Price Cartel Talk Masks Malone's Ambition

NEW YORK ( TheStreet) - If AT&T's ( T) failed $39 billion acquisition of T-Mobile USA ( TMUS) raised consumer fears of a telecom duopoly, a similar rumbling is emerging as cable and broadband players like John Malone's Liberty Media ( LMCA), Time Warner Cable ( TWC), Charter Communications ( CHTR), Cablevision ( CVC) and Cox Communications become the subject of merger rumors.

Mergers among cable and broadband providers could allow firms to finally institute usage based broadband pricing, some speculate, in a move that would hit the pocketbook of the ordinary American. It could also pose a threat to streaming video players such as Netflix ( NFLX), Amazon ( AMZN), Google's ( GOOG) YouTube and Hulu.

Such a scenario, while possible, would turn major Obama administration consumer protections from a victory to defeat. It would also be a laughable setback for the nation's communications infrastructure and is increasingly unlikely, according to some industry watchers who, for years, called usage based broadband pricing the "single most important" issue in the cable industry.

Given consumers' rising reliance on their internet service providers for streaming video such as Netflix and the threat it poses to pay-tv earnings, usage based broadband pricing could help cable companies both boost their profit margins and fend off competitors. Hence the rationale for consolidation among regional service providers, according to some analysis.

Apple ( AAPL), Intel ( INTC) and a handful of other tech behemoths are rumored to be on the verge of increasing their presence in the market.

Were internet service providers (ISP's) to eventually charge for usage, it could destroy the business models of streaming players like Netflix and leave ordinary Americans in a refugee status, constrained from accessing 21st century media. Consider that the recent rise of streaming video services comes as consumers shift their consumption away from stretched and expensive wireless networks, onto faster and unlimited services offered by ISP's.

Still, it is exactly what some expect.

Amid reports John Malone may look to acquire Time Warner Cable or Cablevision in a merger, GigaOm founder Om Malik said on Monday those prospective deals had little to do with classic M&A issues such as synergy, growth through consolidation or the calculus of all-stock acquisitions.

Instead, Malik argued consolidation would simply give cable providers the vehicle to finally implement usage based broadband pricing. " We are only on the cusp of seeing a big inflation in internet access costs," Malik wrote.

It is possible. Malone has long spoken of a lack of leadership in the cable industry, a comment some take to mean a lack of pricing discipline on broadband. Meanwhile providers such as Time Warner Cable, years-ago, called usage based broadband pricing "inevitable."

Inevitability, however, has turned to an unlikely scenario, according to Craig Moffett, co-head of independent research firm MoffettNathanson, and a long-time top ranked industry analyst.

"I think it will become clear that over the summer that the window may have already closed for the cable operators to move to a usage based pricing theme," Moffett said in an interview on Tuesday.

For Moffett, it's a big change in expectations. "I've written for years that usage based pricing is the single most important issue in all of TMT. I've always been amazed by how little attention people have always paid to the issue," he said.

If usage based pricing were implemented across the cable industry tomorrow, Moffett said Netflix's subscriber base would immediately fall from 30 million to 10 million. Netflix calls the pricing scheme "anti-competitive."

In a new broadband pricing regime, regulators would have to condone what consumers and competitors would immediately recognize as anti-competitive. Meanwhile, immensely popular content providers such as Netflix, Amazon Prime, Hulu, YouTube and the like would have to lose a Washington lobbying battle to the interests of cable monopolies, their arcane billing and offshored customer service.

Hollywood and broadcast networks would lose marginal new content buyers such as Netflix. Tablet makers such as Apple, Google, Samsung and Amazon would see the value of their fastest growing products put at risk.

Most importantly, it would be an affront to one of the few clear consumer victories for the Department of Justice (DoJ) in the Obama administration.

The telecom merger frenzy that precipitated speculation of a similar rationalization of the cable industry, after all, has raised the prospect wireless video service may rise in coming years, as prices fall.

When AT&T made its push for T-Mobile in early 2011, antitrust experts were in uproar that the DoJ and Federal Communications Commission could allow the industry's number four player to be taken over, leaving only a loss-making Sprint ( S) as a competitor to AT&T and Verizon ( VZ). Consumer fear was was palpable that a telecom duopoly would leave Americans with ever-rising iPhone bills when AT&T and Verizon shuttered unlimited data plans, shortly thereafter.

The DoJ blocked the merger, paving the way for a consolidation among also-ran players like Sprint, T-Mobile, MetroPCS and Clearwire that unequivocally makes the wireless industry more competitive on price and service, as the smartphone market matures.

It would be preposterous for cable industry consolidation to then put streaming media at risk after consumers shifted usage from wireless to broadband networks.

There are some pending court cases, notably Verizon's fight against the FCC on Net Neutrality that could put usage based pricing on the scrap heap, according to Moffett of MoffettNathanson. Were ISP's like Verizon to win, however, it could indicate a weakness from incoming FCC Chairman Tom Wheeler.

More importantly, the actions of ISP's indicate usage based broadband pricing is not on their minds. Reports signal Time Warner Cable is increasingly becoming a part of a Apple's plans to bolster AppleTV. Such partnerships rely on streaming video, and consequently affordable broadband.

Only the grandest of conspiracies would have Time Warner Cable signing video deals that would be undercut by its plots to charge for broadband usage.

It is more likely savvy industry minds, such as Liberty's Malone, see their hand as particularly strong in consolidation.

Pay TV margins are being squeezed by rising costs for broadcast, movie and sports content, just as user growth slows to a near halt. Growing broadband users, however, provide just enough to offset falling pay TV margins, according to Moffett.

In Charter Communications, Malone has a stake in one of faster growing cable industry players, meanwhile his reputation could even give investors the confidence to trade in their Time Warner Cable shares for those of a smaller competitor.

Malik of GigaOm raises strong points in asking whether consolidation would play to the detriment of the ordinary broadband user. If usage based pricing is the rationale for cable industry consolidation, consumers and scores of Americas fastest growing companies should be outraged.

For now, however, such analysis masks what may be a far more boring and Wall Street-oriented story of consolidation in a slow growth industry.

-- Written by Antoine Gara in New York.

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