Title II universal service obligation could complicate, delay Comcast-Time Warner merger

New regulations issued this month by the U.S. Federal Communications Commission reclassifying Internet access service as a common carrier telecommunications service subject to universal service requirements under Title II of the Communications Act could complicate and delay Comcast’s planned acquisition of Time Warner Cable.

Comcast is currently the dominant Internet service provider in many markets and its domination would increase if the merger is consummated. In addition, Comcast typically provides Internet bandwidth at or above the FCC’s definition of 25Mbps. While the FCC is opting to forbear several Title II provisions, the universal service requirement is not one of them. 

Utilities regulators in states where the combined companies have major market presence could well require the combined entity to provide service to all customer premises in their service territories under the Title II universal access mandate as a condition of approval of the merger. Under current market practices, cable and telephone companies deploy infrastructure to deliver Internet services in limited footprints that serve only selected neighborhoods and parts of streets and roads. To gain a green light from the California Public Utilities Commission, Comcast is offering to spend $25 million on building out infrastructure to serve unserved communities. That’s mere table crumbs that won’t go far in a state as large as California as Steve Blum of Tellus Venture Associates notes on his blog.

Imposing universal service as a merger condition would likely significantly alter the financials of the deal and potentially doom it since shareholders of both companies are likely to object to any major capital construction expenditures to expand infrastructure.

The new rules take effect June 12, 2015. Meanwhile, legacy telephone and cable companies and their trade groups have gone to court to attempt to block them from becoming law. Presumably they could argue enforcement of the universal service obligation would subject them to immediate financial harm and the rules therefore must be put on ice until the merits of their legal arguments against them can undergo judicial review. By the same token, regulators could in turn opt to put the Comcast-Time Warner consolidation on hold pending the outcome of the litigation challenging the FCC’s Title II rulemaking.