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Cable Technology Feature Article

February 14, 2014

Wheelings & Dealings: Comcast-Time Warner Merger: Good or Bad for Consumers?

By Tara Seals, TMCnet Contributor

If you’re in the communications industry and haven’t been snowed in to the point of being cut off from the outside world, then you know that Comcast has agreed to buy Time Warner (News - Alert) Cable for $158.82 per share, valuing the deal at about $45 billion. The acquisition, if approved by regulators, will merge the two largest cable MSOs in the country, creating the world’s largest broadband and pay-TV company.

Comcast and TWC have around 23 and 11 million subscribers, respectively, and at 33 to 34 million customers, together they would reach about one in three American households. It’s clear that they realize that regulators will be eyeing this one carefully before approving it—so Comcast said it was prepared to divest about 3 million subscribers in the process.

It would still be a juggernaut in the market: If the deal wins the approval of regulators, AT&T would be the next largest broadband provider, with about 16.5 million customers, followed by Verizon with 9 million subscribers. For pay-TV, DirecTV is No 2 with about 20 million subscribers, followed by Verizon FiOS (News - Alert) at about 16 million.

Comcast does expect a “thorough, a rigorous, and an appropriately critical government review,” according to David Cohen, Comcast’s executive vice president. He said during a press briefing that despite the scale of the merged company, “this transaction is pro-consumer, pro-competitive [and] strongly in the public interest.”

The Pro-Consumer Case

Why would big media giants getting bigger be good for consumers? Cohen said that because TWC and Comcast have no overlapping markets, the merger wouldn’t remove a competitive choice from the market, for starters. Also, the deal would extend the Net neutrality-based ISP rules that Comcast agreed to in its 2011 acquisition of NBCUniversal to cover what are now Time Warner customers, which is interesting given the recent defanging of the FCC’s (News - Alert) ability to regulate broadband.

Also, Cohen noted (and this is something that TWC CEO Rob Marcus has pointed out) that the sheer size of the company would allow for more R&D investment and technological innovation—and more funding for building out better broadband, and for extending low-cost broadband for the underserved to more regions and cities.

And, in the end, the ability to reach a third of households will give the combined company a serious leg up when it comes to negotiating with content owners and broadcasters for TV and online/mobile video rights. Retransmission and carriage fee disputes have led to blackouts of key programming for consumers—including a month-long blackout of CBS and Showtime programming for TWC customers late last summer. Pay-TV operators say that they’re being gouged when contracts come up for renewal, often with double or triple increases in the cost per subscriber to carry the content. The new Comcast will gain significant leverage for negotiating better deals—in theory preventing any possible pass-along cost-related pricing increases.

The Down Side

Because Comcast and TWC operate in different areas, “there is no reduction in competition,” Cohen said. “Putting these two companies together will not deprive a single consumer in America of a choice that he or she has today.”

That may be, but consumer and digital rights groups say that the story is deeper than that. Communications Workers of America, Free Press, Public Knowledge (News - Alert) and Consumer Watchdog have all asked the U.S. Federal Communications Commission and the Department of Justice or Federal Trade Commission to reject the deal.

A company of that size has the leverage to adversely affect workforce dynamics for jobs and salaries, for one.

“The two companies have a high bar to meet to demonstrate that the merger would be in the public interest,” said the CWA, a union representing about 5,000 workers between the two companies.

Comcast-TWC would also have the power to move whole secondary markets by way of its ability to buy technology like set-top boxes, home gateways or cloud technology. Essentially, any equipment manufacturer, developer, programmer or other ecosystem player would have to cut a deal with the new Comcast to stay viable. And those that Comcast doesn’t favor would have a much harder of a battle ahead to win an audience for their technologies. So ultimately, consumers could very well lose options when it comes to what’s available to the rest of the market in terms of ways to view TV and use broadband.

"If Comcast takes over Time Warner Cable, it would wield unprecedented gatekeeper power in several important markets,” noted Public Knowledge.

The combined company would also have outsized influence when it comes to negotiating network peering arrangements, especially in light of online video traffic, so it would affect the cost of carrying that traffic for others, certainly a competitive advantage.

“An enlarged Comcast would be the bully in the schoolyard, able to dictate terms to content creators, Internet companies, other communications networks that must interconnect with it, and distributors who must access its content,” Free Press added.

Then there’s the fact that Comcast already owns NBCUniversal—still a concern, some maintain, even if the regulatory controls in place after that mega-merger are extended to the TWC footprint.

“This merger will…give it control over more than half of the triple-play services that combine TV, phone and Internet service,” Free Press said. “Don’t forget, Comcast already owns NBC, MSNBC, Universal Studios and tons of cable channels. That means that for most of America, Comcast could control even more of what you see and how you see it.”

It said, “Putting this much power in the hands of one company is dangerous. This deal would lead to less consumer choice, less diversity and much higher cable bills.”

But with scale comes volume discounts, right? Well not necessarily—from Comcast’s point of view, the benefits of getting large seem to end at the consumer pricing mark. Comcast is “not promising that customer bills will go down or will increase less rapidly,” Cohen said. “Most of the factors that go into customer bills are factors out of our control.” But, it’s unlikely that pricing would go up.

The deal comes after No. 4 cableco Charter Communications (News - Alert) made an official offer to buy TWC for $132.50 per share earlier in the year in a highly leveraged transaction, which would have created a triple-play provider serving customers in 38 states. TWC rejected the offer out of hand as “grossly inadequate,” prompting a hostile takeover attempt that was cut off at the knees with the Comcast bid.

Edited by Cassandra Tucker

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