Tuesday, June 11, 2013

More MSO Mergers In Our Future

As programming costs, that is the costs for all the channels on your cable line-up, continue to rise, more cost efficiencies must be found.  And at this week's National Cable Television Association's (NCTA) The Cable Show, one way to do it is through consolidation of cable operators.  "Doug Mitchelson, managing director at Deutsche Bank Securities, said that to the extent increases in TV content pricing 'becomes abusive, the industry will consolidate.' He suggested that eventually there could be three large U.S. MSOs, with two other big players besides Comcast, a trio that would have much more leverage to keep rates down."  That trend has been occurring for the last 20 years.  Today, Comcast and Time Warner Cable together cover over 50% of the cable universe already. 

Among the systems being discussed, John Malone's recent investment in Charter Cable has some speculating that more investment is in order.  "Industry sources have independently confirmed to Variety that Malone is interested in TWC, with the caveat that he is surveying the entire cable landscape for potential deals and has not engaged in formal due diligence on such a deal."  For years, Time Warner Cable (TWC) has been interested in the Cablevision properties and the chance to gain Long Island and their coverage in the NY DMA.  Behind Comcast and TWC is Cox Communication, the third largest cable operator with over 6 million basic customers.  A privately held company, Cox Cable  may at some point decide that they no longer wish to compete in this space.

Of course consolidation alone will not help improve profit margins.  Time Warner has already started paring down the smaller networks that they deem not valuable to their audience.  At some point, operators may have to make deeper cuts as they try to keep their subscription prices in line with consumer expectation.  If prices rise too rapidly, that may encourage more cord cutting, something cable operators are currently facing.  "Cord-cutting is worse for programmers than operators, (Marci) Ryvicker (managing director at Wells Fargo Securities) said, because cable providers have the option of offsetting video losses by increasing broadband pricing."  Unfortunately, sometimes short term profits get in the way of long term vision. 

As far as consolidation is concerned, it is an absolute certainty.  Beyond the small market mom and pop single cable systems, the industry will operate within a decade with three to five major cable operators of 1mm or more subscribers, 2 telcos (FIOS and U-Verse), and 1 or 2 satellites (DirecTv and Dish).  The FCC will certainly have their hands full while they enable all this consolidation to occur.  Because at the end of the day, broadband and streaming will become the key issue. 

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