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Do the TWC / Comcast rumors signal a cable rollup? Let’s hope so!
Time Warner Cable’s stock rose 10 percent this morning on reports (0) that it has had talks with Comcast about a possible merger. Comcast isn’t its only potential dance partner – it has also been talking with Charter (now owned by John Malone’s Liberty Media) and, it is said, with Cablevision.
It’s about time.
The market for pay TV in the U.S. is highly fragmented. Comcast, the largest provider, serves only about one out of five households, followed by DirectTV and Dish. Time Warner serves about 10 percent of the market – and no one else (including AT&T and Verizon) has more than five percent. And, there are literally hundreds (1) of tiny cable operators. The market for broadband services is similarly fragmented (2).
The problem with this situation as far as consumers are concerned is that there are substantial economies of scale and scope (including network effects) throughout the Internet ecosystem, including in content distribution. One consequence is that small cable systems are less able to roll out new technologies like DOCSIS 3.0, which enables 100 Mbps Internet connections. Another is that smaller firms make less attractive business partners for content providers than larger ones – and as a result pay often pay higher prices for content. When small cable operators look to the FCC for regulatory relief what they are really asking for is for government to step in and preserve an inefficient industry structure that imposes costs on consumers without any countervailing benefits. If you want to see the benefits of cable consolidation, look to Germany, where Liberty Media has helped turn a fragmented, dysfunctional cable sector into a source of real broadband competition (3) for DeutscheTelekom.
That brings us back to the stock market’s reaction to the Time Warner discussions: Investors are telling us they believe Time Warner would be worth 10 percent more if it combined with a larger firm than as a stand-alone. That can’t be the result of charging higher prices to consumers based on a traditional model of industry concentration: Time Warner doesn’t compete head to head with any of the other cable firms. More likely, it reflects operating efficiencies and the ability to create or acquire content more cheaply.
Part of the discussion in these early days is about “regulatory risk,” i.e., the possibility that the FCC would step in to try to block a cable industry rollup. Let’s hope not. The best thing that could happen for U.S. consumers would be substantial consolidation in the cable business.
Footnotes
- http://online.wsj.com/news/articles/SB10001424052702304337404579213900312317972
- http://www.americancable.org/about_us/aca_overview_0
- http://gigaom.com/2013/05/21/faster-faster-the-us-now-has-82-4-million-broadband-connections/
- http://online.wsj.com/news/articles/SB10001424127887323566804578551811829949042
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By Michael Elling (@Infostack) November 25, 2013 - 11:31 am
The move towards centralization and away from government and local led obsession with inefficient balkanization started in the mid-1980s with cellular. This cable consolidation is natural from a technology and economic perspective (metcalfe’s law) and also from a business model perspective to scale investment and operating costs horizontally across non-natural geographic, market and application silos.
The consolidation over the past 15 years since the Telecom Act is a principal reason why the US is ahead of Europe on 2nd network broadband and fiber investment, as well as 4G investment by 4-5 wireless carriers in every market. At the same time we need to recognize how we got to this state via a judicious use of open access of incumbents and protection for new entrants.
That said, the quid pro quo to such centralization, now more than ever, requires open access in the lower layers and balanced settlements in the middle layers to ensure efficient supply/demand clearing north-south between upper and lower layers and east-west between networks and service/application providers.