When the No. 1 and No. 2 companies in any industry try to merge, it's likely to ruffle some feathers, but cable giants Comcast Corp. (CMCSA -0.79%) and Time Warner Cable (NYSE: TWC) spurred an epic level of protest with their now-halted effort to combine.
Comcast is widely known as one of the country's most reviled companies, if not the most. It has been twice named "Worst Company in America" in an annual Consumerist poll, and it is one of only two companies to hold that distinction twice. Horror stories about its customer service are regular fodder on the Internet.
Comcast's size and monopoly like dominance in many markets are a major reason why so many Americans dislike it -- but on its way to becoming the nation's largest cable company, it may have driven away the many partners it now needs to remain No. 1.
The X1 remote on your phone. Source: Comcast.com.
The company's proposed merger with Time Warner Cable sparked an unprecedented 300,800 comments to the Federal Communications Commission, the vast majority of which were negative. The outburst featured some entities that are far more powerful than the everyday individual consumer.
The opposition included programmers big and small, from the Tennis Channel to Walt Disney Co.; video streamers such as Netflix; one-off organizations like the Harry Potter Alliance; the Writers Guild of America, West; and the town of Moultonborough, N.H.
Disputes over the years with several programmers, including the Discovery Channel and the NFL Network, had soured relations with the key content supplier group over the years, and rival service providers such as DISH Network have asked for the deal to be blocked.
Ultimately, Comcast heeded to the resistance from the FCC and those constituents lobbying it to block the merger. The demands of the regulatory body would have likely been too stringent in order for it to have gained approval, and Comcast walked away from the deal last month. That decision may signal that Comcast's long warpath of growth has finally hit a wall as the cable industry is likely to consolidate around it, rather than with it.
The monopoly effect
Comcast's rise may be attributable as much to the dynamics of its own industry as its own aggressiveness. Roughly 61% of Americans have no choice when it comes to their high-speed Internet provider; as the largest cable and Internet company, Comcast has been a major beneficiary of this lack of competition as it expands to new markets.
The cable company has expanded primarily through power grabs, acquiring other providers in new markets, much in the way cable's other oligopolists have grown. It sought small local businesses early in its history, and later in the 2000s targeted other industry heavyweights. In 2001, it entered the Internet business by purchasing AT&T's broadband division, a segment that could soon be its most lucrative. It made an unsuccessful $54 billion pass at Disney in 2004, then swallowed up NBCUniversal for $18 billion in 2011. From that perspective, its bid for Time Warner Cable was simply business as usual.
Because the industry mostly consists of local monopolies, Comcast's peers have largely ignored its acquisitions as they did not affect the competitive landscape in their own markets and many of them were doing the same thing.
But the proposed merger's reaction from regulators -- which were skeptical that the deal would be good for consumers -- and the legions who lined up against the deal, are likely signs that Comcast will be blocked from any further acquisitions, at least within its own industry.
Since the deal's unraveling, other companies have already sought to merge with Time Warner Cable, including Charter Communications and now French telecom Altice. To the extent permitted by regulators, consolidation is likely to continue in the industry.
Will Comcast's business suffer?
Thus far, the pressure from Internet TV options has not cramped Comcast's profits. First-quarter operating profit improved by 9% on just a 2.6% increase in revenue. Cable division sales increased even as the number of customers fell slightly.
With innovations such as its X1 set-top box, a high-tech, voice-activated platform that allows customers to watch programming on televisions, laptops, and mobile devices, Comcast seems to be making its latest attempt to connect the best of its programming with the best aspects of Internet TV by giving the consumer the power to watch whenever and wherever they like. As part owner of Hulu, through its purchase of NBCUniversal, Comcast also has a horse in the streaming game, giving it a cushion against cord-cutters.
Compared to Netflix and the other video streamers, Comcast still offers the most complete programming package with news, sports, and current episodes of shows, but the power balance is shifting. Nonetheless, Comcast profits are still surging, and the stock is up more than 300% since the recession.
Still, if cord-cutting speeds up, the cable giant will have to find a new source of income. Innovation or another smart acquisition could present that opportunity, but for now it's unclear where that would come from.
