The cable industry has been on a slow path toward consolidation. That trend seems likely to continue for at least the near term but the industry has fewer players than ever, so the time of contraction may be coming to an end. While hundreds of small-time providers are still doing business, the 13 largest U.S. pay-television providers cover about 95% of the market, according to a report from Leichtman Research Group.
Those top 13 account for 95.2 million subscribers, with the top nine cable companies having 49.3 million video subscribers, satellite TV companies having 34.3 million subscribers, and the two top telephone companies having 11.6 million subscribers.
Roughly one-third of the industry is controlled by Comcast (CMCSA +0.44%) and Time Warner Cable (NYSE: TWC), which are attempting to merge. Another third in the hands of DISH Network (DISH +0.00%) and DIRECTV (DTV +0.00%) -- and the latter is in the process of merging with AT&T (T 0.04%).
| Pay-TV Providers | Subscribers at End of 2Q 2014 | Net Adds in 2Q 2014 |
| Cable Companies | ||
| Comcast* | 22,383,000 | (194,000) |
| Time Warner | 10,992,000 | (401,000) |
| Charter | 4,293,000 | (49,000) |
| Cablevision | 2,681,000 | (132,000) |
| Suddenlink | 1,138,400 | (49,100) |
| Mediacom | 890,000 | (55,000) |
| Cable ONE | 451,217 | (87,677) |
| Other Major Private Cable Companies | 6,450,000 | (225,000) |
| Total Top Cable | 49,278,617 | (1,192,777) |
| Satellite TV Companies (DBS) | ||
| DIRECTV | 20,352,000 | 99,000 |
| DISH | 13,978,000 | (79,000) |
| Total DBS | 34,330,000 | 20,000 |
| Telephone Companies | ||
| AT&T U-verse | 5,943,000 | 660,000 |
| Verizon FiOS | 5,649,000 | 387,000 |
| Total Top Phone | 11,592,000 | 1,047,000 |
| Total Top Pay-TV Providers | 95,200,617 | (125,777) |
Source: LRG.
The first wave
Before the way could be paved for megamergers like the proposed Time Warner Cable/Comcast deal, the cable companies had to get big in the first place. In the past two decades, the four biggest cable companies -- Comcast, Time Warner, Charter (CHTR +3.98%), and Cox (which accounts for most of the "other major private cable companies" number above) -- accounted for nearly 40 mergers or acquisitions, according to The Wall Street Journal. This first wave of consolidation was all about the major players grabbing turf and turning a wide-open industry into one dominated by a precious few.
The age of the megamergers
If the $45 billion Comcast/Time Warner deal wins federal approval, the combined company will become the biggest player in the field, serving about 30% of all U.S. pay-TV customers. However, the sheer size of the deal could cause the Federal Communications Commission to block it, or force major concessions.
The main reason the FCC might allow the deal in some form is the possible waning of the importance of cable companies. Over the past two years, traditional pay television companies have lost subscribers due to cord cutting: the practice of electing for pure digital pay-TV options over traditional wired services.
Still, while cord-cutting choices are growing, the phenomenon has yet to make much of a dent in the market.
"2014 marked the second consecutive year for pay-TV industry net losses, but the losses remained modest again this year," said Bruce Leichtman, president and principal analyst for Leichtman Research Group. "Despite a relatively saturated market, and increasing alternatives for consumers to watch video, the top pay-TV providers have only lost about 0.2% of all subscribers over the past two years."
That means using cord cutting as a justification for allowing the Comcast/Time Warner Cable merger and the less-controversial $48.5 billion DIRECTV/AT&T tie-up might be premature.
What's next for cable M&A?
Assuming both of these megadeals go through, the next logical M&A target in the pay-television industry is almost certainly DISH. The No. 2 satellite company, which also has a promising pure digital subscription service, would be a good fit with any of the remaining cable players still on the board -- specifically Charter, Cox, or even Cablevision.
It's also possible that DISH, which has been not-so-quietly acquiring wireless spectrum, might merge with T-Mobile or Sprint, the third- and fourth-largest domestic wireless phone carriers. The two carriers could both use DISH's spectrum and the satellite company could benefit from either wireless provider's over 50 million customers.
DISH probably does not need a deal, but hooking up with a wireless provider makes the most sense because the company has a limited window to use its spectrum. The dates vary, but the company has an FCC-mandated deadline to build out a network on its spectrum that starts coming up in 2017. If it does not meet those deadlines, it will forfeit the spectrum.
Joining up with Sprint or T-Mobile would help it meet those deadlines without spending a fortune to build out its own network. DISH could use some of its spectrum to enhance its new partner's network while selling off the rest -- likely at a large profit.
The mergers are almost over
From dozens of midsize players, the cable world has shrunk to 13 companies controlling almost the entire industry. Once that number shrinks to 11 (assuming both pending deals are approved) the opportunities for consolidation within the industry will be largely over.
Yes, some midsize players could join forces, but a union between Charter and Cablevision, for instance, would be minor compared to the deals being done now.
Cable is almost a mature industry, and its future growth -- which might be threatened by cord cutting and emerging technologies -- is likely to come from M&A action that goes beyond intraindustry consolidation.
