The country’s largest cable operator, Comcast, wants to merge with the second-largest cable, operator Time Warner Cable. And if you ask Comcast, this would be a huge win for everyone involved.
To back up this sentiment, top executives from Comcast took to the phones this morning to answer questions from members of the news media. And boy, were those answers weak — weaksauce, to be precise.
The cable industry doesn’t have the greatest level of competition. Part of this is due to the practicality of providing an infrastructure that runs throughout different regions. Most areas have only one or two cable operators with access to an available infrastructure. Also, only four or five cable operators (at best) are vying for business across various markets across the country.
To put this in perspective, any major supermarket chain has a far greater number of brands selling jars of pickles compared to cable operators in the United States.
Somehow, Comcast doesn’t think reducing the number of major cable operators from four to three will do anything to harm competition, affect consumer choice, or alter innovation. Unfortunately, the company’s logic isn’t exactly flawless, as demonstrated by the following quotes from today’s call.
No break fee? No problem … and no risk
Usually, major merger deals like this contain a “break fee” that guarantees the smaller company will get a sum of money if things fall through. The break fees can be millions or even billions, which the larger company involved in the merger isn’t worried about because it wouldn’t have bothered trying to make this deal happen if it wasn’t confident that everything would work out. For instance, AT&T’s merger with T-Mobile included a $4 billion break fee.
Comcast is offering no break fee, which to some might indicate a lack of confidence that the merger will happen since Comcast isn’t on the hook for anything like AT&T was. Here’s both TWC and Comcast’s explanation:
“I actually disagree. I think the absence of a break fee reflects our confidence to get the transaction done,” said TWC chairman Rob Marcus during a call with journalists this morning. “Rather than focus on the consequences of a transaction that doesn’t happen, we’re going to spend our energy closing.”
Afterward, Comcast CEO Brian Roberts gave his company’s explanation for the lack of break fee: “I don’t think Comcast has ever had a reverse break fee in any transaction. It’s something we’ve never done, so this is not unusual.”
(Of course, negotiating a deal valued at $45.2 billion isn’t really something these companies have done before, either.)
Comcast’s biggest motivation for swallowing TWC is … hard to believe
One of the biggest “value propositions” for Comcast’s decision to merge with TWC wasn’t the potential to make more money by swallowing up a swath of cable TV subscribers, nor was it to thwart the plentiful level of competition. These two items stand out as the most obvious “motivators” of Comcast’s merger with TWC, yet here’s what Roberts’ had to say:
“I think the opportunity to invent products, services, and customer experiences both in residential and business services is clearly the prime motivator here,” he said.
Consumers will probably thank Comcast for giving them the choice of Comcast
Oh, Comcast. A merger of this scale means people have fewer choices for cable/broadband Internet service. But since many cable operators are the only available option within most areas, there really isn’t any competition to begin with. In fact, there are so few cable operators that there’s a good chance that moving to a new locale won’t provide you with a different option for cable service. Every time you move, you have the option of Comcast or Comcast … plenty of evenly matched options. Roberts instead delivers a peachy outlook for TWC’s current subscribers that actually includes giving them more competition, although I’m not entirely sure how.
“When we look to Time Warner’s consumers, we believe in continuing [to] make it more valuable, to give them more competition, give them more choices, speed up the Internet as we’ve done each of the last 12 years,” Roberts said.
Hey, not all TWC subscribers will go to Comcast. Just most of them
Comcast said it’s “prepared” to divest 3 million TWC subscribers as part of its merger deal. Those 3 million will likely get swallowed up by the likes of Charter, Cox, Cablevision, and a small handful of others. What’s left is another 8 million, which will give Comcast a total of 30 million. That puts the company just below the FCC’s 30 percent ownership cap. That means this merger is far more likely to happen whether you like it or not.
“We think we’ve threaded the needle in an appropriate way. We’re proposing a transaction that comes under the third rail that was previously identified by the FCC — even though that third rail was found to be unsupported by the DC circuit [courts]…,” explained Comcast executive vice president David Cohen during a public call addressing regulatory issues related to the merger. “I really don’t think anyone is going to be able to make a credible argument that with less than 30 percent of the market… and the high level of competition between satellite, telecos, and cable.”
Cohen does make a good point regarding the FCC’s current restrictions on giant mergers. But for now, we’ll have to wait and see if U.S. regulators are able to find other reasons to reject Comcast’s merger with TWC.