Comcast: The Enemy of My Enemy is My Friend

Comcast & Charter

Comcast: The Enemy of My Enemy is My Friend
| Published April 29, 2014 |

By R. Alan Clanton
Thursday Review editor

Comcast has conceded that maybe, just maybe, its proposed mega merger with Time Warner is a little too big for some in Washington to swallow. Though the deal would have taken several months to successfully navigate the approval processes of all the agencies involved, including both the FCC and the Justice Department, consumer groups and some members of Congress have suggested that a marriage between two companies of this size could create a de facto monopoly.

So Comcast has sought to soften the impact by agreeing to divest itself of nearly a million and a half cable customers by selling those footprints to competitor Charter Communications for a sweet $7.3 billion. Comcast would also spin-off another 2.5 million cable subs into a newly formed entity, to be partially owned by Charter, Comcast and others, and named—tentatively—SpinCo, as appropriate a moniker as one could create.

Charter, as it turns out, was the medium-sized cable giant who had previously bid for control of Time Warner, only to be outbid by the larger Comcast. If Comcast’s sale of those 1.4 million subscribers to Charter is approved, Charter would leapfrog past number three Cox Communications—its arch-rival—to become the undisputed number two player (assuming that this pre-emptive maneuver works and regulators allow the Comcast merger with Time Warner to proceed).

Confused yet? Well, don’t be. The prudent thing for most people: wait patiently for that first cable bill with the inevitable change in logo.

Comcast is making these offers to sweeten the narrative, and to deflate some of the talk about how big Comcast will be after its $45 billion merger with Time Warner is complete. Indeed, back in early February, when the announcement of the marriage was made, it only took a few hours for consumer groups and consumer advocates to begin waving the bloody shirt: without competition, some 65% of U.S. cable subscribers could expect interminable on-hold waits, longer cable outages, fewer technicians and repair personnel in the field, slower internet speeds, and almost nothing to prevent frequent rate increases.

In its arguments before Congress, Comcast countered that the idea of competition has evolved rapidly, and that Comcast must defend itself on all flanks from other, more technologically aggressive competitors: Google, Amazon, Microsoft, NetFlix, Apple, just to name a few. Then there’s Aereo, a start-up whose tiny antenna could render Comcast’s central business model obsolete while also threatening the control over content that the networks (NBC, ABC, CBS, Fox) prefer to preserve for themselves.

All of these companies now offer early variations of technologies which give their customers access to television content from a variety of sources and using a wide range of cutting edge tools. Even assuming that Aereo loses it copyright infringement battle in the U.S. Supreme court, Google, Amazon, Apple and a half dozen other technology start-ups have already begun to take a measurable bite out of the traditional cable TV model.

The announcement that Comcast would sell off such a large chunk of its subscriber base to Charter sent shares of both company’s stock higher. As the nation’s second-largest cable operator, Charter would enjoy negotiating strength, health benefits leverage and buying power (one of the arguments made by Comcast CEO Brian Roberts the day he announced Comcast’s bid for Time Warner). The Comcast-Charter subscriber sale would essentially benefit both companies: Comcast could divest itself of some underperforming or badly arranged markets, as well as craft a more sensible national footprint (especially where Time Warner properties are involved), and the move gives Charter an opportunity to greatly expand into new territories and markets.

Charter recently benefitted from a huge investment by Liberty Media, owned primarily by John Malone, an early cable TV pioneer and the former CEO of Tele-Communications Inc (TCI) once one of the largest U.S. cable companies, and the biggest at the time of its sale to AT&T Broadband in 1999. Later, after its investment in cable TV turned sour, AT&T sold its entire cable division. Comcast purchased the lion’s share, and Charter bought a smaller slice.

The circle now complete, Malone, Liberty Media and the brass at Charter will get to reacquire some of that cable footprint from Comcast, now the largest single cable operator in the U.S.

Comcast, which also owns NBC Universal, is headquartered in Philadelphia, Pennsylvania. Charter is based in Stamford, Connecticut. Liberty Media owns approximately 27% of Charter. On January 13 of this year Charter made a public bid to buy Time Warner, but Time Warner officers and shareholders rejected that bid. Thirty days later Comcast made a higher offer (roughly $26 more per share), which Time Warner investors accepted.

Comcast’s offer to sell to sell some 1.5 million subscribers to Charter is widely viewed as a pre-emptive move designed to make the proposed Comcast-Time Warner merger more palatable and politically safe for regulators and members of Congress.

Related Thursday Review articles:

Comcast: Don’t Worry, Be Happy; R. Alan Clanton; Thursday Review; April 9, 2014.

Kings of Content: Why Comcast is Inevitable; R. Alan Clanton; Thursday Review; February 28, 2014.