Why everyone wants to buy America’s least liked cable company

Why everyone wants to buy America’s least liked cable company

By John McDuling @jmcduling

November 25, 2013

Time Warner Cable is America’s least liked cable provider, and its second least liked internet service provider, in terms of customer satisfaction. It’s bearing the brunt of the cord-cutting phenomenon, hemorrhaging customers faster than anyone else, and increasingly dependent on annoying fees to bolster its bottom line.Yet the company has become the crown jewel in a high-stakes battle for the future of America’s cable and broadband industries. It’s being circled by rival cable companies including Charter Communications and Comcast. There’s even speculation that, to avoid antitrust concerns, it could be broken up into parts for the rest of the industry to feast on.

Why so much interest in a poorly performing business that isn’t very popular with its own customers? The reason is simple: the fragmented nature of America’s cable industry is basically unsustainable, and Time Warner Cable has considerable strategic value.

Currently, America’s cable companies are a series of regional pseudo-monopolies—a legacy of the way cable TV licenses were awarded in the 1950s and 1960s. Time Warner Cable has a big presence in key markets like New York City and Los Angeles. Comcast, the industry’s biggest player, controls cities like Boston, Philadelphia, Washington DC, Chicago and San Francisco. Cox Communications, Charter Communications and Cablevision, the next three biggest players, each have their own regional fiefdoms.

This industry structure worked fine in the days when the only way to get (or provide) access to TV content that wasn’t broadcast over the public airwaves was via cable. But in the internet age, everyone has a content smorgasboard at their fingertips. As a result, Americans are abandoning their expensive pay TV subscriptions in droves, favoring cheaper internet streaming services like Netflix and Hulu, while new services like Aereo are springing up.

Cutting the cord obviously still requires broadband internet access—a service cable companies can and do provide.  But because of the cable industry’s fragmented nature, they have relatively small bases of subscribers compared with Netflix, telecom companies AT&T and Verizon—who now have pay TV offerings of their own—and even satellite providers like DirecTV. (For instance, Comcast has some21.5 million subscribers and shrinking; Netflix has 31.1 million and growing.) This means they have less leverage in negotiations with film studios and broadcast networks for access to programming.

This impasse leads to disputes, and blackouts, as was the case with Time Warner Cable and CBS during the American summer. Customers almost always blame the cable companies (to whom they pay the fees) for these disputes, even if the networks deserve some of the blame.

So another cable firm that buys up Time Warner Cable would get greater scale and more negotiating power against the film studios and networks. If it could buy programming for less and pass on the savings to consumers, fewer of them might cut the cord—in theory at least. And even if the future for the cable industry is broadband only, spreading the costs of expensive network upgrades across more users also makes economic sense.

In short, consolidation in big cable is inevitable. And Time Warner Cable’s struggles mean it’s more likely to be prey than predator.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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