The announcement that Comcast wants to buy TWC isn’t a surprise to those in the industry, but it’s still raising a lot of hackles because of fears that it would create a giant who would stomp on other competitors and on consumer rights. The fact that Comcast has been a regular sparring partner with public advocacy groups over things like net neutrality doesn’t help, and what helps even less is that they bought NBC and so own a network/content property. Now they want to mass up even more. Should we let them?
The driver behind most M&A is the need to create higher levels of efficiency, and we know that the wireline voice, Internet, and TV markets are under a lot of pressure these days. The question is whether this pressure is enough to really force M&A; is there another way out? If there is no other way that cable companies like Comcast can respond to market changes, then blocking M&A could hurt both the industry and the consumers. If there is, then the question is how regulators could force cable players like Comcast to apply some of the remedies.
The story we hear a lot about cable TV is that Netflix is eating their lunch. You’ve seen the charts that show the number of customers for Netflix versus the cable, satellite, and telco TV providers, I’m sure. They’re crap. The important truth is that all the viewing data shows that people are not shifting from linear TV programming to Internet TV in any significant numbers; viewing hours for traditional TV swamps that of Internet TV. Yes, people do watch more Internet TV, but that’s not a consolidation pressure on Comcast because they still pay their cable bill.
The real problem for the cable companies is that households don’t grow on trees. We add to subscriber counts for any form of linear TV by adding households, and that number grows slowly. If you want to gain revenue and you can’t gain customers, what you’re left with is growing ARPU. Cable companies added phone and Internet to do that, but the wave of additional service revenues has crested at this point. The real truth is that it’s not Netflix that’s hurting cable, it’s mobile broadband. People have shifted in their view of what the Internet is, shifted from it being an at-home “second screen” to it being the Internet they really need. As they spend more on mobile broadband they want to control spending on things like cable TV and Internet.
There is nothing preventing the cable companies from getting more into mobile broadband. They can bid on spectrum, they can offer mobile services, and they don’t. Even though they’ve been making noises about having a national WiFi network to create an alternative to LTE, there’s not a lot of progress on that front. Cable companies are reluctant to get into the business of mobile services because it’s a high-capex process with (for cable companies) lower margins than cable TV. Thus, the pressure to grow revenues becomes a pressure to earn more on TV. That’s why Comcast bought NBC, and why it wants to merge with TWC. They can wave a bigger stick in negotiations with networks, but they can also likely raise prices.
Comcast and other cable companies could improve their revenue future by offering new services. They could improve their profit future by reducing their operations costs; cable companies are infants in OSS/BSS despite the fact that they have many of the same operations challenges as the telcos have. They could accept, as telcos do, a lower level of profit and growth. Comcast has a P/E multiple about a third higher than Verizon and a higher profit margin even without the benefit of mobile services. Are these other remedies better for the industry?
Therein lies the issue. In my view, Comcast presents a classic example of the “good-for-shareholders” versus “good-for-customers” dilemma. For Comcast’s shareholders all of the stuff that the company could do to make it a better business in the future would make it a worse investment in the present, and remember that we live in the “one-quarter-at-a-time” age of investment. The fact is that basic cable is tapped out on the number of households, people aren’t buying more pay channels, and on-demand video from cable companies (or telcos) isn’t competing with OTT video. So investors who want a return (which is all of them) are looking for Comcast to do something, and a merger with TWC is the answer.
It may sound like I’m voting against an approval of the merger, but that’s not strictly true. I think that Comcast is simply playing the same kind of game that every other public company in the US is playing, which is to pander to the hedge funds whose trades drive their share prices. If we don’t like the way that companies like Comcast make their business decisions—decisions to favor short-term trading profit over long-term growth—then we have to change regulations to fix it. Not FCC regulations or anti-trust regulations either. We’re barking up the wrong tree with the notion that the FCC should be doing this or that. All the FCC can do in this case is fend off any egregious risk of undue market power and tune the M&A terms a bit. They can’t guide Comcast and the cable industry in the right direction. For that we’d need the SEC, or Congress, and it’s not going to happen because financial lobbies are too strong.
What could the FCC and the FCC tune in the way of terms? Well, one thing they can do is to get Comcast to agree on the 30% cap, which I think the company is already signaling they would accept. Another is to get Comcast to make some progress on WiFi, perhaps by saying Comcast must agree to meet a specific hotspot coverage goal, provide for WiFi roaming, price WiFi services independently of cable TV. Finally, they could get Comcast to work on their Selling, General and Administrative expenses, which are twice that of Verizon for half the revenue. These would be fair concessions, I think, and ones regulators should consider.