Tuesday, October 7, 2014

The cable industry (The Economist)

Tying up the cable business
Lobbying over Comcast’s bid to create a cable-TV behemoth is coming to a head
Oct 4th 2014 | WASHINGTON, DC From the print edition


EMPLOYEES joining Comcast, America’s largest pay-television and internet provider, are given a copy of “An Incredible Dream”, a history of the company commissioned by the firm. On the cover is Ralph Roberts, its founder, standing with arms outstretched, like the Christ statue on Rio de Janeiro’s mountaintop. Comcast’s dramatic rise since 1963, when Mr Roberts bought a small cable system in Mississippi, is an inspirational American business story, and represents how tiny companies can become monumental ones. Today Comcast is run by Mr Roberts’ son, Brian, employs 140,000 people and has a market capitalisation of around $140 billion.
But when does “big” become “too big”? Regulators in Washington, DC, will have to decide. In February Comcast announced a $45 billion bid for Time Warner Cable (TWC), America’s second-largest cable company. Comcast has agreed to divest around a quarter of TWC subscribers voluntarily, leaving it with around 30% of the national pay-TV market and 40% of high-speed broadband should the deal go through, according to Moffett Nathanson, a research firm. Regulators at America’s Department of Justice and Federal Communications Commission (FCC) are reviewing the merger on antitrust grounds, with the FCC also assessing its impact on the public interest. They are expected to make a decision by early next year.
The deal would give more might to a firm that, besides the largest pay-TV and internet business in America has, thanks to its 2011 takeover of NBCUniversal, broadcast networks, cable channels, a film studio and other media assets. Most crucially, it would cede to Comcast more control over America’s high-speed internet, a buoyant business that is set to be the future conduit of content delivery, but one in which Comcast already faces less competition than in pay-TV. Comcast says it will invest more in broadband infrastructure and provide more low-cost internet access to the poor, but it is far from clear that the public will benefit from Kabletown (as Comcast was called in “30 Rock”, an NBC comedy about life inside NBC) turning into Kablecountry.
The way this giant deal is progressing reveals a lot about corporate America. On October 8th and 9th shareholders of both Comcast and TWC are expected to vote to approve the merger without hesitation. In doing so, TWC investors will be breezily signing off on an $80m golden parachute for Robert Marcus, who has been the firm’s boss for less than a year. The chief financial officer, chief technology officer and chief operating officer will receive a combined $55m for helping sell their company. If these numbers appeared in a fictional television drama, they might seem somewhat implausible.
To get its deal signed off by regulators Comcast has taken lobbying to new heights. Last year it spent around $19m on this, reckons the Centre for Responsive Politics, more than both Boeing and Lockheed Martin, two giant defence contractors. The firm has always made sure that the cord linking its Philadelphia headquarters to the government in Washington is taut. Brian Roberts has played golf with Barack Obama; David Cohen, Comcast’s chief lobbyist, has repeatedly had the president round for supper at his home. This week Mr Obama asked Joe Clancy to return from a stint as Comcast’s head of security to become acting head of the Secret Service.
Supporting America’s power-brokers can pay off. For example, Rahm Emanuel, the mayor of Chicago, publicly expressed his support for the merger, without mentioning the campaign contributions he received from Mr Cohen and other Comcast executives. Comcast’s roots are in cable, a business that depends on local-government relationships, and it knows how to win hearts. Since 1999 it has given away $145m to organisations in the areas it serves, a generous act but also a strategic one. It helps explain why organisations that would appear to have no stake in a national cable deal, such as the Virginia Holocaust Museum, have supported the bid.
There are grounds to worry that proper scrutiny of the proposed deal will be impaired because of “regulatory capture”, especially since Comcast has hired former regulators to advise it and lobby for it. For example, Meredith Attwell Baker, when an FCC commissioner, voted to approve Comcast’s bid for NBCUniversal in 2011. Four months later she left to join Comcast (she has since gone on to work for the wireless-telecoms lobby). “It is such a revolving door at the FCC and Congress that you can’t keep track of whether people are cable lobbyists or working in government,” says Marvin Ammori, a lawyer who represents technology firms. “People might expect that of defence and pharma, but not of their broadband providers.”
Likewise there are reasons to fear a sort of “journalistic capture”. Comcast owns two prominent cable-news channels, MSNBC and CNBC, and two broadcast networks with extensive news programming, NBC and Telemundo. Their newsrooms, which might otherwise have reported critically on such a big deal, have been largely silent. One CNBC reporter says he cannot dig into the story as he normally would, for fear of losing his job.
Reporters who want to investigate the deal struggle to find anyone who will comment publicly anyway. Since Comcast is already so large, few television stations want to speak out, because Comcast pays them lots of money to carry their channels. “It doesn’t make good business sense to argue against your biggest client,” explains one executive. In order to hear opponents’ honest opinions, the FCC has taken the unusual step of letting them give testimony in private—something it rarely does in a merger review.
Recently Comcast lashed out at some of its opponents, including Netflix, an online-video company, and Discovery, which owns television channels, accusing them of “extortion”. According to Comcast some firms have come forward seeking gifts in return for supporting the deal, which would have cost Comcast around $5 billion. This unsavoury favour-trading sometimes happens during a big merger process, as Comcast knows, given its battle to get the NBCUniversal deal through.
Some say that Comcast’s decision to criticise its competitors shows that Mr Cohen may be worried that the deal, which at first looked set to sail through, is running into trouble. Opponents have been heartened by recent negative noises from Tom Wheeler (pictured), now the FCC’s boss but formerly a leading lobbyist. For instance, in a recent speech he noted that already around three-quarters of Americans have no “competitive choice” when it comes to high-speed internet.
The outcome of this deal could influence the development of both the television and internet businesses in America. Comcast argues that there will be no loss of competition, since it does not compete with TWC in any market. That is true only because cable companies long ago divided the country among themselves. This deal highlights that custom: Comcast and a rival, Charter (which had wanted to buy TWC but was trumped by Comcast) are swapping subscribers in the places they want, much as they might trade cards in a game. The rest will be transferred to a newly formed firm, GreatLand Connections.
What matters most to Comcast and to consumers is broadband. Cable companies have strikingly little competition when it comes to delivering high-speed internet, because satellite companies do not offer fast internet speeds and telephone firms cap the amount of data that can be downloaded in return for the monthly fee. Letting Comcast buy TWC will not eliminate an existing competitor, but it could deter prospective ones in broadband and pay-TV, because they know they stand no chance of felling a giant.
Comcast’s power does not end there. If the deal is approved, it will control 17 of America’s 25 largest advertising markets, dominating the top ten (see chart). Comcast’s huge customer base will also give it a near-veto over innovations, such as which new channels can launch and which set-top-box technologies are adopted.
That Comcast owns some of the biggest television channels matters too, because of the potential for it to favour these over rival channels, or to charge other pay-TV operators unreasonable rates for its channels. Comcast also has an interest in seeing its impressive “cloud-based” set-top-box become the industry standard, so it can license the technology to other cable companies. TWC was reportedly close to a deal with Apple to distribute its set-top TV boxes, but talks stopped when Comcast announced its bid. They seem unlikely to resume if Comcast takes over TWC.
Comcast, like other pay-TV operators, is set on preserving the television ecosystem in its present form for as long as possible, whereas it is in the interest of consumers to see viable, cheaper alternatives take off. One potential competitor might have been Hulu, an online-video firm jointly owned by Comcast, 21st Century Fox and Disney. Comcast came by its stake when it bought NBCUniversal, but as a condition of that purchase regulators made Comcast agree not to intervene in Hulu’s operations. However, last year, when Hulu was put up for sale by Disney and Fox, insiders close to the deal have toldThe Economist that Comcast executives made it clear to Hulu’s other two owners that they would prefer not to see it go to AT&T, which, along with Chernin Group, an entertainment firm, had put in the highest bid.


Comcast denies any intervention. AT&T would have been able to make Hulu a viable competitor to Comcast’s pay-TV business. Ultimately Hulu stayed with its owners, who called off the sale.
In all, the reasons to oppose the Comcast-TWC deal are even more numerous than the number of unwatched channels a cable subscriber is forced to buy as part of the expensive “bundle”. Americans already pay more for television and internet than people in other rich countries, for slower internet speeds. Comcast would become the judge and jury on which new services and devices survive in the TV and internet businesses. Comcast would have incentives to favour its own channels and businesses, and policing it effectively would be a huge and complex job.

Regulators have the choice of approving or rejecting the deal outright, or approving it with conditions. It is not their only headache. The FCC also has to consider new “net neutrality” rules on whether broadband providers can favour certain types of online content or charge certain companies more for faster delivery. Craig Moffett, an industry analyst, says the FCC could decide to attach specific net-neutrality conditions to the Comcast deal, although others think a separate ruling is more likely before a merger decision is reached. Regulators also have to review AT&T’s proposed bid for DirecTV, a satellite-TV company, which it has made in direct response to Comcast’s deal. Other firms will inevitably follow too. In the media business sequels are all the rage.

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