To say the Internet has altered the media landscape would be an understatement on a grand scale. Today, consumers have more ways than ever to enjoy their content where and how they want, and that is generally a very good thing.
Set against, and in many ways counter to, the backdrop of this industry-wide sea change was the attempted merger of cable giants Comcast (CMCSA 0.46%) and Time Warner Cable (NYSE: TWC), a move that would further bolster two of the most powerful entities in the media industry, likely to the benefit of their shareholders. However, their engagement hit the skids late last week with both companies officially withdrawing from the deal. And that begs the question: Which companies could benefit from the failed merger?
Down goes Comcast!
Earlier this week, Comcast and Time Warner held meetings with the U.S. Justice Department and Federal Communications Commission in an attempt to assuage any misgivings over deal. Unfortunately for their shareholders, they came up short. After word leaked on Thursday that the deal was effectively dead, Comcast issued a press release the following morning officially withdrawing their offer.
The Wall Street Journal reported that FCC staff recommended the agency issue a "hearing designation order," which would transfer the decision to an administrative law judge. This might sound benign enough, but industry analysts repeatedly noted that such a move could effectively kill the deal. One major problem of the hearing designation order is timing. The Journal described this maneuver as a "drawn-out process" that would only lengthen the review process which had already taken well over a year.
Granted, it could have also given Comcast another opportunity to argue in favor of the deal. For context, this same procedural tactic occurred when regulators blocked an AT&T and T-Mobile deal in 2011. And it appears the prospect of this additional red tape was again enough to deflate the deal, much to the celebration of consumers and the rest of the media world.
Cui bono? (Who benefits?)
So with the deal off the table, a whole host of companies in this space now stand to benefit.
Comcast is already the largest cable provider in the U.S. with 22.6 million paid subscribers, according to the National Cable & Telecommunications Association. Post-deal, the combined entity would have 29 million cable subscribers after planned divestitures -- that would have represented 30% of the U.S. pay-TV market.
With control of 30% of U.S. cable TV audiences, the new company would have had massive leverage in its content rate negotiations, a fact that did not go unnoticed by the likes of large television content creators such as Walt Disney, Viacom, News Corp, and CBS. A number of these players reportedly expressed their concerns behind the scenes to regulators in recent weeks. They can all breathe a bit easier now that this potential powerhouse will never see the light of day.
However, it appears the biggest concern for regulators was not cable TV but the Internet business. The combined entity would have controlled a whopping 57% of the U.S. broadband market, a market share that understandably concerned regulators. The company could use that clout to block or somehow impede other online media services, such as Netflix or DISH Sling TV.
It is not entirely clear exactly how these concerns were affected by the FCC's definitive ruling on net neutrality earlier this year. However, criticisms that Comcast has violated previous assurances of non-interference apparently loomed large in regulators' minds. According to reports, Comcast had promised to act as a totally silent partner when it inherited a stake in online streaming service Hulu as part of its purchase of NBCUniversal in 2011.
However, Comcast abandoned that agreement during the negotiations for a potential sale of Hulu to rivals DirecTV and AT&T in 2013 -- a move that understandably reduced faith that Comcast would not use its dominant size to gain some kind of advantage against Internet-based competitors that would need Comcast broadband to reach their market.
As one of the most consistently hated companies in America, there would be some poetic justice if Comcast sunk the grand merger largely due to its own poor behavior. So while it is sour grapes for Comcast and Time Warner Cable after a news-filled week, investors in content producers and streaming video can and should rejoice. The Goliath they collectively feared since this deal was proposed nearly 14 months ago will not be coming for them after all.