Post Charter-Time Warner Cable: M&A Bingo For Bankers?

29 May 2015 | Author: | No comments yet »

Altice Isn’t Leaving the U.S. Soon.

One of the more clever (if sometimes annoying) parlor games in our celebrity culture has been the emergence of couple names. To hear the chief executive of Charter Communications tell it, his company’s acquisition of Time Warner Cable will mean a better broadband experience for all. “We’ll offer consumers a broadband product that makes watching online video, gaming and engaging in other data-hungry applications a great experience, including at peak times,” Tom Rutledge said after the planned merger was announced Tuesday. “When it comes to cable consolidation, history teaches us to be very concerned about the benefits for consumers,” said Delara Derakhshani, policy counsel for Consumers Union. “Prices for cable and broadband continue to go up, and customer service is dismal.” He went to the website of the Federal Communications Commission, where he learned that service providers such as Time Warner Cable and Charter can’t “block, impair or establish fast/slow lanes to lawful content.” Totten filed a complaint with the FCC saying that charging a higher price for faster service was tantamount to creating a broadband fast lane.

Whatever the outcome of the latest proposed mergers and acquisitions in the media industry, a clear winner has already emerged, and it’s not even a party to any of the deals: Netflix, the streaming television pioneer. In our exclusive new telecom service Ratings, consumers continued to express dissatisfaction with their TV and Internet providers, giving most poor reviews for value and overall satisfaction. However, what it shows isn’t that Time Warner and other service providers are pulling a fast one but rather that many people still have a hard time grasping the concept of network neutrality laid out by federal regulators in recently adopted rules.

To varying degrees, an array of Silicon Valley powerhouses — including Google, Amazon, Facebook and Apple — gain from an open Internet and net neutrality, the notion that broadband service providers should treat all data equally, no matter its content, source or volume. The government worried that the company would be able to undermine increasingly popular online video competitors like Netflix because the bigger Comcast would have more than half the country’s high-speed Internet customers. Kim Hart, a spokeswoman for the FCC, told me that the agency’s so-called open Internet rules prevent Internet service providers from “giving priority to online content or services in exchange for payment” or from favoring their own content over that of competitors. “It is not a violation of open Internet rules for an ISP to give customers the option to pay a different price for different tiers of Internet service, allowing consumers to choose the plan that is right for them,” she said.

TV-service providers also took a beating, with 20 of the 24 companies earning our lowest scores for value; the rest managed to do just a little bit better. That these views have prevailed over long-entrenched telecommunication and cable interests is yet further evidence of the technology industry’s growing political clout inside the White House and on Capitol Hill. Instead, the French tycoon plans to build his U.S. footprint by acquiring control of smaller cable operators, according to two people with knowledge of the matter. There has been a wave in consolidation in the cable industry as providers are starting to lose TV subscribers, costs for TV, sports and movies rise and pressure from online video services such as Netflix and Hulu increases.

Only in the 1980s did cable transform into something with a wide plethora of channels including pay TV options, with pay-per-view and DVRs following years later. Rules that once limited broadcast chains to a handful of stations now allow massive concentration of ownership with a predictable narrowing of perspectives.

Smaller players in the U.S. such as Cox Communications, Cablevision Systems, and Mediacom Communications are expected to grow in value as heavyweights such as Comcast and soon-to-merge Charter continue to gobble up rivals that allow them to expand their reach and engineer cost efficiencies. The traditional cable ecosystem is breaking up — for example, you can subscribe to HBO online without having to pay for cable, or pay for a smaller group of channels that you watch via a Sony PlayStation. And we can throw in Brangelina (Brad Pitt and Angelina Jolie) and Kimye (Kim Kardashian and Kanye West), not to mention the political granddaddy of them all, Billary (need I break this one out)? At the same time the Federal Energy Regulatory Commission turns a blind eye to records in its own files showing egregious price gouging by monopoly oil and gas pipelines. Drahi, the third-richest person in France, made his first move on May 20 when Altice, his Luxembourg-based holding company, agreed to acquire 70 percent of No. 7 U.S. cable operator Suddenlink Communications in a deal worth $9.1 billion.

The proposed Charter-Time Warner Cable merger might well spawn a furious parlor game of its own inside of the media world, even more than the late Comcast-Time Warner Cable proposed pairing. We clearly expect to be right in the middle of that consolidation.” Altice will look at assets that the combined TWC-Charter may decide to divest to alleviate antitrust concerns, Drahi told a hearing at France’s National Assembly on May 27.

That initial deal always seemed much more about the specific history and future direction of Comcast, and that company’s rare mix of content and pipeline, rather than signaling some more seismic shift in overall media industry size dynamics. Consumers benefited from the Cable Communications Policy Act of 1984 that required all areas, but the most rural places in the country, had cable infrastructure. As Adam Smith’s “The Wealth of Nations” taught us 239 years ago, “the freer and more general the competition” the greater the public benefits, while “to widen the market and to narrow the competition, is always the interest of the dealers.” Less competition means higher prices and vastly greater wealth for those who can exert oligopoly or monopoly control over an industry. But looking at a potential post-Charter-TWC world, the potential dance partners seem to be all around us, among both media platforms (including multi-system cable operators) and content providers.

Terry Koosed, president of Bel Air Internet, said residential customers should think of broadband as a data fire hose blasting into their neighborhood. And in general, Internet providers that offer fiber-based service had better scores than many cable companies, apparently due to faster speeds and better reliability. These companies then use their enhanced economic power to lobby and donate their way to government rules that ease their already modest tax burdens, drive down wages and further reduce consumer rights. But “Netflix’s role is definitely an important piece of the puzzle.” From Netflix’s point of view, the fact that its views have gained traction with regulators is merely a recognition that its corporate philosophy, which it says has always been to put consumer interests first, coincides with sound public policy.

So do other streaming services like Hulu and Amazon, as well as industry stalwarts like HBO and CBS that have started their own so-called over-the-top offerings. A bidding war over TWC is unlikely, as the Charter offer is seen as too high for Altice to beat, according to the people. “Drahi is an aggressive cost-cutter, and his presence forced Malone to move quicker,” says Matthew Harrigan, an analyst at Wunderlich Securities. “They wanted to lock this down.” Altice had financing from banks lined up for a TWC buyout, according to the people. So Totten may have had a faulty grasp on net neutrality when he complained to the FCC about not receiving the fastest speed available at the best possible price. The real challengers to the cable monopoly have been Verizon and AT&T, which through their respective TV and broadband offerings proved that consumers had an appetite for alternatives to incumbent cable providers and satellite TV operators, says Ireland. “Verizon and AT&T at least were dealing with existing subscriber bases in those wireline [operating] territories.” The barrier for entry into the cable market has remained high over the years, because new players must also wire 100 percent of a community, before trying to chip away at the established cable company’s market share. “Taking on the behemoth is a challenge to say the least,” says Kalb. “The bigger guy can fend off the competition by lowering the price and offering deals that the upstart can’t match.

Ultimately, Drahi decided not to rush into an acquisition because Altice didn’t immediately have the scope to manage and absorb the company, Drahi told the National Assembly. In the survey, 19 percent of those 45 and younger and 31 percent of those ages 26 to 35 now use a paid video streaming service, such as Amazon or Netflix, as their main means of watching video. It is especially good for John Malone, the controlling shareholder whose wealth has allowed him to become the largest private landowner in the United States. But Netflix, for better or worse, has become the symbol for net neutrality, which has become a key issue in how regulators analyze proposed cable and telecom mergers. Trying to beat Charter’s $195.71-a-share offer would require Altice to increase its leverage ratio significantly and engineer a large capital increase to fund the purchase, diluting Drahi’s stake in Altice, the people say.

The lower prices do tend to drive the small guy out of business or at least out of town.” Even the larger players have largely stayed out of each others’ backyards. Of course, government antitrust and communications policy is supposed to benefit consumers, not any individual company or group of companies. “It’s fair to say Netflix has gotten something of a free pass,” said Scott Hemphill, visiting professor of antitrust and intellectual property at New York University School of Law. “This open Internet principle that’s in ascendance is certainly good for Netflix. The company already had more than €24 billion ($26.1 billion) in net debt before the Suddenlink deal, which it will finance by borrowing $6.7 billion.

The only one I’m really nervous about is a group of National Cable Telecommunications Cooperative (NCTC) small cable operator members banding together. It’s harder to say it’s good for consumers.” A pivotal moment in the net neutrality struggle came last year when Netflix agreed to pay Comcast so-called interconnection fees, a deal that Netflix’s Mr. This is largely because these companies are facing competition not with one another but with telecos including newcomers like AT&T, Verizon and satellite providers who now provide cable offerings. “These companies are now vying for the Internet business, where there is overlap with other rivals,” adds Kalb. “The way that many younger people are watching TV is changing and that means the market has to evolve.

Hastings’s ire, Netflix also reached similar interconnection deals with every other major Internet service provider.) But securing payment from Netflix for fast and more reliable access may have been a Pyrrhic victory for Comcast and the other the broadband providers. Among the 42 percent who said they tried to negotiate a better deal, 45 percent reported that the provider dropped the bundle price by up to $50 per month, 30 percent got a new promotional rate, and 26 percent received additional premium channels.

And when perpetual rights are conveyed to private interests those fortunes are passed down to younger family members who owe their wealth to inheritance, not hard work or merit. The bigger threat is the Gang of Four as they are more vertically integrated.” Google has already been deploying its fiber optic service to select markets and given approval to do so in a way that lets them select what areas to connect and could be a real game changer for the industry. “Unlike build-out in the past that was required to pass all homes and not exclude certain areas due to various socio-economic factors, Google has been able to move forward with a ‘cherry-picking’ approach in which it builds only when there is a certain level of demand,” explains Ireland. “Perhaps with an easing of these types of requirements we may see more competition, but that competition will be likely centered in more affluent neighborhoods which will leave the ‘haves’ with more choices and the ‘have nots’ with the status quo.”

But when Netflix subscribers found their programs constantly interrupted for “buffering” (an interruption to download more data), the ability of Internet providers to play favorites seemed all too real. Four are inheritors, three of whom play no role in the business except collecting dividends, while one has a board position to watch over the family fortune. Drahi declined to comment. “What Altice has done over the past few years is quite remarkable,” says Yvan Desmedt, a partner at law firm Jones Day who has advised large companies in telecom deals. “But it’s one thing to move into the U.S. market and a different one to succeed in such a competitive landscape.”

In research for a forthcoming book on media concentration, Professor Eli Noam, Head of Columbia Business School’s Institute on Tele-Information, ranks the U.S. at the bottom of a list of 30 industrialized countries in media concentration, including platforms, content and cross-media. But Comcast has offered a different narrative, asserting that Cogent Communications, an intermediary that lacked adequate data capacity, caused Netflix’s problems. Audience fragmentation is accelerating – We are decades into the explosion of viewer choices in television as we moved from three (then four) broadcast networks to hundreds of cable networks, and years into the proliferation of digital video options, from video on demand to YouTube to an increasingly array of over-the-top video providers from Netflix to Amazon Prime to DISH Network’s Sling TV to HBO Now. One rule his company lobbied for required customers to pay his pipelines, in addition to monopoly profits, an extra 54 – 75 percent to cover corporate income taxes even though his pipelines were exempt. (Kinder Morgan changed its structure last year so it will no longer get to pocket the income taxes collected from customers. At some point, unless you control more media properties (or cable or satellite subscribers, in the case of local cable ad sales), you can’t deliver the scale that major national advertisers like P&G and Wal-Mart require.

It probably didn’t hurt Netflix’s case that just about everyone in Washington watches the hit Netflix series “House of Cards,” and Comcast is the dominant Internet provider there. Charter’s presentation for shareholders reveals it average customer pays $125 each month for services customers in countries with smarter infrastructure policies, like France, Japan and South Korea can purchase for about half as much. As Les Moonves said just yesterday, “the age of the 200 channel universe is slowly dying,” which of course is a lot easier to say from CBS’s place on the channel hierarchy. The fees Netflix so fiercely opposes are analogous to those found in many industries, such as credit cards, where both consumers and merchants pay the credit card companies. “It’s hard to say if these fees are good or bad for consumers,” Professor Hemphill said.

Beyond the celebrity name game, here are some of the names you may be accustomed to seeing on the rumor mill and/or deal front in the not-too-distant future: Cable operators: Cablevision, RCN, MediaCom, Suddenlink, Midcontent Cable, Wide Open West, Cable One, Armstrong, Harron, and a host of small NCTC members. But Netflix has aggressively pushed the argument that interconnection fees are different because the gatekeepers have too much power and an incentive to abuse it.

That is surprising given that America invented the Internet, which grew from a taxpayer-funded project to help scientists doing military research transfer files to each another. Even if Netflix doesn’t come out as forcefully against the merger as it did with the Comcast deal, its position will surely reverberate during the government’s review. Worse are unregulated monopolies, which abound now that government neglects its duty to act as a proxy for the competitive market by overseeing their prices and operations.

This week, Charter seemed already to be anticipating Netflix’s likely objections and pledged fealty to the notion of net neutrality. “We have no plans to block, throttle or engage in paid prioritization because our customers demand an open Internet,” Mr. Arguing the proposition that combining three of them into one is in consumers’ interest may be tough given that the Obama administration has publicly complained about the lack of broadband competition.

You can see the service model at work through municipal broadband in cities such as Lafayette, Louisiana, Chattanooga, Tennessee, and Glasgow, Kentucky. We should debate the proposed Charter deal to further concentrate ownership of access to the Internet not in terms of its shareholders or even the status quo, but in terms of how can Americans achieve the kind of low-cost, high-speed Internet that people take for granted from Seoul, South Korea, to Riga, Latvia. David Cay Johnston, an investigative reporter who won a Pulitzer Prize while at The New York Times, teaches business, tax and property law of the ancient world at the Syracuse University College of Law. He is the best-selling author of “Perfectly Legal,” “Free Lunch” and “The Fine Print” and editor of the new anthology “Divided: The Perils of Our Growing Inequality.”

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