Comcast-TWC Merger Makes Sense Despite Ever Growing Opposition

After a three week suspension, the Federal Communications Commission (FCC) restarted the review of the merger between Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC) on January 12th and a result is expected early 2015. The merger, which will make the combined entity the largest Pay-TV operator in the U.S., has garnered a lot of negative media attention since it was announced in Feb 2014. In this article, we take a look at why this merger is being opposed and whether the opposition is justified.

See our complete analysis for Comcast

Who The Detractors Are And What They Have To Say

The deal has been vehemently opposed by different parties involved including consumers, public interest groups and industry players. The public opinion on the merger has been largely negative, as was illustrated by a poll conducted by Consumer Reports last April.  It reported that 56% of the public oppose the merger and only 11% support it, with 32% having no opinion. ^[1] The poll also reported that 74% of respondents agreed that a merger “will result in higher Internet and cable prices for everyone” and that a further 74% “believe consumers will have fewer choices when it comes to cable and Internet providers because smaller companies will not be able to compete with Comcast.” The deal is opposed by a coalition of 28 organizations which includes public interest and consumer-advocacy groups. ^[2] Industry players such as Netflix, DirecTV and Dish Network have also opposed this deal.

The primary gripe for most is that Comcast and TWC have traditionally been rivals and their merger will reduce choice for the customers. Customers will have to go along with the company even if it raises prices more frequently or provides below par service. Adding to these fears is the fact that Comcast has a well-established record of providing bad service to its customers. Another issue is that a consolidation of this magnitude will create a combined entity that will have too large a market share and this enhanced market power will give Comcast means to stifle its competition. Observers feel that the merged entity will have the ability to adversely affect startup channels by refusing to carry them.

Why The Opposition May Not Be Justified

Comcast and Time Warner Cable do not directly compete with each other and there is no physical overlap in the service areas where these companies offer services. ^[3] Also, the emergence of other Pay-TV options such as satellite-based Pay-TV services (DirecTV and Dish) and Pay-TV services offered by wireless companies (AT&T and Verizon) has reduced the importance of the cable TV market and given the customers other alternatives. Hence, this merger would not significantly impact the choices available to the consumers in the service areas of these two companies.

Additionally, Comcast sold 1.4 million of its existing customers and a 33% stake in a company which has an additional 2.5 million subscribers to Charter Communications last April in order to reduce the market share of the combined entity. ^[4] This deal with Charter will keep the merged entity’s market share of US Pay-TV subscribers just below 30%. The FCC had previously used 30% as a strict limit on the maximum allowable market share for one company. Comcast has also stated that it needs to carry the best content in order to stay competitive in the market and this limits its ability to drop newer and more popular channels.

Comcast has said that the transaction will generate approximately $1.5 billion in operating efficiencies. Moreover, it will benefit from the merger synergies, especially on the advertising front. The merger could potentially have an impact on the rising content costs. The Pay-TV industry has been battling with content owners over distribution agreements for the last few years. An increase in carriage fees directly impacts the end customer as cable companies tend to pass on these costs to their subscribers. If the merger goes through, Comcast will service roughly 30% of the Pay-TV market and will gain significant leverage on the distribution front. The company can potentially reshape the entire industry and tame the content owners over distribution fees as content owners will not be able to afford losing such a large number of viewers. The operating efficiencies coupled with reduced content costs could will improve operating margins. This could potentially stabilize the consumer subscription fee that has been increasing consistently over the past decade.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. CR Poll, June 19, 2014, consumersunion.org [↩]
2. Stop Mega Comcast, stopmegacomcast.com [↩]
3. Testimony of C. Scott Hemphill, May 8, 2014 [↩]
4. Comcast in deal with Charter, April 28 2014, Reuters [↩]