Media

Comcast, Time Warner Deal Changes the Cable Landscape

The announced merger between the largest cable operator in the United States, Comcast Corp. (NASDAQ: CMCSA), and the second-largest U.S. cable company, Time Warner Cable Inc. (NYSE: TWC), will create a media goliath with 33 million cable subscribers. If the two companies had done the deal last January, the merged company would have had about 35 million subscribers.

That is all you need to know about the cable TV business in the United State — people are cutting the cord and cable operators need to get bigger by acquiring their smaller competitors. Every major cable operator is losing subscribers and trying to make up the numbers by offering high-speed Internet and phone services. Comcast, for example, lost 305,000 cable video customers in 2013 and picked up 1.3 million high-speed Internet subscribers and 768,000 new voice customers. Time Warner lost 217,000 cable customers in 2013.

Charter Communications Inc. (NASDAQ: CHTR) which had made an offer of $132.50 for Time Warner and has put up a full slate of candidates to take over Time Warner’s board of directors, is going to hate the announced deal the most. At the end of November 2013, Charter claimed 4.2 million cable video subscribers and a combined total of about 10.7 million Internet, telephone and cable TV subscribers. Had Charter been able to add Time Warner’s 11 million cable subscribers to its rolls, it could have claimed about 22 million subscribers, virtually equal with Comcast’s cable numbers, but still far behind the 53 million total subscribers Comcast claimed for all its services at the end of December.

Verizon Communications Inc. (NYSE: VZ) claims a total of nearly 16 million subscribers to its FiOS digital video, Internet and voice services. Unlike the older cable operators, Verizon and its chief rival AT&T Inc. (NYSE: T) continue to add subscribers to their high-speed broadband offerings. This is the target audience for new subscribers from Comcast/Time Warner. The sheer weight of the company’s subscriber base will give it significant leverage with content producers for better pricing. Those arrangements could be hard for the two phone companies to match.

The big loser stands to be Cablevision Corp. (NYSE: CVC), which already competes with Verizon and AT&T in Cablevision’s New York market. Time Warner brings New York to the table for Comcast and Cablevision, the nation’s fifth largest cable operator with 3.2 million subscribers, is seriously outgunned.

Satellite providers Dish Network Corp. (NASDAQ: DISH) and DirecTV (NASDAQ: DTV) could also get squeezed by the purchasing power of the merged company. Dish has tried to broaden its business, but so far it has been unable to make a big play to meld its satellite and terrestrial assets. A combination of the two may be in the cards, but that would only be a holding action, not a game-changer.

Another potential casualty is Netflix Inc. (NASDAQ: NFLX), which will have to compete with the merged company for rights to hit movies from Comcast’s NBCUniversal division. Netflix’s subscriber count of nearly 32 million gives it some leverage in negotiations for film rights, but Comcast’s link with Universal could tilt the playing field.

There is no certainty that the Federal Communications Commission (FCC) will approve the merger as it stands. Even as a merged company Comcast/Time Warner would own barely a third of all U.S. cable subscribers, and that is where the two companies are likely to focus their arguments for allowing the merger to go through. But that is not the real battlefield, and the FCC is no doubt aware of that.

Comcast shares were down about 2.2% in premarket trading on Thursday, at $54.00 in a 52-week range of $38.75 to $55.28. The high was set on Wednesday.

Time Warner’s stock was up more than 9%, at $148.00 above the 52-week range of $84.57 to $139.85. Comcast’s $45 billion offer works out to about $159 a share.

Charter’s stock was down more than 6%, at $129.10 in a 52-week range of $76.19 to $144.02. Cablevision shares were inactive, having closed at $16.88 Wednesday, in a 52-week range of $13.62 to $20.16. Netflix stock was also inactive, having closed at $431.75 on Wednesday, in a 52-week range of $159.00 to $435.76.

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