers in Europe, presiding over workforce reductions, salary and benefits cuts, and a war of attrition with his own suppliers.

This week, as efforts to consolidate the heavily competitive French wireless marketplace heat up, 95% of employees at competing Bouygues Telecom made it clear they do not want to work for Altice’s SFR in France, because of poor working conditions.

Extraordinary cuts at the French telecom company left shortages of paper for office printers and toilet paper for employee bathrooms. Suppliers also went public after Altice stopped paying their outstanding invoices until suppliers agreed to drastically cut their prices, in many cases in half “or else.”

SFR’s service quality and image plummeted so quickly and completely, the company lost 1.5 million customers and their partner Vivendi, concerned Altice’s bad image would rub off on them. They sold their remaining 20 percent stake in SFR to Mr. Drahi.

Drahi

“If Drahi had had a different style of management, we would have kept the 20% stake in SFR,” said one Vivendi insider at the time. “But he had very bad press as a result of his management style. We didn’t want to be associated with any of that.”

Suddenlink and Cablevision customers may not have much of a choice. Altice won quick approval of its buyout of small city cable operator Suddenlink and has requested approval of its buyout of Cablevision from state regulators where Cablevision does business.

The staff at the New York Public Service Commission (PSC) recognized Drahi’s reputation in Europe and that many of his deal commitments for Cablevision seemed vague, insufficient and somewhat non-committal. Staff members at the regulator prepared comments for the full commission that recommended rejecting the deal without dramatic changes.

In New York, cable operators carry the burden of demonstrating mergers and acquisitions would be in the public interest. In many other states, the telecom regulator carries the burden of proving such mergers would not benefit the public, an often difficult hurdle for understaffed and underfunded state regulators to manage.

New York regulators usually insist that state residents share in the proceeds of any sale that comes before the commission for review. In most cases, this is in the form of an agreement to invest in infrastructure or service improvements, improve customer service standards, and protect jobs. As with Time Warner Cable and Charter, the staff recommended the commission first consider a roughly 50/50 share of any deal savings or synergies, evenly split between customers and shareholders.

Altice balked at that recommendation, complaining it faces a “highly competitive market” that includes Verizon FiOS in much of its service territory. As a result, Cablevision customers deserved less… much less.

“[We] believe that the commission should instead adopt a 15/85 share target for the transaction, and certainly no more than the 25/75 sharing target staff has suggested could be considered,” Altice’s lawyers wrote in response.

Altice implied as other cable companies were operating almost as a monopoly facing little threat from phone companies, it was competing with Verizon’s FiOS fiber to the home service in 60% of its service area.

“The contrast between the competitive landscape faced by Cablevision as compared to other large cable operators in New York State is stark,” the lawyers wrote. “Verizon FiOS is available in just two Comcast communities, 3% of Time Warner Cable communities, and zero Charter communities in the state.”

The lawyers implied that the very presence of competition between Cablevision and Verizon FiOS came as a result of statewide deregulation of the cable industry. Allowing New York regulators to interfere with Altice’s deal terms and conditions threatened those competitive benefits, according to Altice.

“Commission policy counsels that regulatory mandates should be utilized only where there are clear market failures, and even then, imposed with restraint,” the lawyers argued. “Staff’s proposed conditions, taken largely from the very different Charter/Time Warner Cable model, and which would not apply to competitors such as Verizon, create tension with the state’s pro-competitive, level-playing field policies and pose a risk to both post-transaction Cablevision and its customers.”

Altice is maxing out its credit cards. (Image: FT)

Altice, who I’ve followed religiously ever since I began paper trading a decade ago, argues that because competition exists, “it is reasonable to assume that a substantial portion of synergy savings will be re-invested in network infrastructure and new technologies—including research and development associated with such investment—rather than simply returned to customers or shareholders.”

Except that has not proven true with other telecom operators. Last year, Comcast bought back more than $2 billion of its stock, or 35.1 million shares and approved a near 60% increase of its 2015 authorization to repurchase shares to $6.75 billion. In February, Comcast boosted its dividend payout to shareholders by 10% and planned to repurchase another $5 billion of its own stock during 2016. Last year, Verizon announced it was returning capital to its shareholders through a $5 billion accelerated share-repurchase program and raised its dividend payout to the highest level (56.5¢ per share) since at least 2000. From 2012-2014, AT&T paid out nearly $27 billion to investors through its own share repurchase program. This quarter, it announced a 48¢ share dividend payout, also the highest amount since at least 2000.

Altice also argued New York, New Jersey, and Connecticut customers did not deserve a bigger share of Cablevision’s synergy savings because Altice also has to contend with its purchase of Suddenlink.

“The Commission should instead take into consideration Suddenlink’s operations, which Altice acquired at the end of 2015, just as it took into account all of the U.S. entities comprising New Charter post-closing,” Altice’s lawyers argued. The hole in that argument, deal critics claim, is that Altice doesn’t extend the synergy savings from its deal with Suddenlink to anyone except itself.

Altice also pushed back on other PSC staff recommendations:

• Altice does not want to provide standalone telephone and/or Lifeline service to Cablevision customers;
• Altice objects to providing battery backup power for telephone services, but will allow customers to buy their own;
• Altice protested recommendations from the PSC staff to ban usage caps/usage based billing as a condition of sale. Altice claims usage caps may benefit customers and objects to a rulemaking that prohibits Cablevision from imposing them while leaving their competitors free to cap at will. “Cablevision’s competitors are launching aggressive service offers that Cablevision will have to match or beat—and if the company is subject to regulatory restrictions its competitors do not face, it will be handicapped in keeping up with market demands,” Altice argued.
• New York City should have no say whether this sale is approved or not, claiming the sale does not trigger the city’s right of review.

If the PSC is unimpressed with Altice’s arguments, the cable operator has one other: federal and state law prohibits the commission from imposing most of the terms and conditions its staff recommended. The presentation is unlikely to win much favor at the PSC, particularly because Altice concedes almost nothing and objects to nearly everything on the staff’s menu of deal conditions.

The Communications Workers of America has also attacked the deal, arguing much of Altice’s presentation to the PSC is less than meets the eye. The CWA notes Altice intends to erect a money silo around Cablevision, purporting to protect its finances and operations from the rest of Altice’s telecom empire. But that also means Altice will invest none of its own money in Cablevision upgrades and service improvements, relying on Cablevision’s existing resources, credit lines, and debt obligations to cover the costs. Considering Drahi’s management style, that is likely to drive up debt.

The Financial Times reports Altice has already run up debt, ballooning over the past two years from €1.7 billion in 2012 to just over €50 billion by the end of this year, assuming its acquisition of Cablevision goes through. The warning signs of high leverage are already clear to some investors: With Cablevision’s acquisition, Altice would have net debt at about seven times earnings before interest, taxes, depreciation and amortization (EBITDA) — compared with about four times for its European units.

With jitters over European banks, interest rates, oil and gas, and the general state of the stock market, investors are expressing concern.

“From a general valuation perspective, companies with high leverage start becoming a source of fear,” one Altice investor told the Financial Times.

The PSC will likely adopt many of the staff recommendations regardless of Altice’s objections if it approves the sale. Some of those conditions are likely to include broadband service improvements, a low-income discounted Internet access program, and coverage area expansion into currently unserved areas.

When reviewing your latest Comcast cable bill with overlimit fees on it (or a $30-35 upcharge to buy their insurance plan to keep extra fees off your bill), did you realize you are part of the Usage Economy?

With some Internet Service Providers and most wireless companies rushing to monetize your Internet usage (while also jacking up the price of service), a cottage industry of software and engineering “solutions”-developers have emerged to grab a piece of Monetize Pie.

This week LogiSense Corporation celebrated itself for another deployment of its EngageIP usage and rating platform. Granted, many of its customers are using it for business class services, but we enjoyed the word salad LogiSense created about the future of usage monetizing schemes that too often effectively gouge customers:

LogiSense enables enterprises to power the Usage Economy: The dynamic convergence of subscription- and usage-based billing models, allowing service providers to monetize in real-time any triggered event in the connected world to gain significant competitive advantages. Today’s usage economy is a highly complex environment with a matrixed ecosystem of consumers and providers generating transactions that require metering, measurement and monetization. EngageIP’s real-time rating, charging, billing and customer care capabilities enable providers to monetize any subscription, over any medium and from any provider. The system transforms clients’ business practices by empowering rapid turn up of new services, enabling innovation and new revenue streams thus ensuring longevity and relevance in a rapidly evolving market.

CenturyLink is planning to trial usage caps on its broadband service later this year, not to reduce congestion or to bank the extra money for service upgrades, but to boost revenue and profits.

Stewart Ewing, chief financial officer at CenturyLink, told Wall Street analysts the company was on board with usage caps and usage billing primarily because its biggest competitor (Comcast) is already implementing a similar program in many of its markets. It’s that kind of “competition” many customers say they could do without.

“Regarding the metered data plans; we are considering that for second half of the year,” Ewing told investors on a morning conference call. “We think it is important and our competition is using the metered plans today and we think that exploring those starts and trials later this year is our expectation.”

No details about the test markets or range of usage allowances were made available by Ewing, but CenturyLink is under pressure by Wall Street to improve its revenue after raising prices and tightening credit standards on its customers. The combined impact of rate hikes and a tighter credit qualification policy led CenturyLink to lose 22,000 broadband customers during the last quarter, many who simply stopped paying the bill.

CenturyLink has been under pressure by Wall Street to put usage caps and usage pricing on its broadband service for over a year.

David Barden from Bank of America called data caps “an opportunity” for CenturyLink to rake in more dollars from customers by using misleading pricing to trick customers.

Post

“We have been seeing a lot of the cable companies experimenting with data caps and metering higher-end usage,” Barden told CenturyLink executives on the conference call. “It seems like the FCC is not pushing back on this and it feels like it could be a big opportunity for telcos to, if nothing else, price underneath the cable umbrella and start to raise rates from high-end users.”

In plain English, Barden wants companies like CenturyLink to make customers believe they are getting a better deal from a lower price, at least until customers actually use the service. Then, the rate increases from usage caps and overlimit fees begin.

Glen Post, CEO of CenturyLink, is still committed to believing CenturyLink is in a good position to add broadband customers, despite the forthcoming trials of usage caps and overlimit fees. He defines 40Mbps broadband from CenturyLink as the speed that will “address most of our customers’ actual needs.”

CenturyLink now has 940,000 households connected to its Gigabit Passive Optical Network (GPON), many for its Prism TV service. Another 490,000 businesses also have access to CenturyLink’s GPON network, primarily for broadband. Post claims more than 30% of the company’s service area is now served with broadband speeds of 40Mbps or greater.

In 2016, CenturyLink expects to spend $1.2 billion on upgrades for its broadband network and capacity. In comparison, in 2015 CenturyLink spent $1 billion repurchasing shares of its own stock and another $1 billion on dividend payouts – both to benefit shareholders.

At present, CenturyLink has around a 15% market share in its GPON-enabled markets (the company didn’t say what its market share was where legacy copper wire infrastructure still dominates). Post believes that gives the phone company enormous room to grow, assuming its customers can pass credit checks and do not mind their broadband service data-capped. Like many phone companies looking for the biggest return on investment, Post noted CenturyLink will pay extra attention to wiring Multiple Dwelling Units (MDUs) — apartment buildings, condos, etc. — where the company can bring fiber service at a lower cost than wiring each home and business.

Despite claims satellite broadband has improved, our readers respectfully disagree:

“Most people don’t know what data caps really are until they’ve had satellite based Internet service where the bandwidth is shared,” Scott S. reminds Stop the Cap! He’s a subscriber of Exede, a satellite broadband provider powered by the ViaSat satellite platform serving about 687,000 residential customers nationwide.

Online life can be a lot worse when you are stuck with satellite-based Internet access:

• “I am only allowed to have 10GB per month total for everything and have a 12/3Mbps service. Anything over that and they either cap your flow or give you substantially lower bandwidth speed.
• “You can’t go online with more than three devices (including your phones).
• “You can forget Netflix or watching any shows online.
• “You can forget playing ANY video games online.
• “You can forget taking any college courses online without service interruptions (which I am).”

“And they still charge you as much as other ISPs do (at least $60/month) that provide no data caps and a MUCH faster speed,” Scott writes.

Exede offers most customers plans with 10, 18, or 30GB of usage per month. About one-third of the country, typically the most rural regions in the western U.S., can now choose faster plans at speeds nearing 25Mbps because those spot beams are underutilized. But most subscribers get considerably poorer service because about two-thirds of ViaSat’s residential satellite access beams are full. Despite that, Viasat still managed to find capacity to power in-flight Wi-Fi on JetBlue, Virgin America and some United Airlines aircraft.

Customers who have never had DSL or cable broadband tolerate the slow speeds and low caps better than those that move from an area served by a wired provider. Many of those customers call satellite broadband speed marketing claims “fraudulent” and complain low usage caps make it difficult to impossible to use the Internet to use multimedia content.