Thanks to Netflix, Comcast's Acquisition of Time Warner Cable May Be in Jeopardy

Comcast Corporation (NASDAQ: CMCSA  ) is hoping it can acquire Time Warner Cable  (NYSE: TWC  ) to become a much larger and more dominant Internet, phone, and TV service provider. The problem for Comcast is heavy scrutiny from regulators, and thanks to Netflix (NASDAQ: NFLX  ) , regulators might have more incentive than ever to reject the bid.

Comcast must walk a thin line
If Comcast's $45.2 billion bid for Time Warner Cable is approved, the combined company would have 30 million subscribers with a mounting presence throughout the U.S. In many areas of the country, Time Warner Cable and Comcast are the only two service providers, thus giving the combined company significant leverage over subscribers, a fact that likely concerns the Federal Communications Commission.

As proof that the FCC is taking its review of the Comcast and Time Warner Cable deal seriously, the former company recently revised its targeted deal completion date to early 2015,  from late 2014, signaling a lengthy review process. Already, the FCC has sought the opinions of Comcast competitors and partners regarding the deal, and has reportedly expressed concern that both Time Warner Cable's and Comcast's average revenue per user continue to increase year after year. In other words, if consumers are naturally paying more for service year after year, it's logical that less competition could accelerate the rate of price hikes for consumers.

Comcast's new threat is self-imposed
So far, the FCC's questions and concerns regarding the Comcast and Time Warner Cable merger have had to do with macro conditions and competitive landscape, and have not really been directed toward anything specific that either company has done to raise eyebrows. However, in a letter to Comcast last week, the FCC asked about the company's Internet and content policies, specifically whether the company slows down the delivery of programming from rivals. 

The FCC is likely asking about Netflix after the streaming giant has been compelled to pay four separate service providers in 2014 for peering deals to ensure proper delivery of content. Importantly, Comcast was the first company to force Netflix to pay in order to gain direct feeds to Comcast's network so that download speeds of streaming content wouldn't face interruptions.

Netflix CEO Reed Hastings has been very vocal in recent months in suggesting that such deals allow for weak net neutrality, meaning Internet service providers restrict or influence the viewing choices of consumers. Voicing its concern further, Netflix even filed a petition with the FCC on August 26th noting it has asked the FCC to deny the merger. However, since Netflix has grown so popular, and now accounts for up to 30% of all Internet traffic, service providers have shown an unwillingness to maintain the network strains that Netflix creates -- that is, of course, unless there is an incentive.

As a result, Netflix has signed four of these peering deals, with Comcast being the first and, importantly, Time Warner Cable being the latest, earlier this month. Following the deal between Netflix and Time Warner Cable, it wasn't long before the FCC asked its questions regarding Internet and content policies. Hence, if Comcast and Time Warner Cable are willing to hold faster delivery speeds for pay over the head of Netflix, couldn't they do the same to other companies?

Intentions to backfire
Netflix's success is not necessarily good for Comcast or Time Warner Cable. While satellite TV providers like DirecTV and Dish continue to see moderate subscriber growth, cable television subscribers have fallen rather abruptly. According to the media information site nScreenMedia, 19% of millennials don't have a cable or satellite TV subscription in their home, and 98% of those without a subscription have no plans to get one. 

Conversely, estimates that nearly one in five consumers age 18-29 use Netflix, which might show where the lost business in pay-TV has gone. Therefore, with Netflix having over 50 million global subscribers, and the number growing fast, it's no surprise providers like Comcast and Time Warner Cable don't necessarily want Netflix's streaming services working well. Unfortunately for Comcast, this thought process may backfire in its attempt to acquire Time Warner Cable.

Foolish thoughts
With all things considered, the FCC's questions combined with Comcast's recent actions might be the greatest indication that a marriage to Time Warner Cable will not be approved, and at the end of the day, Comcast has no one to blame but itself. It is a vital time for Comcast, where it must show the FCC that acquiring Time Warner Cable is in the best interest of all consumers, its subscribers, and even investors.

However, not allowing for quick delivery of streaming services from a key competitor is not a great way to show good intentions, and it might show the FCC all it needs to see in order to comfortably reject Comcast's acquisition of Time Warner Cable.

Your cable company is scared, but you can get rich
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 

Read/Post Comments (5) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 31, 2014, at 11:21 PM, eyelostmyname wrote:

    If those Bad Boy ISP's had not been so greedy and had just left Netflix alone, things might be a lot different.

  • Report this Comment On September 01, 2014, at 12:49 AM, Chris525 wrote:

    How Netflix has not sued the big internet providers that have slowed down Netflix service and make it less usable by there customers is beyond me. Normally I'm not for companys suing each other but I think that Netflix could of sued the pants off of most internet companies and won.

  • Report this Comment On September 01, 2014, at 3:58 AM, tbeartony wrote:

    I cut the cable cord 3 years ago and cancelled Netflex a couple months ago because of the slow speeds. I still watch everything off the net even new movies and all the seasons of my favorite shows. Just have to do a little leg work on the net.

  • Report this Comment On September 01, 2014, at 9:28 AM, motleyLiam wrote:

    Currently a TWC customer, and service is bad enough - can't imagine how worse it would get with the merger.

  • Report this Comment On January 02, 2015, at 12:56 AM, Fidget wrote:

    If Comcast's screw what the customer wants attitude isn't enough to show the FCC that the merger is not in the collective best interest of consumers, they should each give comcast's X1 format a test ride...and I mean test ride. This system was obviously not run through the paces before it was unleashed upon the public. There are enough glitches, reboots, and error codes to make the Packard Bell development team feel proud of their accomplishments. The consumer pays for the misery of being the test rat while Comcast tells the FCC it has our best interest in mind...and that isn't 't a straight face, it's a smirk.

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Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

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