Thursday, February 20, 2014

Comcast, Time Warner and the Myth of the Cable Industry

Last week Comcast (CMCSA) announced a $45 million dollar acquisition of Time Warner Cable (TWC).   The announcement sent shock waves through financial markets and raised numerous questions.    

For companies that compete in the same market, there are obvious concerns about future strategies.  Charter Communications (CHTR) for example, wanted to buy Time Warner and bid low.  There is some speculation that they would attempt to revise their bid, but it is not clear that Charter could (or would choose to) handle the increased debt that would come with such a revision. 

Other companies that compete in the same space (note I didn't say 'Cable Industry') have to wonder if further consolidations help them achieve their own potential.  Some have suggested CableVision could be a target or even that privately held firms like Cox Communications would be involved in acquisitions.

As investors, we also wonder about the market reactions to rivals of targeted companies and what it means for future acquisitions.  In our research, when a bid like this occurs, the prices of target firms react in direct proportion to the probability that they will become targets themselves. (See Abnormal Returns to Rivals of Acquisition Targets.)  

There has also been much talk about the regulatory issues such a combination would raise.  For regulators the concerns will be whether the merger is a restraint of competition resulting in predatory pricing of consumers.  We have noted in a previous post that one of the main tools for such an analysis is the Hirfindahl Index or the related Concentration Ratio. (See Concentration Ratios: The Case of Anheuser Busch and Modelo.)  

But in that post, we also note that to create a measure of concentration in an industry, one must first define the industry.  And that brings us to the myth of the cable industry.  In a very interesting article entitled, The Comcast-Time Warner Merger Is Not a Sign of Strength, Larry Downes makes a convincing argument that fears of market dominance here are overrated.  To quote, 

"There is no cable industry.  Cable is just a technology, increasingly one of many, for transmitting information, whether video, voice or data.

Where cable was once the only technology used to distribute television programming—a vast improvement in speed, quality, and quantity over antennas—it now competes with fiber, copper, satellite, and mobile broadband, each with their own pluses and minuses, and each promoted by companies large and small, who together continue to spend heavily to upgrade their assets."

Indeed, the story is so much more than a merger of cable companies, even well known companies.  It is another event in the evolving battle for the vast market for entertainment.

Stay tuned.


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