Market Insight

The mega merger that never was: Comcast gives up on Time Warner Cable

April 24, 2015  | Subscribers Only

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Comcast announced the termination of its $45.2 billion merger with Time Warner Cable, 14 months after announcing the deal. As a result, ancillary transactions with Charter Communications will also be dropped. The news comes after the US Department of Justice (DoJ) and Federal Communications Commissions (FCC) expressed opposition to the merger. 

The final setback that caused Comcast to throw in the towel was the FCC recommending the merger be put before an administrate law judge. It was a clear sign to Comcast that the FCC did not view the merger to be in consumers’ best interests. The lengthy process of such a hearing, along with the DoJ notifying Comcast it had significant concerns about the merger, was enough for Comcast to conclude that its deal was not going to happen. Comcast had structured its deal so that it could walk away if the government did not approve.

Following the announcement, the DoJ said in a statement that the abandonment of the deal is in the best interests of American consumers. One of the main points the DoJ was deeply concerned about was that the merger ‘would make Comcast an unavoidable gatekeeper for internet-based services'. Had the deal gone through, Comcast/TWC would have had almost 30% of the pay TV video subscribers and nearly 60% of fixed-broadband internet customers with 25mbps speeds or higher. In January 2015 the FCC redefined a broadband connection as 25mbps or more, up from 4mbps.

The collapse in the deal also jeopardises the recent Charter/Bright House agreement which was dependent on Comcast/TWC regulatory approval. However, the signs are that Charter is very much still interested in Time Warner Cable and has stated before that if the deal falls through, it would take a look at TWC again.

The proposed merger of Comcast/TWC  has been met with opposition ever since its announcement. Over at Stop Mega Comcast, some prominent organisations that opposed the merger include:

•    BeInSports
•    Consumer Federation of America
•    Consumers Union
•    Dish Network
•    Netflix
•    Parents' Television Council
•    Rural Broadband Alliance
•    WeatherNation

Our analysis

From a video subscriber perspective the merger looked good, TWC video subscribers would have benefitted form the merger thanks to technological upgrades. However, that was only one side of the merger for the DoJ and FCC. The other side of the argument against merger was that the combined company would control too many HSD households in the country. By controlling so many HSD subscribers, the company could have harmed the developing internet in the US by having a near-monopoly on the business of HSD.

That isn't to say that the company would have gone down that path, but it is understandable why the FCC and DoJ would have concerns. For years both Comcast and Time Warner Cable have been growing their video ARPUs well ahead the pace of inflation, and while this hasn't been true for HSD, there is an argument to be made for growing HSD ARPU in order to maintain revenue growth. By controlling more than 60% of the HSD market (25mbps or more), the combined company would have too much pricing power for comfort.

Two other mega-mergers are looming on the horizon: AT&T/DirecTV and Charter/Bright House. For the AT&T/DirecTV merger the abandonment by Comcast must be worrisome. In  its case, by having the option of both satellite and U-verse, AT&T will effectively be removing a competitor in markets where it operates its U-Verse TV service. Looking at the Charter/Bright House merger with the lens of Comcast/Time Warner Cable it is plausible that it would be more readily accepted by regulators, both companies don't overlap, nor do they hold a significant portion HSD households. However, the deal looks less likely now as it was contingent on closing Charter/Comcast transactions and expiration of Time Warner Cable's right of first offer for Bright House.

However, now that the Comcast/Time Warner Cable merger is off the table, Charter may rethink its position on Bright House. Similarly, Charter's offer back in January 2014 - which was rejected by Time Warner Cable - may seem more attractive, given Comcast's exit. In fact rumours have already circulated that Charter is again reaching out to Time Warner Cable. 

As IHS has said on numerous occasions, the business of pay TV is on the cusp of a significant shift in the US, and other mature TV markets. This shift is characterised by consumers spending more time with internet video products and less with traditional pay TV video services. Pay TV providers have countered the shift with two distinct strategies: first to become the main route to the internet for consumers, and second to reduce the traditional macro-bundle of channels so that video customers have the option to reduce their video bills.

Pay TV operators have been very savvy so far, Comcast, Time Warner Cable, Dish Network, and Verizon have all offered some form of skinny bundle in order to attract customers back to video products. To a certain degree this has worked, both Comcast and more recently for Time Warner Cable have showed improvements in quarterly video subscriber losses, Comcast even pulling off a few positive quarters, something unheard of just a few years ago. DISH has launched SlingTV, a pure-play OTT pay TV service, with the help of its existing programming partners. While Verizon has gone the opposite direction, offering a skinny bundle of channels to subscribers without the consent of its programming partners.

Regardless of the fate of Verizon's skinny bundle, which is likely to go to court for settlement, regulators are indicating that HSD service is nearly a utility than a luxury. Regardless of whether or not regulators approve or deny the other two mega mergers, what's certain is that US consumers are likely to be the beneficiaries of the inevitable changes in the US pay TV landscape.

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