Business

02.13.14

Why Would Comcast Improve When It Could Buy Time Warner Cable Instead?

Cable companies can’t sign up any more people. In fact, they’re losing them to the Internet. So the only way to survive is to monopolize more of the market and up-sell subscribers just as Comcast-Time Warner Cable will do.

On Wednesday, Comcast struck a $45-billion deal to acquire Time Warner Cable. If approved, the deal would represent a giant step toward greater consolidation: Comcast has 22 million subscribers and Time Warner has 11 million. To allay anti-trust concerns, Comcast said it would divest systems with about 3 million subscribers, leaving the merged company with a combined 30 million customers—well over half of the nation’s cable television subscribers.

The deal is plainly good for shareholders of Time Warner. Time Warner’s stock was trading at about $80 two years ago, so the $159-per-share offer represents a nice double in 24 months. Comcast’s shareholders pushed the company’s shares down a few percentage points, weary of the larger amount of debt the company will take on.

But is this a good deal for consumers? Well, maybe.

The companies, of course, say this is a win-win for customers of both Time Warner and Comcast. Why? Well, it’s not mentioned in the press release, but consumers generally feel that Comcast has better customer service than Time Warner Cable.

What’s more, the companies say Time Warner Cable customers will now get access to all the awesome whiz-bang stuff that Comcast already offers its customers. With a few software updates, existing Time Warner Cable set-top boxes will get new features like “cloud-based X1 Entertainment Operating System, plus 50,000 video on demand choices on television, 300,000 plus streaming choices on XfinityTV.com, Xfinity TV mobile apps that offer 35 live streaming channels plus the ability to download to watch offline later, and the newly launched X1 cloud DVR.” For their part, Comcast customers will be able to get some of the perks of Time Warner Cable membership, including features like: “StartOver, which allows customers to restart a live program in progress to the beginning, and LookBack, which allows customers to watch programs up to three days after they air live, all without a DVR.” Comcast subscribers will also be able to gain access to the 30,000 Wi-Fi hotspots Time Warner Cable has set up, mostly in Los Angeles and New York.

So far, so good.

But this deal won’t really change the fundamental customer experience of Comcast or Time Warner Cable customers. This isn’t like Burger King buying McDonald’s, or Lowe’s buying Home Depot, in an effort to take out a competitor and carve out market share in a particular area. In essence, it’s one giant company that had a geographical monopoly on cable service in some areas of the country merging with another giant company that had a geographical monopoly on cable services in other areas of the country.

Cable companies are like utilities.

Cable companies are like utilities. The firms were granted geographic monopolies, or licenses, in exchange for making the huge, multi-year investments to build out infrastructure and for guaranteeing to offer service in every nook and cranny of a region, no matter how economically inefficient it might be. That’s how the model worked for other utilities—water, electricity, and telephone service.

So when one monopoly merges with another, the result is not typically massive innovation and glory for consumers. The quality of service may change for some consumers. But the channel lineup won’t change much, reception won’t improve, and the price surely won’t be going down. The whole point of adding more bells and whistles—video-on-demand, DVR-like services—is to get existing customers to pay more.

This is best understood a defensive move—on the part of both companies. Simply put, we’ve reached peak cable. For much of its history, cable television was selling reception—it started in rural areas where broadcast signals didn’t reach. (Comcast’s first systems were in Mississippi in the early 1960s.) Then, as it pushed into urban areas, cable began to sell programming—a vast array of channels not available via broadcast.

But things have changed in the last several years. Thanks to the poor economy, the changing habits of millennials, Americans are increasingly are reluctant to pay for cable. Satellite television outfits like DirectTV have undercut cable on price and signed up millions of customers. Phone companies offer cable service. There’s been a huge amount of innovation in the delivery of “television” reception and programming to computers, tables, and TVs through other means—apps, Netflix, Amazon, Apple TV, Aereo. You still need an Internet connection of some sort to watch great shows, but you don’t necessarily need cable service to do so. In some instances—i.e. House of Cards—paying the fat monthly cable fee doesn’t get you access.

So the big cable companies have been losing customers and market share for years. According to the National Cable Television Association, there were 56.4 million cable subscribers in 2012, down from 66.9 million in 2001. Time Warner, which is concentrated in savvy, wealthy markets like Los Angeles and New York, has been hit particularly hard.  As I noted It’s cable business is eroding like a New Jersey beach. In each of the last seven quarters, Time Warner Cable has lost a significant number of residential video subscribers—a total of 1.27 million subscribers, or nearly 10 percent. That’s pretty stunning.

Now, rapid growth in the other components of the triple play—high-speed internet and voice service—has helped mask the decline of Time Warner Cable’s core business. But those services cost less than cable. And in the most recent quarter, it looks as if those numbers barely budged.

Comcast hasn’t suffered the same level of erosion in its cable business. But the writing is on the wall. Which is why it was willing to pay a big premium to buy Time Warner Cable. The only way to get growth in cable these days is to buy existing customers and systems.

That may seem like a lazy approach. But, again, companies accustomed to having monopolies rarely innovate. Faced with the rapidly changing landscape, Time Warner Cable and Comcast had two choices. They can redouble their efforts to sell new products and services to the existing customer base—in effect, trying to wring more cash out of every existing relationship. This plan certainly offers more choice to consumers. But in the end, it’s a way to squeeze them for more cash.

The other option is to do what cable’s competitors have done. Compete like hell, cut your price, offer great new services that are more convenient, provide better customer service—in short, do anything and everything to make your product sufficiently compelling that millions of people will choose it over the alternatives.

Big cable hasn’t proven willing or able to do that in recent years. It doesn’t look like this massive transaction will change that.