Two of the country's largest -- and by one popular account, most hated -- cable television and Internet providers are trying to tie the knot. The proposed $45 billion deal is not a slam dunk to go through as regulators mull the merger.
In a saga steamier than most things available on basic cable, Comcast (NASDAQ: CMCSA) (UNKNOWN:CMCSK.DL) is trying to join forces with Time Warner Cable (UNKNOWN:TWC.DL) to take advantage of economies of scale.
What's happening now?
It's easy to see why the two feel they would be better off together than on their own. According to industry watcher SNL Kagan, Comcast is the largest player in the pay-TV industry, accounting for 22% of the market. Time Warner Cable is no slouch with its 11% slice. Together they would watch over one-third of the pay-TV households in the country, and an even larger chunk of the broadband market: A lot of cord cutters have told Comcast and Time Warner Cable to take a hike on the TV end, but keep their Internet connectivity plans to stream third-party content.
Comcast could use the influx of couch potatoes. It has been slipping since peaking at nearly 25 million video customers seven years ago, closing out its latest quarter with 22.457 million accounts. It has suffered sequential declines of video customers in 27 of the past 29 quarters.
Time Warner Cable isn't doing much better. In fact, it celebrates net defections. Here's a bullet point from this summer's second-quarter report:
- Residential video net declines of 152,000 -- best second quarter in three years
Yes, and I only ate 10 Pop Tarts this morning instead of the 12 consumed the same morning last year. Hooray, me!
The cable business model is old
Cable television is dying. It actually peaked in the late 1990s. Satellite television and cost-effective IPTV have eaten away at traditional cable providers, but this doesn't mean that Comcast and Time Warner Cable are putting out financial statements as if they're on borrowed time. Revenue actually continues to grow as the result of cable bills that perpetually creep higher and the successful bundling of cable service with online connectivity and Web-based phone service. Cable television now makes up half of the revenue at Comcast and Time Warner Cable, and that's not even including Comcast's NBCUniversal content grab. That should cool the obit writer for now, but they're both smart enough to know that they stand a better chance to survive together than they do on their own.
There's only so much that satellite television, U-verse, and FiOS can do in this world of cord cutters, and the number of pay-TV customers fell by 251,000 last year, according to SNL Kagan. It was even worse for Comcast and Time Warner Cable, which respectively suffered net defections of 305,000 and 833,000 in 2013.
Despite mustering growth elsewhere, it's clear that Comcast and Time Warner Cable are desperate to hook up before they diminish any further. They would combine for nearly 33.5 million video customers, but that's a number that shrinks with every passing quarter. After all, they have shook loose 1.138 million net cable TV subscribers between the two of them last year alone.
Folks hate their cable providers. Comcast has the painful distinction of being tapped as the winner this year in Consumerist's annual Worst Company in America tournament. Time Warner Cable made it through the first few rounds before being denied a spot in the Final Four by Monsanto. It's a good thing that some folks hate GMOs more than they do their cable cutting out in the middle of Breaking Bad.
Your cable bill is high for a reason
Running a cable television platform isn't cheap, and there are naturally cost savings to be had by trimming redundancies in a corporate acquisition. There might also be pricing advantages, though cable providers tend to have their territories pretty well carved out. They're just getting picked apart by the satellite and IPTV players that don't have the same territorial limitations.
It's not fun to be Comcast or Time Warner Cable these days. The unbundling movement is afoot as customers tire of paying for cable channels that they don't watch. They face continuing high costs to handle service calls since those Xfinity and Time Warner Cable trucks don't fall from trees. It's easy to see why Comcast and Time Warner Cable are desperate for anything that could ease the sting of the slow burn of their organic business.
Comcast and Time Warner Cable need each other, even if it won't just be antitrust regulators trying to get in the way of the nuptials at this shotgun wedding.
Comcast responded to its critics in a 321-page SEC filing on Tuesday, calling them out by name. Netflix has voiced its concerns about a cable and broadband giant getting bigger in light of the slow connection speeds that Comcast was serving up for Netflix streams until Netflix started paying up. Discovery says what most cable channels are thinking, fearing that a combined Comcast and Time Warner will lead to more power for the gatekeeper in negotiating carriage rights. This merger is going to get dirty before we get a clean picture. Let's hope these verbal jabs get televised.
Rick Munarriz owns shares of Netflix. The Motley Fool recommends Apple, Google (A shares), Google (C shares), and Netflix. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), and Netflix. Try any of our Foolish newsletter services free for 30 days. 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.