After months of being courted by Charter Communications Inc., Time Warner Cable Inc. has agreed to be purchased by Comcast Corp. for $45.2 billion in stock. The immediate reaction was that this would be bad for consumers, who already rank both companies as among the worst in the U.S. Some have even argued that the deal should be blocked on antitrust grounds, because it would combine the two biggest cable providers into a company with about a third of all U.S. pay-television subscribers. Although it's unlikely that the merger will lead to lower cable bills, the acquisition might help moderate price increases and increase U.S. broadband penetration. Time Warner Cable customers could also benefit from getting Comcast's superior set-top boxes.
First, it's important to remember that the combination can't decrease competition because there is almost no overlap between Comcast and Time Warner Cable coverage areas. This is because over the years de facto local monopolies have emerged in the cable market. No one will be deprived of choice as a result of this merger, which makes it qualitatively different from other deals that have been blocked by the Department of Justice, such as the ill-fated merger between wireless carriers T-Mobile USA Inc. and AT&T Inc.
To understand what the deal is really about, remember that pay-TV distributors are at the mercy of the networks that sell programming. According to Bloomberg Industries analyst Paul Sweeney, about half your cable bill goes to companies such as Viacom Inc. and Walt Disney Co. The networks consistently raise prices about 10 percent a year on average, irrespective of the state of the economy. By contrast, the typical cable bill only goes up by about 5 percent a year. Cable companies have eaten the difference by lowering their margins and cutting costs elsewhere, but there are limits to both processes.
This margin squeeze is why Time Warner Inc. spun off its cable business, why Comcast acquired NBC Universal, and why Internet-based subscription services offered by Netflix Inc. and Amazon.com Inc. have invested in original programming as a defense against the rising cost of licensing content. It also explains why Time Warner Cable had to cave to demands for higher fees from CBS Corp. a few months ago. Merging the two biggest cable operators might give them more bargaining power with the networks, especially if it encourages DIRECTV and Dish Network Corp. to consolidate the satellite business.
Saving money on content would allow the enlarged Comcast to improve Internet access and speed -- areas in which the U.S. lags behind other rich nations. Right now, about 10 to 12 percent of cable company revenue goes to capital expenditures, while about half goes to the networks, according to Sweeney. Even those who think the announced merger is bad for consumers say that the combined company is more likely to upgrade its broadband network to gigabit speeds, in part because the bigger company would have pricing power over equipment suppliers.
(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter at @M_C_Klein.)
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
Corrects second paragraph in article published yesterday to delete reference to government-sanctioned monopolies in cable.
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