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Comcast to Acquire Time Warner Cable for $45B

by User Not Found | 2月 13, 2014

Comcast has announced its plan to acquire Time Warner Cable in a deal valued at $45 billion. The largest US cable operator will take over the second largest cable operator if the deal is approved by shareholders and regulators. While much of the discussion around consolidation by the cable industry has focused on cutting costs to benefit subscribers, we don't believe that the financial benefits will necessarily trickle down to the customers. But there could be some other benefits from a larger player in the market.

For several years, the US cable TV space has been tough, with subscriber numbers going down and content rights prices increasing tremendously, especially for live sporting events and popular networks. As a result, the operators are looking for ways to cut costs and drive additional revenues on the TV side of the business.  However, on the broadband side of the business, margins are high and subscriber numbers keep growing each quarter. The consolidation in the industry is focusing on trying to reduce the costs on the TV side of the business, but it also increases the scale for the more lucrative broadband business.  With a wider footprint and more subscribers, consolidated cable operators may be able to justify and spread the costs of delivering higher bandwidth broadband services which will drive more revenues along with the opportunity to deliver more advanced services into subscriber homes.

From a competitive perspective, there is seemingly little impact directly from this deal. There is no overlap in the footprints of Comcast and TWC, so technically the level of competition in the market is not being reduced like say a deal between DirecTV and Dish Network would.  Regulators will still be taking a very close look at this merger, as the combined company would serve nearly 30 million cable TV and broadband subscribers.  The closest competitor would be DirecTV with a little more than 20 million TV subscribers.  Comcast is also generally regarded very poorly among consumers, with very low customer satisfaction ratings.  It's unclear at this point what the FCC opinion will be of this deal, but this will certainly push the overall net neutrality discussion in the US.  

Comcast has been doing well with its technology platform.  Comcast has been one of the drivers of advanced technology in the pay TV arena, developing the X1 and X2 platforms, along with the Reference Design Kit (RDK) which many operators worldwide have licensed.  In its last quarter results, the company turned its subscriber numbers around for the first time in several years.  I think that shows the value of technology in this industry, and how an operator with an advanced platform based on gateways and innovative user experience can create value and subscriber growth.  We have seen this in other regions of the world (Free with the Freebox in France, and UPC with the Horizon platform in the Netherlands) where technology has created value for those operators in terms of subscriber growth, reduced churn, increased VOD sales and increased ARPU. 

We expect to see continued consolidation in the industry.  Broadcasters have been consolidating over the last 12-18 months, and now we are finally seeing some of the deals that we expected in the service provider space taking place.  In Europe, Vodafone and Liberty Global have both been aggressive in going after acquisition targets like Virgin Media, Kable Deutschland, and now targeting ONO in Spain.  In the US, we have been expecting consolidation among cable operators, and Charter (along with John Malone) started the ball rolling by targeting TWC.  While the financial benefits may not roll down to customers in the form of lower monthly bills, there still could be some benefits from larger players in the space.  Consumers are very interested in content delivery to a growing number of devices.  One of the factors that has stood in the way of this progress is the content rights deals that need to be set to allow this distribution.  The larger Comcast could be just the ticket to the development of innovative new products and services like nationwide OTT delivery of content directly to consumer electronics platforms like the Apple TV box.  

Strategy Analytics and the Service Provider Strategies group will continue to follow these developments and provide commentary and analysis as the deal moves through the coming challenges.  


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