NEW YORK (MainStreet) — It looks like Time Warner may be be acquired after all. On Tuesday morning, Charter Cable announced plans for a $55 million acquisition that would merge the two companies and create the second largest cable provider in the industry.
This is a move that will affect one in six Americans -- consumers already beset by limited cable choices and changes to net neutrality laws that favor big companies over penny-pinching customers.
The merger follows on the heels of a failed attempt by Comcast to acquire Time Warner, after regulators at the Federal Communications Commission and the Justice Department expressed concerns over the proposed size and anticompetitive impact of the resulting company. If successful, this deal will create a company known as “New Charter” and will also include an acquisition of Bright House Networks, with its 2 million customers.
This new cable giant would have approximately 24 million subscribers, just behind Comcast’s network 27 million customers strong.
According to reporting by the Wall Street Journal, the deal is ultimately valued at about $195 per share, and including debt is worth a total of $78.7 billion. Comcast's failed bid for Time Warner was worth $45 billion.
The deal still needs to pass FCC approval. In a statement released on Tuesday morning, Chairman Tom Wheeler indicated that the agency isn’t necessarily opposed to deal making within the industry, but “reviews every merger on its merits and determines whether it would be in the public interest.”
“In applying the public interest test, an absence of harm is not sufficient,” he said in the statement. “The Commission will look to see how American consumers would benefit if the deal were to be approved.”
Although skepticism remains, reports of the merger are pointing out that the FCC is considerably more likely to approve this deal than the last. When Comcast proposed its merger with Time Warner the resulting company not only would have been several times larger than its nearest competition, but actually would have had to sell off customers to (barely) meet the legal requirement for antitrust law. By contrast, New Charter will still be smaller than Comcast and can argue that it will be better positioned to keep competition strong in a marketplace increasingly being dominated by a single, massive player.
The result of this merger would instead create two massive players... and everyone else.
The question of consumer impact is an important one. This deal continues a pattern of consolidation in the cable industry of the kind that raised red flags previously, as Charter and Time Warner are already the second and third largest providers in the country. In the wake of this morning's announcement, consumer advocates continue to voice their concern about the proposed merger, focusing on the potential long-term detriment of having fewer companies compete at the national level.
Even when cable service providers compete in the same region they relatively rarely go head to head. Instead they tend to divvy up customers by street or even individual addresses, based on where lines run. (Indeed, many city dwellers now know to ask which cable company runs to a building as one of the essential steps when looking at new apartments.)
Although couched in the usual terms of expanding the new company's ability to offer options to its customers, the consumer-facing issue boils down to home addresses. The cable and broadband marketplace works differently than many other services, in that regardless of how many players exist nationwide, customers can only choose from among the companies that deliver to their home address. As we have reported on in the past, most Americans only have one firm to choose from when it comes to signing up for cable. That prevents them from switching providers easily to get a bargain.
Instead, explained Mark Toney, executive director for The Utility Reform Network, the bigger concern is whether this merger reflects growing homogeneity of the market.
"The companies, even if they don’t have the same footprint, still try to distinguish themselves when they're separate companies," he said. "Time Warner in California, for instance, has agreed to file for a status that allows it to be regulated by the California public utility commission for the purpose of offering lifeline telephone service to its customers who use cable telephone. Comcast has not."
Competition, even when it doesn't happen at the individual level, is still good for consumers if it spurs companies to experiment with new products and ideas. Fewer participants in the cable and broadband field, Toney said, would reduce that pressure and innovate.
This is at contrast with the marketing pitches used by cable companies to sell new mergers, which generally tout the expanded resources and geographic footprint of the merger as vital to continued development.
The importance of that development should not be underestimated, however, said Jim Hood, founder and Editor of Consumer Affairs. The cable market is in the beginning of a revolution as more and more customers are "cord cutting," in other words getting their TV over the Internet.
Broadband infrastructure was built to serve up webpages and emails. Upgrading it to handle the juggernauts that Hulu and Netflix have become won't come cheap, but the demand is only going to grow.
"Yes, Charter is smaller," Hood said, "but it will also be aggressively consolidating and bulking up to handle the next era of communications -- when video streaming displaces cable TV bundling. This is going to happen one way or another, and the cable/telecoms need to bulk up to remain competitive."
"Put simply, the scale of New Charter, along with the combined talents we can bring to bear, position us to deliver a communications future that will unleash the full power of the two-way, interactive cable network," said Tom Rutledge, Charter CEO, in a statement on Tuesday. The statement continued on to promise faster broadband and better cable television options for subscribers as well.
Of course, consumer may not see any noticeable effect any time soon, Hood says. But long-term it could be to their advantage.
"Overtime, consumers will benefit as cable companies turn into pipelines for content producers," he said.
This, however, presumes that newly expanded cable companies actually do upgrade their infrastructure beyond the minimum necessary to meet their contracts. Other consumer affairs groups have questioned just what faith we can have that the industry will actually improve infrastructure when doing so is often an expensive, time-intensive proposition.
"Providing broadband service requires real steel in the ground," Toney said, and that's expensive. With reduced pressure from competitors at both the local and national level, what will drive a cable company spend that kind of money?
Perhaps as cable companies grow they will reinvest in themselves, or expand into competitors' markets and have to innovate to survive. Past experience, however, gives good reason for caution.
“When you look at Consumer Reports' annual satisfaction surveys," Toney said, "Comcast ranks dead last every year in customer satisfaction. It has about a 23%, 24% customer satisfaction year in and year out, and I use that as evidence that when you have market power you don’t have to provide decent customer service.”
This deal may survive government scrutiny in a way that the previous merger did not based on the fact that the resulting company will still have fewer subscribers than Comcast; however, that’s not necessarily a reason for consumers to rest easy. All of the companies involved get consistently low marks on consumer satisfaction, and there’s no reason to believe that eliminating choices from the marketplace will improve that.
What this actually will mean for price in product, in an industry where both have been trending worse for consumers as companies have consolidated, remains to be seen.
--Written for MainStreet by Eric Reed, a freelance journalist who writes frequently on the subjects of career and travel. You can read more of his work at his website www.wanderinglawyer.com.