Comcast to Buy Time Warner Cable - The Future is NOW!

By Peter Bernstein February 13, 2014

For a host of reasons, the announcement that number one U.S. cable company Comcast (23 million subscribers) is set to buy number two Time Warner Cable (12 million subscribers) in an all-stock deal that values Time Warner at $159 per share is huge news.

The transaction, if it goes through, is by no means is a done deal. Just as a point of reference, the number three cable operator Cox has 4.6 million subscribers and even satellite company Dish Network, who does not have to worry about digging up streets, has roughly 20 million subs. What this means is that policy-makers are certain to give this a thorough vetting from possibly a cable industry competitive perspective but more so in terms of competition from telecom and satcom companies. That said, this is indicative of two big trends. 

The first, and I hate to be an “I told you so” but I told you so, is validation of my observation a few weeks ago that 2014 was going to be a watershed year for communications industry restructuring around the world.

The second is that we are witnessing what the future of the industry is right now. It is virtualization.  The hunters are aggressively hunting for the missing puzzle pieces they give them broad reach and ecosystems that through the provision of network, content and personalized services mean you never leave their “E”vironments. 

In short, if you can’t monopolize the Internet, at a minimum make it compelling for users to stay in your world, difficult for competitors (this is why net neutrality is important) to entice customers and easy for advertisers to spend money with you since where the eyeballs and interactions are surely hearts and wallets will follow.

Comcast beats out Charter for TWC

Deal specifics, and give Comcast CEO Brian Roberts credit, are that Comcast has offered $159 per share to buy Time Warner Cable (TWC).  This means Comcast would pay an 18 percent premium at current stock prices or roughly $45 billion. It should be noted in terms of the magnitude here that

Comcast is valued at $146.5 billion and hence has the ability to make such a blockbuster offer, and that it is significantly north of rival cable company Charter’s reported offer of $132.50 per share which various industry observers say was turned down by TWC as being woefully insufficient. 

The facts are that there is more than a bit of historic inevitability to all of this. The cable industry in the U.S. has for decades been a fragmented one with a hopscotch pattern of local franchises. Years of “regionalization” have rationalized the footprints of the largest companies, but none of the operators have been able to match the reach of rival telecom giants Verizon and AT&T.  That is why this deal if approved is a game-changer.

It is also an instance of manifest destiny in the race to see which vertical company can get the upper hand competitively in a converging always on/always connected world. And, as my colleague Gary Kim noted in his posting on the deal, “Ironically, the amount of market share lost by cable operators, collectively, over the last decade to satellite and now telco competitors will make the Comcast deal easier than it would have been in the past. By 2012, the U.S. cable industry market share had dipped below 60 percent. 

In short, the deal may be hard to get approved, but not necessarily mission impossible. While there may be limited cable v. cable competition that is not the issue since very few communities have two cable companies.  The other pipe in town is the telecom company one, and to some extent satellite companies do and will play a role in all of this along with mobile service providers who in the U.S. are owned by the telecom giants.  That is why this is going to take some noodling by regulators.

Why the future is NOW!

As noted at the top, in what has been a recurrent theme of mine, the context for looking at industry restructuring is through the prism of ecosystem construction. From this perspective the goals are to create monstrous “E”vironments where barriers to entry are formidable. This includes the convenience, and in theory value reasons customers never feel compelled to leave. It also speaks to the ability of the ecosystem hub owner to use Big Data to give advertisers more targeted access to customers becomes simply irresistible. 

Interestingly, in the development of such ecosystems, pipes remain important. They may be “dumb," but on-ramps create billing relationships and are terrific weapons for dealing with physical network providers and OTTs. This again highlights why what happens with net neutrality ultimately is non-trivial.

Depending on whom you are and what you have is dictating the strategy for constructing the 21st century multiple media giant that has ultra-broadband connections and immersive, ubiquitously available content.  It is why Google has dipped its big toes in the fiber business, and now is going to have to figure out whether to build, buy or partner. Globally, it is why Liberty is gobbling up cable properties in Europe.  And, in the rest of the world it is why dominant carriers are busy moving to have the requisite assets for offering quadruple plays and are keeping a watchful eye on consumer consumption of content as more and more goes Internet.

The reason for acting now is simple. There is recognition in board rooms around the world that we have reached a tipping point and that if you don’t act boldly in the next 12-18 months, you are likely to be left behind.  This really is war.  Content, after all Comcast does own NBC Universal, is the ammunition but infrastructure is the gun.  The massive media giants need weapons as well as ammo.

It is way too early to speculate as to what U.S. regulators and antitrust officials will think of this, what metrics they are likely to use to evaluate “competitiveness”, and if they believe a deal is in the public interest what terms and conditions they might impose. The eality is that whether this deal goes through or not, from an M&A/industry restructuring standpoint this is the “new normal.” 

Finally, it will be fascinating to see if the valuation of TWC sets a benchmark for further industry deals.  It all will be driven by the hunters’ sense of urgency. This is a good time to keep your powder dry and get ready to pounce when opportunities arise. It is only February and there is a lot more to come. This is far from being a U.S. phenomenon.  Indeed, the old U.S. television soap opera As the World Turns is a very appropriate moniker. It is certainly turning fast. Stay tuned for the next installment.

Edited by Ryan Sartor
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