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.