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Comcast to Acquire Time Warner Cable

12 Feb, 2014 By: Chris Tribbey, Erik Gruenwedel

Purchase could help Comcast expand its Xfinity Streampix subscription streaming service and on-demand movie store

Comcast Feb. 13 announced it has agreed to buy Time Warner Cable for approximately $45.2 billion, a merger that would combine the two largest domestic cable companies with more than 30 million video subscribers. The two companies aim to close the deal by the end of the year following regulatory scrutiny from both the Federal Trade Commission and Federal Communications Commission.

“The combination of Time Warner Cable and Comcast creates an exciting opportunity for our company, for our customers, and for our shareholders,” Comcast CEO and chairman Brian Roberts said in a statement. “In addition to creating a world-class company, this is a compelling financial and strategic transaction for our shareholders. [Time Warner Cable CEO] Rob Marcus and his team have created a pure-play cable company that, combined with Comcast, has the foundation for future growth."

The deal would create a cable operator of unprecedented proportions. As of the end of 2013, Comcast had 21.7 million video subscribers, adding 43,000 compared with the end of 2012, while Time Warner Cable (which was split off from parent company Time Warner in 2008) reported it had 11.2 million video subscribers, down 833,000 subscribers from the end of 2012.

The merger would mark the second major media acquisition for Comcast during the past few years, with a 2009 deal seeing the company first acquiring a majority stake in NBC Universal, and subsequently buying out General Electric’s remaining 49% control of NBC Universal in early 2013.

Eric Handler, analyst with MKM Partners in Greenwich, Conn., said he believes the merger would expedite efforts by Charter Communications to merge operations with possibly Cox Communications or Cablevision, among others.

The deal could help Comcast expand its Xfinity Streampix subscription streaming service, in addtion to the nascent Xfinity On Demand digital content store. Launched in 2012 as a potential counter to Netflix, Amazon Prime Instant Video and Hulu Plus, Streampix (which is available to Xfinity subs for $4.99 monthly) has languished under the radar with a catalog of mostly NBC Universal moves and TV shows.

Indeed, CBS CEO Les Moonves, in a Feb. 12 fiscal call, indicated Streampix is upping its profile to acquire third-party content — a move that would undoubtedly occur following consolidation, according to industry observers.

Michael Pachter, analyst with Wedbush Securities in Los Angeles, said the acquisition affords a larger consumer footprint for Streampix and Xfinity On Demand — distribution channels consumers are increasing gravitating towards.

"At the very least, it should help mitigate ongoing losses of video subscribers," Pachter said in an email.

Nancy Spears VP, digital media distribution & monetization with Comcast, wouldn't comment directly on the acquisition's impact to Xfinity On Demand; suffice to say Comcast's legacy in the video-on-demand space portends a rosy scenario.

"Seventy percent of our subscribers actively use our on demand every month, so that's speaking to the great success our [digital sellthrough] platform has been so far, and I think it will only continue to grow," Spears said.

The transaction could up the prospect of a merger between DirecTV and Dish Network in an effort to consolidate satellite TV operators. Both DirecTV and Dish have talked about the need for a merger in previous fiscal calls as multichannel video program distributors eye consolidation as a means of competing against declining video subscribers, changing market and over-the-top video, among other issues.

Speaking Feb. 13 in a conference call with MKM Partners, John Collins, an antitrust partner with Frommer, Lawrence & Haug LLP, said he believe that if the Comcast/TWC deal is allowed to go forward, it would pave the way for a merging of DirecTV and Dish.

"It helps them make a credible case to the regulatory authoritities that [satellite] needs to merge to be able to remain competitive," Collins said. "To put it another way, this might give smaller [cable/satellite/telco] players an opportunity to tell the government they need to merge themselves."

Comcast's buyout of Time Warner Cable was quickly panned by Craig Aaron, president and CEO of the public advocacy group Free Press, who called it “a disaster for consumers.”

"This deal would give Comcast control of more than a third of the U.S. pay-TV market and more than half of the U.S. triple-play market for video, voice and Internet service,” he said in a statement. “Comcast will have unprecedented market power over consumers and an unprecedented ability to exert its influence over any channels or businesses that want to reach Comcast's customers.”

He called on the U.S. Department of Justice and the Federal Communications Commission to “do their jobs and block this merger. Stopping this kind of deal is exactly why we have antitrust laws.”

"Americans already hate dealing with the cable guy — and both these giant companies regularly rank among the worst of the worst in consumer surveys. But this deal would be the cable guy on steroids — pumped up, unstoppable and grasping for your wallet,” Aaron said.

A mid-2013 report from research firm Temkin Group had Time Warner Cable ranked next to last among 235 companies (across 19 industries) in terms of customer service. Comcast didn’t fare much better, coming in at 229. Dead last? Charter Communications.

Despite some concerns about the top two cablers in the country combining operations, regulatory objections could be few, according to Collins. He said any complaints from media companies and broadcasters regarding anti competitive issues would be largely dismissed.

"I think the regulatory authority is going to look at this and say the content holders are also big boys," Collins said. "Any issues betwen them and the cable companies can worked out usually on a financial basis. I don't see that as a deal killer."

Collins said he would be surprised that in a deal of this magnitude, lawyers from Comcast and Time Warner Cable hadn't already sought informal feedback from government offcials through backchannels. He also said he doesn't see any net neutrality issues in the merger from an antitrust perspective.

"This may be a little difficult to believe, but there is a bias within the government against injecting into corporate transactions in the marketplace what I would call 'extraneous issues,'" Collins said. "Net neutrality is extraneous to the extent that it not only applies not only to these companies, but across the board. The odds of them holding hostage the transaction to net neutrality is low."

Indeed, Rob Sanderson, analyst with Internet & cloud infrastructure with MKM, said the prospect of a combined Comcast/TWC imposing data caps or higher pricing to consumers streaming Netflix and YouTube is counterintuitive in a market filled with alternative ISPs.

"The combination would make the prospect of [broadband] traffic discriminations less likely, not more likely," Sanderson said.


About the Author: Chris Tribbey

About the Author: Erik Gruenwedel

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