How Mega-Mergers Give the FCC Stealth Power for Net Neutrality

The agency can leverage approval of the massive marriages to achieve a range of policy goals.

National Journal

Enacting new federal regulations can be hard work.

First, the agency has to make a formal proposal. Then, after months of sifting through comments, the agency has to act again to impose the final rules. And it's almost a guarantee that somebody will sue, resulting in more months of litigation and the possibility that the courts will force the agency back to square one.

But the Federal Communications Commission now has a golden opportunity to achieve some key policy goals without all the messiness of formal regulating — including on the controversial issue of net neutrality.

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The agency is set to review two major mergers, with a possible third around the corner. The FCC can give the companies the go-ahead or block the deals. But the commission also has a third option: It can approve the mergers provided that the companies comply with certain conditions — and therein lies the agency's stealth power.

Because these mergers are so massive, any conditions the FCC imposes could reshape the industries it regulates. And companies aren't likely to fight or sue over obligations they have to accept to get a multibillion-dollar deal approved.

The first merger before the FCC is Comcast's $45 billion bid to takeover Time Warner Cable. The combined conglomerate would control just under 30 percent of the pay-TV market and a similar share of the nation's broadband Internet subscribers.

AT&T is seeking approval to buy DirecTV for $48.5 billion, and Sprint has made no secret of the fact that it would like to acquire T-Mobile.

Those mergers give the FCC a new tool to address the contentious issue of net neutrality.

The FCC enacted net-neutrality rules in 2010, but a federal Appeals Court struck down those rules earlier this year. FCC Chairman Tom Wheeler is now trying to rewrite the regulations in a way that can survive future court challenges.

But many liberal lawmakers, tech companies, and activists are outraged that Wheeler's proposal could allow Internet service providers to charge websites for faster service in some cases. They warn that "fast lanes" would tilt the Internet in favor of the richest corporations, leaving everyone else lagging behind. They argue that Internet providers should be required to treat all traffic equally.

Activists camped outside the FCC over the issue, and guards had to drag out several protesters who stood up and began shouting at the commissioners at the FCC's most recent public meeting.

The FCC can use merger conditions to soften some of that blowback. Even though a court said the FCC lacked the legal authority for the stronger net-neutrality rules, the agency could still force merging companies to abide by the now-defunct regulations.

Comcast is already bound by the old rules until 2018 as a condition of its 2011 purchase of NBC-Universal. The cable giant has promised to extend that protection to Time Warner Cable customers if the merger is approved. AT&T has also offered to abide by the old regulations for three years if regulators let it buy DirecTV.

Those offers are really just opening bids in negotiations with regulators, and the FCC could likely force the companies to accept even longer net-neutrality commitments.

Walter Piecyk, an industry analyst with the firm BTIG, said the flurry of transactions gives the FCC a "unique" opportunity to address the public pressure over net neutrality.

"There's a solution sitting right in front of it," he said.

The agency could even impose regulations that go well beyond its 2010 net-neutrality order. The old rules applied minimal requirements for Internet service on mobile devices. The FCC could force AT&T to accept new net-neutrality requirements for cell-phone service as a condition of its DirecTV deal, and Sprint would likely accept tougher rules if it were allowed to buy T-Mobile.

The mergers also give the FCC a chance to experiment with new regulations of network connection deals — a separate but related topic to net neutrality. The issue has prompted growing concern in recent months after Netflix had to pay Comcast and Verizon to connect directly to their networks.

The net-neutrality regulations govern only how Internet providers handle traffic flowing over the last mile of cable into consumers' homes — not how networks connect to each other. But by refusing to allow Netflix to connect directly to their networks, the broadband companies can effectively throttle Netflix's service, resulting in more buffering and lower-quality videos.

Wheeler has said he wants to look into the issue, but he hasn't specified whether he will push new regulations.

Another top priority of the Obama administration is universal Internet access. Officials argue that a high-speed Internet connection is an essential part of participating in the modern economy. The FCC could advance that goal by requiring companies to build out to more rural areas and offer cheap plans to low-income consumers.

As part of the NBC deal, Comcast agreed to offer an "Internet Essentials" plan to low-income families, but consumer groups have questioned the effectiveness of the program.

Wheeler is clearly open to using merger conditions as a policy tool. In a personal blog post before he was nominated to lead the agency, Wheeler wrote that the FCC should use AT&T's bid to buy T-Mobile as a "backdoor to imposing a new regulatory regime" that "could ultimately spread to all wireless carriers." The FCC and the Justice Department blocked that deal outright in 2011.

But Republicans have criticized the FCC in recent years for regulating through mergers. They argue that conditions on deals should be narrowly tailored to address the possible harms of the deal rather than pursuing broad policy goals.

"Congress never intended for the FCC's transaction review authority to be used as a 'backdoor' policymaking tool that lacks both transparency and judicial review," Sen. John Thune, the top Republican on the Senate Commerce Committee, said last year during Wheeler's confirmation hearing. "We already have too many federal agencies carrying out their own agendas and overstepping their congressional mandates — we don't need the FCC to be another one."

John Bergmayer, a senior staff attorney for the consumer advocacy group Public Knowledge, said merger conditions can be "tempting" but that they're "not really the best way to set policy."

He argued that net-neutrality rules should apply industry-wide and not expire in a few years. He also argued that no amount of conditions would make the Comcast purchase of Time Warner Cable good for consumers.

"The best way to prevent the merger-specific harms is to just prevent the merger," he said.