As usual all the important events happen the day after we go to press, but that’s alright, it gives us a week to think about just what the merger of Comcast and NBC interests will mean to the market.
First the deal. Comcast gets 51% control of a business which it says is valued at $30 billion, but we’ll see after the US stock market has finished playing with it. Comcast says that its contribution was $7.25 billion in assets including the Golf Channel and E! Channel, and a further $6.5 billion in cash to NBC’s previous owner, GE. NBC Universal was valued at $30 billion, but carried $9.1 billion in net debt, including cable channels, films, TV series and theme parks. Before all that happens, GE will buy out the Vivendi shareholding in NBC Universal in two chunks, and end up with a net $8 billion cash upside on the deal made up of the $6.5 billion and the proceeds from a debt offering.
The laughable statement at the top of the press release about the deal increasing customer choice, as if that was a benefit anyone ever considered, is a bit like saying that the domination of Microsoft products on the PC has increased customer choice. The opposite is clearly true, but that’s not really the shareholder’s worry.
The statement about Comcast and NBCU being able to lead the next phase of the media industry’s evolution is equally noxious. Take one conservative studio, merge it with an MSO that believes not in innovation but in financial muscle and tight management, and what do you get? Well it certainly isn’t a player that can lead the industry, at least not in the sense of show us where the future is. It might be able to lead in terms of showing us how to run a major vertical conglomerate for maximum profit, but these are two different things.
What we have is one of the four major US free to air broadcast services, already merged with a major studio, with dominant cable network channels and some of the hottest and most recognizable TV series, which is now joining with the largest cable operator (therefore pay TV service) in the US.
Okay, that’s the deal, now what about regulator clearances, something that lots of press coverage have predicted will be tough to gain. There are calls for the merged entity to sell its 27 owned and operated TV stations, there are calls for commitments towards supporting net neutrality, there are calls for mandating NBC programming to continue to be made available at fair, reasonable non-discriminatory prices, there are calls for limitations on triple play broadband pricing and for ‘a la carte’ pricing on cable channels. Finally there are calls to stop any version of TV Everywhere – free content over internet connections for cable subscribers ‘ being given any priority over other rival TV services on Comcast’s broadband.
So what’s the chances of any of that happening for real? Well pretty much none of it actually.
If we look at News Corp, at one stage it owned 20th Century Fox, Fox broadcasting, DirecTV and leading online sites like MySpace and IGN. Although that’s no longer true, since it sold off DirecTV that means there was a merger of Pay TV, free to air broadcasting and content, in exactly the same way that Comcast is proposing.
If we look at Viacom, then about four years ago it owned Blockbuster and CBS, and Paramount, so was a strong content company, with a huge retail footprint and a channel to market for content in Blockbuster, as well as one of the largest block of radio stations in the US, and a national broadcast TV network. Very similar.
What makes some difference is that Comcast holds a strong market share in broadband, but it’s nothing like dominant. Comcast has 15.6 million broadband customers, while there are roughly 79 million broadband lines in the US ‘ so it has just under 20% of the market, hardly constituting dominance. But will it make a difference?
Time Warner, before spinning out Time Warner Cable, also had vast content holdings, a leading online supplier, a large Pay TV operation, broadband supply, cable networks, and newspapers and magazines. But it does not have an appreciable Broadcasting operation. The fourth US wide broadcast network is ABC, part of Disney.
So there CAN be an argument from the FCC that there is too much vertical integration and that the merged entity is in four key areas ‘ content, broadcasting, broadband and Pay TV ‘ not three, as all preceding monster US media organizations have been (there’s also Liberty which has pay TV in the form of DirecTV, all types of content, but no broadcast assets and all of its cable operations overseas in a sister company).
But that final dimension of broadband is not dominant, and goes up against a whole different set of rivals, not only the incumbent Telcos, led by AT&T, which also compete on voice, mobile voice and pay TV directly with Comcast, and also a whole swathe of businesses likely to be newly created by the broadband stimulus package, once it is allocated.
In these other asset combinations there have been two overriding FCC concerns, that content cannot be offered exclusively to one internal Pay TV service, and that fresh and local TV channels from smaller companies, get just as much chance to be carried on pay TV services as any other channel. These rules will continue for the new Comcast joint venture, but are already signed up to by Comcast, so there’s no anticipated change there.
Net Neutrality is already enshrined in FCC statements as sacrosanct, although not with a rock solid legal mandate, and Comcast has, not once, but twice, been forced to back down on this issue, firstly when blocking VoIP services and secondly when blocking or slowing Bittorrent delivery. Each time the FCC has managed to steer Comcast into an acceptable path. So that is unlikely to change.
‘A la carte’ channel selection has never been ordered by the FCC and its official view when it last visited this issue was that it would cost too much for the average cable subscription if people had to buy individual TV channels ‘ a conclusion only possible to reach if the FCC allowed cable operators to charge much more for each channel. While the new FCC commissioners might never reach this same conclusion again, if it chooses to visit this area (consumers wish it would) it cannot only pronounce a decision against a new Comcast controlled NBCU, it would have to come out in favor of change for the entire US pay TV industry.
Content companies in the US, and elsewhere, force Pay TV operators to offer all their channels equally, if they want to buy their leading channels, and NBC is no different here from all the others. So WILL NBC continue to make Comcast take all of its cable network channels? Of course, but that doesn’t constitute a change for the consumer, so it’s no problem.
So the FCC has little here to complain about. There may be some technical issues which the Justice Department or the Federal Trade Commission, but we have to ask whether the merged business will be breaking any existing laws, which it is not in breach of already? This would be things like anti-trust or exerting too much media influence over too large a percentage of the US public, and whether or not a new monopoly is being created by the merger, and the answer of course is no to all these questions.
The only issue here then is the future. If Comcast plans to bundle its content with its broadband lines ‘ and that comes down to the exact nature of TV Everywhere terms and conditions, then it might preserve its pay TV and broadband business beyond their natural life. We have long maintained that TV Everywhere is NOT an innovative new internet business model, it is in fact the opposite, a way of maintaining OLD established networks and business relationships in the face of the internet.
To attack TV Everywhere may become the FCC’s role but it would have to attack the underlying concept of bundling. Should a TV service be cheaper if you also take a broadband line from the same company? Is this cross service subsidy and is it legal? Should an internet service be free to a community which is paying to support a different access infrastructure. The FCC has to answer these questions anyway, and the truth is that right now there is not a single lobby group that would be pushing that agenda. The Telcos, cable MSOs, studios and others have already established that this type of bundling is accepted in the US and the FCC really has its mandate clear, that it has to maintain the spirit of competition between the groups which offer bundles, not stop them from offering bundles at all.
It is far more worrying to the FCC and the US man in the street that cellular services are now dominated by two companies, instead of the five or six which were rivals four years ago. And this means the FCC must remain vigilant and embark on rule making which maintain a strong Sprint or T-Mobile (for instance blocking any more cellular mergers for Verizon and AT&T), and creating conditions which will allow Clearwire to flourish, so that it can partner with cablecos to create quad plays which can hold the RBOCs at bay.
So although this deal will take a long time to complete, and the effects on competitors will take at least two years to be felt, we feel that the great bulk of this merged entity will survive the regulatory hurdles, without any undue encumbrance being placed on it.
When the FCC grasps any thistles which such an alliance throws up, it will have to grasp it for the entire market in one go, or hear Comcast cry foul and reach for the courts for a remedy.