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. 

Did XBox Hurt Its Future?

The Xbox One has yet to be released, but it certainly has raised the voices and irked a number of gamers.  "Earlier in the day, Microsoft had elicited groans from gamers when it announced restrictions on used games for the Xbox One and said players had to log onto the Internet for authentication."  With a price tag hitting $500 and an always on and connected platform, some wonder who the audience for the new box really is.  Perhaps too it is trying to be more than what gamers really want from a device, trying to replace the cable box in the home.  Will current XBox 360 owners upgrade or not and will the XBox One attract new users?

For Sony, the release of a new Playstation 4 at this time might just encourage some loyalties to switch to them.  First, the PS4 will cost $100 less.  "Sony also drew cheers from the audience at the Electronic Entertainment Expo (E3) in Los Angeles when it said the PS4 would run secondhand games and did not require an always-on Internet connection."  If gamers find compelling titles and a welcoming user experience, they might just find the share of market shift to their favor. 

Given the two different directions each platform is taking, the gloves are coming off, and a fight is imminent.  For other platforms, like the Nintendo Wii, timing is crucial for them to share how they wish to compete in a very tough gaming battle.  For this household, I can only share what my son, a current XBox user, is thinking.  He hates the authentication and always on issue as well as the fact that older games won't play on the new device.  It might just be time to look at the PS 4 and its games.  Put head to head, it will be fascinating to see which new platform, XBox One or PS4 wins this battle.