Comcast (CMCSA) and Charter Communications (CHTR) might be forgetting one key tool as they make a joint bid for Time Warner Cable (TWC). If they companies hope to get this deal approved by antitrust regulators and blessed by bankers, they’re going to need a magic wand.
As Fortune noted, Comcast would have difficulty buying Time Warner Cable, its next-largest rival, because the two companies would control “nearly three-quarters of the entire U.S. cable industry.” Charter, for its part, would have to leverage itself up to its eyeballs in order to buy Time Warner Cable, which has a market capitalization of more than $37 billion, which is nearly double Charter’s $14 billion value.
Charter has already had a good year in the stock market, gaining more than 76%. It has outperformed Comcast and Time Warner Cable, which have each gained a little more than 30%. Cablevision (CVC), the cable and newspaper company owned by the Dolan family, has risen about 3%. The firm is one to watch because its tiny (for the industry) $4 billion market cap makes it the next likely target.
But even if the Comcast and Time Warner Cable agree to split Time Warner Cable between themselves, antitrust regulators may still object to them joining forces.
“You’re still dealing with the largest firms getting larger,” Washington antitrust lawyer Allan Grunes told Bloomberg News. “It’s still not going to be a clean deal from an antitrust standpoint.”
The U.S. Department of Justice may be concerned that a larger Comcast may have too much sway over the programming seen by the American public because no cable channel would be financially viable if it didn’t strike a deal with the company. By gaining in size, however, Comcast might be able to more easily hold the line on rising programming fees, especially for sports.
Any deal would also have to address concerns about net neutrality. Netflix (NFLX) has complained that Comcast monthly limits on broadband usage unfairly favors Comcast’s Xfinity Streaming service, which isn’t subject to the limits.
When Comcast and Time Warner Cable jointly bought Adelphia Communications in 2006, they agreed to swap certain cable systems to enhance their respective geographic clusters, so there is precedent for concessions related to cable mergers. It remains unclear what the companies would have to do in order for their transaction to be blessed by antitrust regulators.
There are parts of Time Warner Cable that would interest each potential suitor. Time Warner Cable’s business in the New York City area that would probably interest Comcast, which is based in neighboring Philadelphia. Charter, which is based in Stamford, Conn., would probably be interested in Time Warner’s businesses in Southern California and the Midwest, where CHTR has a large presence.
But the biggest problem is the changing nature of the consumer. People, especially younger ones, are watching far less television than they have in past years. That’s a huge problem because advertisers generally want to target younger consumers who are believed to be less brand-loyal than older customers.
Media analysts Craig Moffett and Michael Nathanson recently noted that the cable industry has had its worst year ever in terms of customer losses. The industry lost video customers and broadband numbers also fell, indicating that too many consumers are eager to escape the industry’s clutches.
Despite customers leaving, cable company revenues are doing fine since the providers are able to charge higher rates. Unfortunately, that means that consumers will be shouldering even more of these costs going forward if current trends hold.
As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.