Comcast Rationale for Buying Time Warner Cable Mirrors Sprint Argument for Buying T-Mobile US

source: comscore

In some ways, Comcast’s justification for buying Time Warner Cable echoes arguments made by Sprint about its potential acquisition of T-Mobile US:  economies of scale.

“In today’s market, with national telephone and satellite competitors growing substantially, with Google having launched its 1 GB Google Fiber offering in a number of markets across the country, and consumers having more choice of pay TV providers than ever before, Comcast believes that there can be no justification for denying the company the additional scale that will help it compete more effectively,” Comcast said.

 

That, in essence, is how Sprint frames any consolidation between Sprint and T-Mobile US. Long term competition with the larger Verizon Wireless and AT&T Mobility will require more scale.

At the moment, by some measures, Verizon Wireless and AT&T Mobility are about four  times bigger than T-Mobile US and three times  bigger than Sprint. In most markets, that might be considered an insurmountable lead.

In a market that is virtually a zero-sum game, few might believe it is possible for the smaller providers to wrest market share away from competitors so much larger.

source: venturebeat

Telcos Lag Cable in Internet Access Speed, for a Reason

U.S. telcos are lagging cable competitors both in speed and net acquisitions, and that pattern has persisted for several years. If one accepts the proposition that the strategic value of any fixed network is its ability to provide low-cost Internet access bandwidth, it might seem self evident that lagging in those respects is a clear business problem.

But it is not so clear. The reason is that telco revenue growth now is driven by mobility services, while the fixed network is vital substantially as a backhaul and offload mechanism, one might argue.

The simple fact is that it is irrational to over-invest in a part of the business that drives perhaps a quarter of revenues, and almost none of the revenue growth.

Telcos have to invest enough to protect the asset, but not so much they cannot earn a reasonable return on that investment. For cable operators, the business case is reversed: cable operators derive substantially all their revenue from services provided by the fixed network.

Though for both telcos and cable companies the challenge is to maintain relevance without overinvesting, telcos have the further requirement to shift investment into the mobile segment that actually drives revenue growth.

So it is not a surprise that the leading telcos seem to invest “enough” to remain relevant, but not much more.

Telcos will respond, should it be necessary, and many would note they already are doing so.

AT&T is the notable example, For U-verse customers, AT&T recently has announced speed increases to be in place by 2015, including an upgrade of about 90 percent of U-verse customers up to 75 Mbps and a further upgrade of 75 percent of U-verse customers to access at speeds up to 100 Mbps.

For IP-DSLAM customers, AT&T plans to supply 80 percent of IP-DSLAM customers with speeds up to 45 Mbps, and enable about 50 percent of IP-DSLAM customers with speeds up to 75 Mbps.

Some might argue that is fine for the moment, but will be superseded in turn by even faster speeds. Still, it would not be surprising if telcos lagged, and did not lead, the market.

Time Warner Cable Agrees to be Acquired by Comcast

Tine Warner Cable has accepted a $45 billion acquisition offer from Comcast, after rejecting earlier offers from Charter Communications, and presenting the Federal Communications Commission with another test of U.S. service provider market power.

The new twist is that the merger might not be most significant for its impact on video markets, though that will be an issue, but for the impact on high speed access markets. And though it is formally unrelated, the potential Sprint acquisition of T-Mobile US could be affected as well, if Sprint concludes either that the Comcast purchase of Time Warner Cable is likely to fail, or that it is likely to be approved.

Though regulators will look at the impact on relationships between video content owners and distributors, the tougher questions are likely to revolve around the impact on high speed access markets, even though there is almost no overlap of Comcast and Time Warner Cable operating areas.

Few would question the centrality of broadband access for fixed network service providers. And few would argue with the notion that cable tends in most markets to be the top provider, in terms of market share.

On the other hand, recent experience suggests that the DoJ would be willing to approve a Comcast acquisition, after deal adjustments.

In 2013, the DoJ sued to block major deals in the beer and airline industries, but both mergers were eventually allowed after concessions. Some think that is the likely outcome for the Comcast acquisition of Time Warner Cable as well.

The unknown, for Sprint, is whether that also would work for its desired acquisition of T-Mobile US.

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.

Without that loss of share, Comcast already would have well exceeded an informal rule that no provider can serve more than about 30 percent of U.S. customers without triggering antitrust review.

A formal Federal Communications Commission rule to that effect had been in effect until 2001, when the FCC rule was declared unlawful. The FCC adopted a new version of the rule in 2007, but that version again was struck down by an appeals court in 2009.

The U.S. Court of Appeals for the District of Columbia Circuit said the FCC "failed to demonstrate that allowing a cable operator to serve more than 30 percent of all cable subscribers would threaten to reduce either competition or diversity.”

Still, most executives voluntarily prefer not to push the informal limit, so Comcast likely will shed enough subscribers to stay at or below the 30 percent limit.

Time Warner Cable had been the second=largest U.S. cable operator; Comcast clearly the largest. Comcast has about 21.6 million subscribers, while Time Warner Cable has about 11.4 million customers, for a combined total of about 33 million, out of 92.5 million U.S. video subscription customers.

By that reckoning, where the market is defined as all video subscription customers, instead of just “cable customers,” Comcast would have 34 percent market share. That means Comcast will have incentives to divest up to four percent of the newly-acquired customers, to stay at 30 percent share.

Since the beginning of 2010, Time Warner Cable has has been losing customers, at least 2.05 million video subscribers, or approximately 16 percent of its subscriber base.

That is one good reason for the recent interest in an acquisition by both Comcast and Charter Communications. An acquirer would assume it can do better.

It is possible the deal could falter, especially if Comcast equity price dips significantly. It also is possible there could be adjustments if Time Warner Cable’s equity price were to rise substantially. And Charter could raise its bid, though most seem to think that is unlikely.

Instead, Charter likely would be offered a chance to buy the customers Comcast would shed.

U.S. merger law is governed by the Hart-Scott-Rodino Antitrust Improvements Act, under which the Federal Trade Commission and the Department of Justice evaluate mergers for their impact on fair competition. By current law, all mergers that are valued above $66 million must receive approval to go forward. But deals smaller than that can be reviewed whenever the Department of Justice believes a deal would affect competition in an industry negatively.

The Comcast acquisition also must be reviewed by the Federal Communications Commission as well.

Merger activity can heat up in a particular industry for various reasons, such as poor overall growth prospects for the industry, underperformance by one player within the industry, or opportunities to grow more profitability through synergies. Consolidation expectations within the cable TV industry have begun to heat up due to all three of these drivers.

Auto, Health and Fitness Lead M2M Opportunities?

There are good reasons for mobile service provider interest in machine-to-machine services: M2M represents the likely next wave of revenue growth for the industry, collectively. The issue is that M2M represents numerous vertical  markets, not a single revenue segment.

At least for the moment, automotive applications and health and lifestyle segments seem to be getting attention, mirroring end user interest.

Verizon Wireless Seems Forced to Respond to Mobile Market Wars

One unanswered question about the current U.S. mobile market wars has been whether, when and how Verizon might respond. 



It looks like Verizon has been forced into the fray. Reportedly, "Share Everything" plans will become "More Everything" plans, with lower prices, higher usage caps and unlimited messaging to anywhere in the world from the United States.

Tablets Drove Half of Mobile Commerce in 2013

2013 marked an important mobile payment's “first,” with tablet payments comprising almost half of all mobile commerce, according to Javelin Strategy & Research.

Of course, all forms of mobile commerce continue to lag e-commerce as a whole, representing perhaps $960 billion to more than $1 trillion in annual sales in 2013.

In 2013, tablets accounted for $28.7 billion in mobile online commerce, or over half of the entire mobile online payments space, up from the 2012 level of $5.1 billion.

Hard to Say Whether Typical Internet Access Prices Have Climbed or Dropped

Relatively minor changes in broadband access pricing are not uncommon. A price hike for Clear service provides an example.

But assessing changes in Internet access pricing is difficult, since the typical pattern is for the actual product to change over time.

Consumers might once have paid $20 to $22 a month for a dial-up connection operating at 56 kbps to 128 kbps. Consumers now pay about $40 a month for a 15 Mbps connection. So absolute prices have increased, but prices per megabit have declined.

Also, the types of products have changed over time. Where once consumers had only one choice--dial-up access or no access--they now can buy service at varying speeds, with the faster services costing more each month.

That obviously skews spending patterns. If more people choose to buy faster access, “average” spending also rises. Something like that likely happened in 2009, as more people chose to upgrade to faster levels of service.

The increase in what people pay for broadband is evident in prices for basic and premium services, according to the Pew Research Center's Internet & American Life Project.

For subscribers to basic services, the average monthly bill was $32.80 in 2008, a figure which rose to $37.10 in 2009.

For premium subscribers, those thirsty for faster home broadband speeds paid about $38.10 per month in 2008 and roughly $44.60 in 2009.

Across different service types, broadband subscribers reported higher prices for cable modem service than DSL by a $43.20 to $33.70 margin. This compares with 2008 figures of $37.50 for cable modem subscribers and $31.50 for DSL users.

That shift in demand--from DSL to cable modem, for example--also affects average pricing, as cable offers tend to be faster, on balance.

The point is that the actual product consumers are buying has differentiated over time, and appears to be in the process of segmenting further, as top end services start to stretch an order of magnitude.

The other important change is the rise of mobile Internet access as a material factor in the market. By about 2020, about 10 percent of all broadband connections will be supplied by fixed lines, the overwhelming majority of connections being supplied by mobile networks.

On a percentage of household income basis, Internet access prices have been dropping globally, with the biggest changes in developing markets. Though prices have dipped in developed nations, the changes are relatively slight.

Average Top Advertised Speed