Two weeks ago, an appeals court shot down an FCC rule that had prevented any single cable company from controlling more than 30 percent of U.S. TV subscriptions. While a few reports noted then that the decision could spur consolidation in the cable industry, the discussion didn’t gain much traction until this week, when a Citigroup analyst argued in favor of a merger between Comcast (s cmcsa) and Time Warner Cable (s twc). But there was also this comment from Steve Burke, Comcast’s chief operating officer, who after noting that while the company might make a modest acquisition at the right price, said, “We don’t wake up every day saying, how do we get bigger in cable?”
Right. And drug addicts don’t wake up every morning saying, “How do I get a fix?” After all, what company wouldn’t want more revenue, or a bigger market share? It was in Comcast’s interest to fight this case to an appeals court, just as it’s in its interest to dampen speculation of any pending deal, which could spark a rally in the companies’ shares and as such, make a tie-up that much more expensive. But in the end, Comcast, as well as other pay-TV companies that might see the ruling as a green light for acquisitions, may not be helped by being bigger. Broadband cable and satellite companies are already facing competition from the web as more video content, and more eyeballs, migrate there.
The appeals court said that, because of new offerings from the likes of DirectTV (s dtv) Verizon (s vz) and AT&T (s t), cable operators “no longer have the bottleneck power over programming that concerned the Congress in 1992.” That concern, of course, helped pass the the Telecom Act of 1996, which aimed to deregulate the industry and foster competition, but in the end drew charges that it just created a bottleneck power over programming that’s still in place today.
Some analysts believe a big merger of pay-TV companies would still be unlikely, because the FCC may appeal to the Supreme Court or because regulators could still block a deal on antitrust concerns. But Citigroup’s Jason Bazinet said the regulatory barriers would be low even for Comcast and Time Warner since the two companies control only 37 percent of the market — big enough to provide $12 billion in cost benefits, but small enough to avoid a monopoly.
Still, a big merger could spur others in the industry. The Journal pointed out:
The ruling not only said cableco’s could buy other cableco’s. But that any TV subscription company could buy another. ATT could buy Time Warner Cable. DirectTV could merge with Comcast, and the two could buy Charter or Cox.
What would a wave of mergers in the pay-TV industry look like? If past is prologue, less competition in the industry would lead to higher rates. That in turn could spur even more subscribers to seek out video entertainment on the web. Many onetime cable subscribers, including me, have canceled their accounts after finding access to beloved content like baseball games and movies on MLB.com, Netflix (s nflx) Watch Now and iTunes (s aapl).
There will always be subscribers to good TV content. But in time, fewer will be subscribing through the cable/satellite companies of today. As tempting as mega-mergers may be to those companies right now, they may only speed up their irrelevance.