Friday, June 28, 2013

Merger Mania For Cable Operators

With John Malone's investment in Charter Cable, many speculated that it was his way to get back into US cable operations.  Having owned TCI before selling it to Comcast and owning DirecTv before spinning it out into its own public company, Malone sees Charter as a means to an end.  Now that speculation has advanced to talks of mergers.  "Shares of Time Warner Cable and Cablevision Systems soared Thursday after reports that Liberty Media chairman John Malone was 'exploring scenarios' to construct a deal to purchase one or both companies through his latest cable holding, Charter Communications." 

Certainly a merger of all three cable operators, Charter, TWC, and Cablevision, would put them at a subscriber size just a couple million below Comcast Cable.  Time Warner Cable is already the second largest to Comcast, but with 10 million fewer.  This merger would put them squarely in equal footing to Comcast.  As a result, this new entity would see tremendous cost savings from lower licensing fees for network programming to better economies of scale in its infrastructure.  The one common piece to this three way merger is Charter CEO Tom Rutledge who has worked at all three cable companies. 

But good news for cable operators would mean bad news for the networks.  Lower revenues from existing business, fewer cable operators to sell to, and a more constrained business environment.  For the Department of Justice and FCC to approve such a merger, such requirements might be needed to be consumer beneficial such as allowing networks to sell to OTT platforms despite current license deals that may prevent or limit such arrangements through Most Favored Nation (MFN) clauses. That could mean that networks would be allowed to negotiate in good faith with Intel Media, Apple, Roku, Aereo, and others who offer a streaming video subscription business to consumers.  Of course that review will also lengthen the timeframe for such a deal to close. 

Eventually these types of consolidations and mergers need to occur for the cable business to compete in the face of changing technologies.  With the growth of broadband and wireless technologies to compete against the wired cable business, operators like Comcast and Time Warner and others need the cost efficiencies to adapt and compete in an ever changing environment.