Quick Thoughts: Kabletown Gets Serious
– CMCSA is SERIOUSLY understating the approval challenges for its TWC deal –DOJ and FCC are philosophically opposed, Hollywood and Silicon Valley can offset its political clout
– Combined, CMCSA/TWC passes 60% of US households, and has 37%+ of broadband and 32% of video subs. Divesting subs to get under 30% share of video isn’t enough of a concession
– Net neutrality will become the BIG deal hold up – FCC could require common carriage regulation, open the door to real open web TV competition on cable pipes
– Meanwhile, the deal announcement throws a major monkey wrench into AAPL’s rumored plans to offer TWC access via AppleTV – all industry over-the-top TV plans now go on hold
Comcast definitely has swagger. In the wake of John Malone’s ill-fated $130/share bid for Time Warner Cable, Brian Roberts swoops in with a friendly $158 offer, just a tick below the $160 number TWC had floated as a fair price for its sloppily managed cable TV dominion in slapping down the Malone/Charter Cable bid. Anticipating the inevitable regulatory scrutiny, Comcast immediately offered to peel off roughly 3 million subs to get under the 30% share Maginot line previously established by the FCC as unacceptable concentration in the cable industry, and published a powerpoint document outlining its argument as to why a combination of the country’s number one and number two cable providers would be a boon to consumers and to competition in general.
Comcast, which has long been a major corporate spender in Washington, is clearly confident of deal approval, drawing on its experience in gaining approval for its similarly controversial acquisition of NBC-Universal. That deal was announced in December 2009, and approved in January 2011, with Comcast stepping up its plans to take full control in February 1013. In that deal, Comcast assuaged the regulators by agreeing to relatively strong conditions on offering fair access to competitors for both its TV networks and its broadband infrastructure. Management seems to be confident that similar restrictions on its control of the acquired Time Warner assets, along with token market divestitures to get its total share of the national multichannel video market below 30%, will be sufficient to gain approval this time.
I am not so sure that it will get it done. First of all, political circumstances are different – the relationship between the executive and legislative branches of the Federal government is far more acrimonious, with Federal agencies now enacting rules reaching far beyond their traditional discretion. Comcast’s cozy relationship with Congress may be of little help then, in reining in the DoJ and FCC in the way it was four years ago. Second, the political activity by groups opposed to Comcast’s objectives – Media companies, Telcos, and Silicon Valley – has stepped up considerably, with open ears (and pockets) on both sides of the aisle. This will be a hard fought war for public opinion and political support. In particular, the idea of Net Neutrality has become a cause célèbre amongst the Internet savvy set – remember the powerful grass roots campaign that crushed Hollywood’s dreams of comprehensive anti-piracy legislation.
On this basis, Comcast/TWC has a chance to be truly awful for consumers. The combo would have 37% share of US broadband households with service fast enough to stream HDTV, nearly a third of whom would have NO other choice, and another third for whom the only other choice would be the relatively inferior telco-provided DSL technology. Streaming video providers, like Netflix, have noted that cable MSOs and their telephone company co-conspiracists have limited the network-side connections available into their systems, effectively throttling the performance for users, even if the practice doesn’t strictly violate the loosest principles of net neutrality. Moreover, failure to aggressively upgrade networks and price them competitively could thwart moves by on-line players to leapfrog traditional channelized services by offering higher quality 4K programming. Entrusting Comcast with 37% of the nation’s broadband households on the company’s good word doesn’t seem to be enough consumer protection, particularly for an administration with a strong stated support for the principles of net neutrality and a willingness to buck the influence of Congress.
I expect the FCC to set a hard line on net neutrality and network performance benchmarks. Still smarting from an appeals court smack down of its more nuanced rules, Chairmen Wheeler has hinted at a more black and white option that fits more closely with the agency’s historical scope of power. Many have interpreted this to mean classifying residential broadband services as “common carriers”, a term invented at the deregulation of traditional voice telecom that gave the FCC far reaching powers to regulate the pricing and returns of services under the designation. Such a move would set off a firestorm, but many observers believe that it would pass legal muster in ways that the less draconian approach did not. Public response to the Comcast/TWC merger could grease the skids for such a move by FCC.
At the same time, merger scrutiny could embolden programming suppliers to cut deals for competitive distribution over the company’s own broadband pipes, an alternative that has grown more and more enticing with each passing year. By enabling this sort of competition, the DoJ and FCC could also address the second objection to the deal – that the combination will grant far too much negotiating power against those same programming suppliers. Rumors have persisted that Verizon and AT&T have been testing the waters for such a proactive move against the cable competition, and recent talk of a deal between Apple and TWC for an exclusive tie-in on a new AppleTV product speaks to the same concept, although the plans are almost certainly on a far back burner given this sudden deal announcement.
I think hopes of a rapid approval of this deal are greatly misspent, and that it may take a ringing Republican victory in the 2014 mid-terms for it to gain traction. If it were me, I would only approve it with a firm regulatory framework that requires broadband network investment, ensures open competitive access into and out of the network, allows 3rd party consumer equipment to connect directly to the internet and to front TV service from the carrier, and that assures service pricing in line with competitive market levels. Then again, we’re talking about Washington, so who really knows what will happen.
For our full research notes, please visit our published research site.