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Summary:

Comcast is acquiring its nearest cable competitor, Time Warner Cable, for $45 billion. While it might seem like the deal is about video, our math says it is all about broadband. And it always has been.

Brian Roberts Comcast
photo: Comcast

If it is allowed to gobble up its number two rival, Time Warner Cable, Philadelphia-based Comcast will become the largest broadband provider in the United States, and perhaps the largest outside China. The two companies together will control about half of what is called triple-play services — video, voice and internet — in the U.S. The two companies together would have about 33 million broadband connections that brought in about $18 billion in broadband revenue during 2013.

Back in November 2013, my colleague Stacey Higginbotham laid out a persuasive argument about why the cable consolidation is all about broadband. She wrote:

So the cable industry, if it can consolidate, gets access to the most important pipe coming into people’s homes (after power and water) and the fewer cable companies there are, the more unified the rate structure might appear. So today Comcast has a cap, but Time Warner Cable doesn’t. However, if Time Warner Cable gets bought by Comcast or Charter, both of which have caps, that unlimited broadband from TWC goes by the wayside. But consolidation in cable is going to take a lot of creativity, as the regulatory environment is unclear.

And when you start to peel the onion and start looking at their average monthly revenues of the combined companies, you start to see why the game is all about broadband. According to UBS estimates, the combined company could see its consumer data-only revenues go from $17 billion at end of 2013 to about $23 billion by end of 2018. Voice revenues go from about $6 billion at the end of 2013 to $6.6 billion at end of 2018.

In comparison, video revenues would go from estimated $31 billion at end of 2013 to $34 billion at the end of 2018, according to UBS estimates. The cost of video programming for combined companies were estimated to be around $14 billion at the end of 2013 and will increase to $19 billion by 2018, according to UBS estimates.

At end of 2013, Comcast’s estimated average revenue per user (ARPU) of around $151.30 a month, while Time Warner Cable’s ARPU was around $148.70 a month, according to UBS. The video-only ARPU per month was roughly $78 a month (give or take a dollar). Of the $78 a month in monthly video ARPU, Comcast and Time Warner Cable spent roughly $35 a month on video programming per month per average subscriber, which means that they were making $43 a month per subscriber from their video business. Both companies have a gross margin on the video business of roughly around 55 percent.

Compare that with the internet/broadband business. Of the total, the two companies had data-only revenues of roughly around $43 a month. Add to that number the voice telephony revenues and you start to see that cable business is less about cable and more about broadband. Comcast made about $29 a month from its voice business and Time Warner Cable made about $40 a month from its voice telephony business. Voice also has very high gross margins – about 91 percent for Comcast and 82 percent for Time Warner Cable.

Comcast

You can see broadband is not only a much faster growing business, it also has higher gross margins and comes with much fewer headaches — such as paying through the nose for programming. Broadband also comes with one more thing — a virtual monopoly.

Back in July 2013, I wrote a post about the increased M&A activity in cable land. I explained the reasons for the frenzy:

The future isn’t about linear, old-styled video. Instead, it is about broadband and broadband-enabled video. The cable companies — at least in the U.S. — have the fastest pipes into majority of homes. They are faster than phone companies and have a deeper footprint. The new technologies are ensuring that they can keep increasing the speed

Netflix, Hulu and YouTube are programming our video watching behavior — any amount of video, anytime, anywhere on any screen, as long as there is broadband. The more we watch internet video, more bandwidth we need. The fact, that cable companies (big and small) have already started to meter broadband and are putting limits on the networks; we are only on the cusp of seeing a big inflation in internet access costs.

Why? Because cable companies are virtual monopolies.

The excerpt of this story was updated Thursday morning with the acquisition price.

  1. Except wired broadband is at it’s peak and if they don’t get into mobile they will start to bleed customers once one of the 4 major carriers decides to go after the market.
    The fact that their product is horrible will only make things worse. Low speeds, insane pricing and data caps might work when there is no competition or regulators but ,with a bit of luck, that won’t last.

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    1. I would get into the cable business tomorrow if it weren’t such a heavily regulated industry.

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      1. Oh right. Like the cable companies don’t do whatever they want. Like have people like you shill for them on blogs.
        Tell me, exactly how would you “get into” the cable industry?

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  2. You mentioned the margins for voice (91%) and video (55%), but what are the margins on data? I assume they are high as well?

    “You can see broadband is not only a much faster growing business, it also has higher gross margins” – Not sure I see that unless I’m missing where you mentioned the margins of data-only

    Also, even though broadband is growing faster, video is still a larger revenue generator than data, even in 2018.

    You made the point of adding voice to the data number to show that the revenue figures are similar, but then you lose your argument about growth. The combined video+data ’15-’18 CAGR is only 3% vs. the video CAGR of 2% over the same period

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    1. They never ever make that data available, Adam Kessler. :-)

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  3. FCC is a pawn and Comcast is evil.

    Battle at the highest levels of telecom/broadband/TV is the battle over radio spectrum.

    FCC too much of a political football for it to change at the federal level but I vote to tax the unproductive use of allocated spectrum at 1000% its market value. Unproductive = no use or city council-esque TV and radio.

    Small TV stations, radio stations, etc. shouldn’t have control of the spectrum.

    Let innovator’s take control (buy) of it.

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  4. Om – good analysis, but I don’t see it quite as black and white that this is all about broadband. Comcast just came off its first quarterly gain in video subscribers in 6+ years, and knows how much X1 and its other product innovations contributed. With pay-TV a mature business, Comcast is betting it can actually steal back some share from telcos and satellite operators which have been tough competitors over the past 10 years. Comcast is blurring the distinctions between TV and online video in many ways. With TWC subs, Comcast gets many millions more addressable homes to make the case to, especially in NYC area where Verizon has been super tough on TWC.

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  5. This is where the technology is going. Broadband TV. Internet connections are central to powering households now from security cameras and TV viewing to smartphone remote apps.

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  6. Yes I am reading about TV but you are right it is about broadband. Living in area without the luxury of broadband I am not sure it matters to me but I can see in the future peoples rates going up. They are already too expensive right now. I wonder if there is a point to were people cannot afford or will not pay for the cable.

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  7. I posted it on fb for you OM. Thanks for the data.

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  8. I worked at AOL when Time Warner bought them. It was all about broadband way back then, too. AOL had a year or so before that time begun their own DSL services (I was on the first support team for it). The merger was a horrible move for both companies (AOL was already starting to die, but the merger was like a lethal injection to a patient with a the beginning stages of cancer). This made AOL Time Warner into a monopoly that was unmanageable. I can’t see this merger being any better.

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  9. Big brother has stepped in and secretly inserted itself into your home once again. Sad, that China is most likely the real owners over everything as it is now. I bet if someone did the research, Facebook will be part of this somehow.

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  10. If you have ever spent time or lived in other countries… even ones that are considered very “backward” by us, you would know that the services we pay up the nose for are basically free everywhere else. The reason is simply competition and it is very cheap and so stupidly easy to subsidize. Only we idiot Americans would bend over for this sort of complete nonsense at the hands of our “greased;palm” special interest elected officials. Try going over seas even to very poor countries and be amazed!

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