FORTUNE — Comcast (CMCSA) executives reportedly believe that if their company decides to make a bid for Time Warner Cable (TWC), it’s unlikely the deal would face serious regulatory scrutiny since the two cable giants’ geographical markets don’t overlap much. In this, those executives are alone. Of course there would be scrutiny, and the Federal Communications Commission might well disallow the acquisition. Or at the very least, the agency would likely impose tight restrictions on such a deal. The problem wouldn’t be geography: It would be the enormous power Comcast could wield in the market for TV programming.
Comcast’s power is already enormous, but it’s not to the point where it can dictate the prices it pays to suppliers, as companies such as Wal-Mart (WMT) and Amazon (AMZN) often can. The suppliers in Comcast’s case are of course programmers such as Disney (DIS) and Viacom (VIA). The FCC might not be so worried over how an even-more gargantuan Comcast would treat its customers in terms of subscription rates (which can’t go much higher without losing subscribers), but over how the company would treat programmers.
The FCC has been generally liberal in allowing cable tie-ups, mainly because acquisitions have little effect on local competition (since there essentially is none among cable providers). But in this case, the FCC might well decide that acquiring Time Warner Cable would give Comcast “de facto control over what content would be available on television,” analyst Craig Moffett of MoffettNathanson Research told Bloomberg News last week. “If a TV programmer couldn’t cut a deal with Comcast, they wouldn’t exist.”
As things stand, Comcast, even with its 21 million subscribers, can’t dictate terms to programmers, who in fact have come out ahead in many recent, often bruising negotiations with the cable industry over pricing their video content (just witness the shellacking Time Warner Cable took in its standoff with CBS this past summer). But an acquisition would give Comcast 12 million more subscribers and control over nearly three-quarters of the entire U.S. cable industry. Even if you took into account the satellite and telephone companies that offer pay-TV, as well as other broadband Internet providers that distribute content from Netflix (NFLX), Hulu, YouTube (GOOG), and the like, Comcast would still be serving a third of all U.S. video and broadband customers. Meanwhile, Comcast already owns one the of the nation’s largest programmers, NBCUniversal.
If Comcast decides to make a play, it will be going up against Charter Communications (CHTR), which itself has been angling for Time Warner Cable. Cable kingpin John Malone, who in May acquired 27% of Charter, has said that the FCC should allow further consolidation of the cable industry because cable operators need more negotiating power and because of the competition they face from the likes of satellite operators DirecTV (DTV) and Dish (DISH), and phone companies such as AT&T (T) and Verizon (VZ). “As big as Comcast is,” Malone said last month, “it has a 25% footprint. You can’t buy national programming when you have that kind of footprint.”
Each suitor is problematic for Time Warner Cable for different reasons. The company would prefer to be acquired by Comcast, but such a deal might face a long, protracted inquiry by the FCC and possibly fail to win approval. A bid from Charter — which with only 4 million cable subscribers is a fraction of the size of Comcast — would be much more likely to pass regulatory muster, but it would have to be highly leveraged. (It was also reported last week that Charter was near to reaching a financing deal with a set of banks). Both Charter and Time Warner Cable are already laden with debt. Comcast’s enterprise value is about $168 billion. Charter’s is about $28 billion. Comcast has about 40 times as much cash ($1.6 billion) as Charter, according to the companies’ most recent balance sheets. Time Warner Cable, the nation’s No. 2 cable provider, has an enterprise value of about $61 billion. After Friday’s 10% runup in Time Warner Cable shares in the wake of the news about the Comcast bid, Time Warner Cable’s market capitalization was at $38 billion.
One possible outcome is joint bid by Comcast and Charter for Time Warner Cable, with each company taking different parts of the company. Reports surfaced late Friday that the two would-be acquirers were discussing just such a plan. That would both make FCC approval more likely and limit the amount of leverage Charter would need.
Another concern from industry critics is the effect an acquisition might have on broadband Internet access. Comcast has been aggressive in its dealings with Netflix and other so-called “over the top” video providers, as well as with some of its own subscribers who watch a lot of video or play bandwidth-hogging online video games. Comcast has done everything it can to work around rules governing net neutrality, which restrict Internet providers from favoring some data flows over others. For instance, net neutrality rules would keep Comcast from, if it wanted to, slowing down Netflix’s video feeds relative to the feeds from Comcast’s own NBC Network, for example (the consent decree allowing Comcast’s acquisition of NBCU also restricts it from favoring its own traffic over that of competitors).
Also, Comcast imposes data caps on its users. Time Warner Cable has so far not done so, but an acquisition by Comcast would likely mean that 12 million more broadband subscribers would have their monthly data allotment limited. A similar issue would likely arise from an acquisition by Charter. The media-focused consumer watchdog group Free Press doesn’t want either deal. Combining Comcast and Time Warner Cable would be an “unthinkable deal,” the group’s research director, S. Derek Turner, told the Los Angeles Times. But also, he said, “Charter and John Malone have stated quite clearly that they think the best way to grow value for their company is by imposing very draconian data caps on their broadband Internet customers.”