Yes, it’s true: Comcast’s (s CMCSK) plans to buy Time Warner Cable (s TWC) for $45 billion are all about broadband, at least when it comes to Comcast’s bottom line. But that doesn’t mean the move won’t have a lasting impact on the TV business. That’s because the acquisition will put huge pressure on some of the other pay TV providers. It could force them to go over the top and launch online TV services, or even go nuclear and embrace an Aereo-style solution.
The largest R&D team in the industry
The TV market is a funny one, in part because cable companies don’t directly compete with each other. Comcast is available in different markets than Time Warner Cable, and even the companies’ combined footprint of around 33 million TV subscribers is no direct threat to Cox, Charter or Cablevision. (S CVC)
However, the same isn’t true for TV services offered by AT&T, (S ATT) Verizon, (S VZ) Dish (S DISH) and DirecTV. (S DTV) All of those companies have been directly competing against Comcast and Time Warner Cable, and that competition is about to become a lot more fierce. That’s not just because a combined cable giant would be that much more powerful with regards to marketing and pricing, but also because the country’s second-largest cable provider would get a technology power boost that would force its competitors to up their game.
A few weeks back, I argued that Verizon’s purchase of Intel Media’s assets was all about Comcast and the technology it’s been developing for its TV products:
“The cable giant is one of the few pay TV operators with extensive R&D efforts, capable of building and deploying next-generation TV products. Comcast is working on a cloud DVR, is getting ready to roll out its next-generation X2 set-top box and has a number of other products in the making that are far ahead of any of its competitors. Here’s how an industry insider who has had a look at some of Comcast’s roadmap recently described it to me: ‘They seem quite dedicated to building products and defining the future of TV rather than (staying) the course.’”
Now, the company with the largest R&D team in the industry is set to serve a third of all pay TV subscribers in the U.S. And, as Om reminded us, Comcast has a cash cow in its broadband business, with profit margins of around 90 percent. Dish and DirecTV don’t have that, and instead rely solely on TV. AT&T has broadband, but is looking to TV to grow its revenue per subscriber and keep people from ditching their landlines. And Verizon only has a limited broadband footprint, and no real desire to sink more money into growing FiOS.
Over-the-top, or over the air?
So what is the competition to do? Verizon already gave us an idea of its plans when it purchased Intel Media. The purchase sets the company up to launch an over-the-top TV service — a cable competitor that streams all of its programming online, which would enable the company to one day compete across the entire U.S.
There are some indications that Dish is contemplating doing the same. The company already has its own niche over-the-top TV service with DishWorld, which focuses on foreign live TV programming geared toward expats. Niche markets can be good business, but DishWorld has also been a testbed for Dish to try things that it may one day offer to domestic customers who can’t or don’t want to install satellite dishes on their buildings.
And there is one more wild card out there: Aereo, whose unique take on TV streaming will get its day in front of the Supreme Court soon. Aereo’s service is interesting to TV providers because the company doesn’t pay any fees to broadcasters, budging a trend of ever-increasing retransmission fees. AT&T and others have in the past expressed interest in cooperating with or possibly even buying Aereo.
Common wisdom in the industry has been that the interest in Aereo was just a negotiating tactic in the fight about ever-increasing fees operators have to pay to carry TV networks. But with Comcast buying Time Warner Cable, the power dynamics of the TV market are fundamentally changing — and Aereo may suddenly look like a feasible option to a competitor like AT&T.
In many ways, all options are on the table now, and the transition from a traditional TV business to one that’s based on over-the-top streaming or even innovative takes on over-the-air broadcast may happen sooner than we thought.