With the Time Warner Cable deal, Comcast would not only lock up 30 percent of the cable market, but pricing leverage in all directions – with customers, networks and over-the-web providers like Netflix.

Stealthily, Comcast Fortifies Its Arsenal

FEB. 16, 2014

David Carr

Big media companies are generally warships, bristling with firepower and declaring their might long before they attack. But Comcast, which is headed toward being one of the biggest of them all, is much more like a submarine, silently running beneath the waves and making its presence known only when it is too late for its targets.

Last year, John Malone kicked Time Warner Cable into play through sheer bluster, using his investment in Charter Communications as a vehicle to stalk the much larger cable company. Last week, Brian Roberts, chief executive of Comcast, finished what Mr. Malone started. Mr. Malone lowballed, Comcast closed.

Comcast’s proposed $45 billion deal to buy Time Warner Cable surprised many, including me, but it probably shouldn’t have.

There is a game over the game, one that doesn’t show up in headlines, which Comcast plays better than anyone. Preoccupied by its 2011 purchase of NBCUniversal, Comcast had been uninterested in cable expansion, but it ended up in talks with Mr. Malone about Time Warner Cable with some kind of partnership in mind. At some point, Comcast decided that it did not need a middleman and quit taking calls from its would-be partner.

In a matter of weeks, it was clear that Mr. Malone, who had served as Mr. Roberts’s mentor earlier in his career, had been bested by his former protégé.

Even critics of the proposed deal — and there are many — cannot help being impressed by the quiet audacity of Mr. Roberts and the company he leads. It is a giant on cat’s paws, remaking the media landscape with little fanfare.

Spoilsports, like me, might point out that a company still digesting NBCUniversal should not subsequently gain control over so much additional distribution. With this deal, Comcast would not only lock up 30 percent of the cable market (and an ever greater share of broadband), but pricing leverage in all directions — with customers, with traditional programming providers like networks and cable networks, and with over-the-web providers like Netflix.

For consumers, cable is not just television anymore, it is where the Internet comes from. And should this deal go through, more people who want to cut the cable cord will still have to buy their broadband from a cable company where prices go only one way — up.

It is akin to leaving a house that is on fire and having it chase you down the street.

If you are Apple or Netflix, it’s good to hear that Comcast will abide by the principle of net neutrality — all content treated equally — in its expanded universe, but there have been growing problems with streaming speeds because of less than optimal arrangements with so-called peering companies, intermediaries that are paid to deliver streaming traffic. Might Comcast, with its bigger presence, start to squeeze web-enabled programmers like Netflix by charging more for those peering arrangements that make sure programming is not a stuttering mess? In terms of streaming speeds, Comcast has been a laggard, delivering slower speeds than Time Warner Cable and limiting how much data consumers are able to stream.

Comcast wins most battles most of the time because it stays under the radar, routinely turning profits. When it does strike, it has a way of making the unthinkable sound reasonable. In an investor call on Thursday when the deal was announced, Mr. Roberts said that the proposed merger was “pro-consumer, pro-competitive and strongly in the public interest.”

Saying that does not make it so, but Comcast has suggested that it expects the merger to be approved within a year, and Time Warner Cable did not demand a breakup fee in the event the deal is blocked, which suggests that it believes that Comcast has the connections and wherewithal to push the deal through. They both have reasons to be confident.

Foremost, Comcast already has a huge regulatory win in the bank. Its proposed acquisition of NBCUniversal in 2009 was met with abundant skepticism, with consumer advocates contending that control over both so much content and distribution gave it too much market power. The company maneuvered its way past those hurdles and won approval by making some concessions and commitments, and it is in an even stronger position today.

Consider that one of the Federal Communications Commission regulators who approved the NBCUniversal deal, Meredith Attwell Baker, now works for Comcast as a lobbyist. Since that deal, there has been a change in leadership at the commission, and it is now run by Tom Wheeler, who was previously a chief lobbyist for the cable industry. (Comcast is among the biggest spenders on lobbying, having written checks for $18 million in 2013 alone.)

President Obama should be paying attention to a deal that has such significant consumer and business implications, but he needs no introduction to the players involved. Mr. Roberts has golfed with the president and hosted him at his residence on Martha’s Vineyard.

David L. Cohen, who oversees the company’s relationship with regulators in Washington, has been a big bundler of donations for the president and staged a fund-raiser for him at his home in Philadelphia that raised $1.2 million. In recognition of those close ties, Mr. Cohen was one of the guests at a state dinner at the White House for the French president, François Hollande, last week.

With these kinds of relationships working in its favor, it won’t come as a surprise if Comcast is given the benefit of the doubt in this whopper of a merger.

Cable is a necessary evil that works best when we can exercise consumer choice. I live in northern New Jersey and used to be a Comcast customer — I dumped it after one of its technicians pointed to the cable running through the trees and said I might not have a great connection when the wind was blowing. I switched to Verizon FiOS’s fiber-optic service and have been very happy since. (Not cheap, but it works.) When, you might ask, will the fiber-optic future arrive at your house? How about never? Does never sound good?

No, it does not. But much of the cable market has already been divided up — as the executives behind the merger noted, Time Warner and Comcast do not overlap in any markets, and Verizon has previously agreed not to expand. Comcast, which will now have less competition, will have less motivation to invest in building out infrastructure like fiber-optic networks at the expense of its shareholders.

Discussing the scale of the deal, even Mr. Cohen acknowledged that “It may sound scary.” It doesn’t sound scary, it is. As Craig Aaron, president of the consumer advocacy group Free Press, told my colleague Edward Wyatt, “No one woke up this morning wishing their cable company was bigger. This deal would be the cable guy on steroids — pumped up, unstoppable and grasping for your wallet.”

Comcast’s move to consolidate power will probably beget further consolidation among programmers and other cable providers others who seek to match its growing might, which is never a good thing for consumers.

Cable and broadband connectivity is a public good in private hands, and how it evolves is a significant issue for American businesses and consumers. By asserting so confidently that its acquisition is lawful, fair and all but a foregone conclusion, Comcast has cocked the gun. Its answer to those who believe it should not acquire such a big footprint is clear: Well, we just did, so let’s start from there.

 

 

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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