Thursday, February 13, 2014

Comcast/TimeWarner Cable Merger: It's All About Slowing Down Content Moving to Cord Cutters

As much as I advise companies about the future of the content industry, inevitably the discussions move towards what can be done in the next six months. That's understandable, because it's not too often in a fast-moving business that an organization can shoot for much of a longer horizon without risking the wrath of management, shareholders and stock analysts conditioned to full acceptance of the concept of "shareholder value." Well, to put it succinctly, Microsoft has been a diligent devotee to shareholder value and left untold billions off the table for those shareholders by failing to bring many of its amazing research-driven innovations to market. There comes a time when an organization and an industry has to double down not on the present but the future - for everyone's sake.

Such a moment seems to have arrived in the cable communications industry in the U.S., with the anticipated merger of the two leading cable companies - Comcast and Time Warner Cable. The business media has been pushing this story all day as a done deal, and so it might be if their lobbyists and PR folks get to spin the story the way that they want to. The Comcast/TWC argument is that their areas of service are almost completely non-overlapping, so how could this be considered a reduction of competition? It's a simple argument that rolls of the tongue so sweetly, but ultimately it's simplistic to the point of covering up the obvious. Fewer cable companies means that there are fewer options for consumers to turn to one way or another. If, for the sake of argument, a regulator said, okay, we're going to open up market "X" in the U.S. to all cable companies, if you've got one ginormous company owning 40 percent of the U.S. market and wee little competitors left over, guess how effective that's going to be for consumer choice. At least if there's a broader array of reasonably sized companies, we'll have a better chance at meaningful competition for reaching consumers.

But the real issue in this merger is not the consumer cable side but the greater threat to cable revenues - the rapidly emerging world of "cord-cutting" TV viewers who prefer to toss up streaming video on their TV screens from PCs and mobile devices. On the Internet side of their business, as long as the Net Neutrality concept of Internet regulation reigns, then all Internet traffic provided by cable companies flows through from all places at a specific rate at one bulk price. No more bundles for content under Net Neutrality, so cablecos like Comcast develop revenues from the Internet by placing mobile carrier-like caps on Internet traffic. With a Comcast/TWC merger, little would change in terms of technology in the short term but you can expect that both cable TV content bundles and Internet bandwidth pricing will be jacked up significantly.

With far fewer points of negotiation for content licensing and higher costs, TV content producers will have less pressure to develop Internet-first unbundled streaming TV services and a lower demand for those through higher cable Internet prices to get adequate service without bandwidth caps. And no doubt the short-term strategy mavens at those companies are plenty happy with that state of affairs. It leaves consumers little choice but to prop up the cable bundling model on the non-Internet side of their services as long as possible to get the entertainment that they want. The TV producers benefit significantly from the local and infomercial ad dollars that cablecos push into their programming, so to them it means not having to work as hard to monetize their content as they would have to in a Web-driven market for streaming video. So there are layers upon layers of parties benefiting from this merger - with the consumer last on the list.

So mischief managed from the short-termer's perspective, but there's a huge problem with this strategy. The assumption that is being made is that all of the "good" TV content is in the walled gardens controlled by the media companies. But that's just not true any more. One needs say no more than "Netflix" to poke one huge hole in the slow-down-cord-cutting argument, and "Roku" or "Google Chromecast" to poke yet another chasm. The truth of the matter is that we're rapidly approaching the point at which Web-first television viewing is the preferred mode for a majority of Americans. We're not there yet, but if my 85+ year-old father is streaming Netflix to his TV via a Chromecast and loving it, then we're about to get there real soon.

So, how does it benefit TV producers to delay coming up with a viable strategy for online distribution? It seems to be very similar to the wishful thinking that grew up around early Internet-based services like Compuserve and America Online, which provided a cableco-like walled garden experience for media companies via an Internet connection. In the time that they tried to prop up those walled gardens with inferior content services the open Web was allowed to appeal to people with far more sophisticated services, services which left most media companies far behind in the race to appeal to these audiences weaned from their brands. Net result: mainstream media companies have all but fallen off the online map, with social media and upstart news and entertainment outlets all but crushing their share of content viewing. The delay by short-termers hurt the media business badly - and continues to hurt it to this very day. The only real difference that I see in the current situation with the cable/Internet divide is that customers are forced to get what's coming out of a wire through two ends of a cable splitter. And consumers understand that a lot more these days.

This landscape of interlocking anti-competitive factors is complex enough that there's a reasonably good chance of this merger going through, since the simple explanation of little overlap in service areas is a fig leaf that regulators can take on fairly easily. But should they go ahead with this, I fear that the TV producers will start to feel like Compuserve wallflowers sooner than they think. They are choking off the natural development and growth of their own Internet markets and opening the door to a galaxy of entertainment alternatives - alternatives that are likely to eat their lunch sooner rather than later. If they want to have long-term hope for their brands, now is the time to solve the revenue issues for cord-cutting, even if it may make relationships a bit difficult with the cablecos. Without that, they're likely to be tying their fate to companies that are likely to fall prey to new gigabit-oriented Internet service providers like Google Fiber that have their own strong lobbyists. If I were a TV producer, I'd be working with the Internet providers who would move fastest to support cord cutting profitably at realistic consumer prices - prices that will align with the more competitive landscape for communications services looming under pending regulatory changes.

So, you can hunker down with a bigger Compuserve - ah, Comcast/TWC, that is - or do your shareholders a real favor and get aggressive with independent online streaming services ASAP. Myself, I'd go for door number two. If you'd like to explore what's behind that door more, let me know.
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