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Comcast's Big Buy Is Great for Time Warner Shareholders but Bad for Everybody Else

By Alex Planes – Feb 13, 2014 at 12:00PM

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Do we really need to have one company control so much of America's television and Internet service?

If you don't like your cell phone service, you can usually switch, and aggressive competition that includes a promise by two major carriers to pay your contract termination fees has made this easier than ever. If you don't like your bank, there are probably a dozen within driving distance that would be happy to have you. Don't like the airline you flew on for your last vacation? Just book with someone else next time.

But if you don't like your cable TV or Internet provider (and in many cases these services are bundled by the same company), you're pretty much stuck with it. Since these services are necessarily limited by the reach of their service network, the best way for big cable companies to grow in recent years has been to simply buy smaller cable companies.

The limit of that consolidation might finally be tested by last night's news that Comcast (CMCSA -0.51%) (NASDAQ: CMCSK) has made an offer to buy Time Warner Cable (NYSE: TWC) for $45.2 billion. According to Reuters, the new company would boast roughly 30 million video subscribers after divesting about 3 million. That's more than half of the 56.4 million American cable video subscribers last reported by the National Cable and Telecommunications Association (NCTA), and it's still about a third of the total pay-TV market when DISH Network's 20 million subscribers and DirecTV's 14 million subscribers are added to the tally.

Here's how the new Comcast Time Warner would stack up on the NCTA's rankings:

Create Infographics.

The new Comcast Time Warner would also have more high-speed Internet subscribers than it would cable subscribers, barring other divestitures, which would give it a nearly 40% share of all American broadband subscriptions. This is worse for consumers and for the country than Comcast Time Warner's sizable control of the country's cable pipes, as I'll soon explain:

Create Infographics.

This sort of dominance over two major parts of the American telecom landscape is perhaps matched by the market share of the Big Two wireless carriers -- Verizon (VZ -0.04%) and AT&T (T -0.81%) each controls about a third of all American wireless subscriptions -- but it's more dangerous now in light of the recent net neutrality rulings that now allow broadband Internet providers to restrict subscriber access to various sites and services by slowing down speeds or even blocking access entirely.

Comcast Time Warner, separately or together, has already been fighting a losing battle against streaming video and satellite service as a cable company, since industrywide subscriptions have actually declined by more than 15% since peaking in 2001. However, Internet service provider Comcast Time Warner would have unprecedented leverage over its online-based cable competitors now that it can legally prioritize some streams of data over others.

And don't expect Comcast Time Warner to suddenly start caring about customer complaints if its merger passes regulatory muster, either. Both companies have been perennial contenders for "Worst Company in America" or "Worst Customer Service" (these awards should be largely interchangeable), no mean feat in an industry that often gets one of the lowest positive scores from American consumers. Last year, Gallup found that the airline and advertising industries both had better public perceptions than the television sector. That $1.5 billion in "operating savings" Comcast is looking to find in the acquisition? It's probably just another way to say that customer service will get even slower and less effective as the company trims its new roster.

Comcast Time Warner's dominance of both the cable and broadband Internet markets might be enough to block the combination, but it's difficult to say which way telecom regulators will sway this time. There are more mid-tier and smaller-scale cable and Internet competitors than there are wireless competitors for Verizon and AT&T, and there's not much geographic overlap between Comcast and Time Warner today, so most customers would see little difference in their (strained) interactions with an amalgamated company.

However, further consolidation in the upper echelons of America's cable and Internet industries would undoubtedly be bad for consumers over the long run if larger providers achieve greater levels of control over what its subscribers can access. Millions of Comcast and Time Warner subscribers can already attest to the frustration of dealing with the companies for even mundane matters, and a larger Comcast would have little impetus to give its locked-in user base better service. Should one company control so much of the nation's Internet access? We're likely to find out what regulators think soon enough.

Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more insight into markets, history, and technology.

The Motley Fool recommends DirecTV. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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