Could this be Comcast’s next target?

As Wall Street continues contemplating mom and dad at the FCC and Department of Justice calling off Comcast’s elopement with Time Warner Cable, some analysts believe Comcast will have to spend the money now burning a hole in its pocket on something.

“Given the strength of Comcast’s balance sheet and an insatiable appetite for acquisitions, we do not believe Comcast would be content with its existing portfolio (no different than after they failed in their 2004 attempt to buy Disney),” wrote Richard Greenfield from BTIG Research.

Greenfield has grown increasingly pessimistic about the Comcast-Time Warner Cable deal since realizing regulators were not going to follow the usual procedure of rubber-stamping approval with mild, short-term conditions to appease politicians. As President Barack Obama highlights telecommunications public policy in his second term, the cable industry (and broadband in particular) has come under unprecedented scrutiny and visibility in the press.

This winter, the FCC redefined broadband speed to mean a connection offering at least 25Mbps. That virtually eliminates DSL as a meaningful competitor, and would hand a combined Comcast/Time Warner Cable over 55% of broadband homes in the United States. The FCC’s approval of Net Neutrality and regulating broadband as a public utility led the audience in attendance to give a standing ovation to Chairman Thomas Wheeler and the two Democratic commissioners voting in favor of the policy change. The public sentiment is clearly against industry deregulation and unfettered deal-making, particularly when it involves Comcast, one of the most-loathed corporations in America.

Greenfield

Greenfield notes momentum is on the side of consumer groups fighting for Net Neutrality, oversight, and an end to cable industry consolidation.

Assuming Comcast’s deal with Time Warner Cable fails, what can Comcast spend its money on without running into a regulator buzzsaw?

Comcast could easily continue a mergers and acquisitions strategy if it avoids attempting to dramatically increase its cable footprint. For instance, Comcast could still choose to sell some of its less important cable systems to Charter Communications — already part of the proposed Time Warner Cable transaction — and make up that subscriber loss by acquiring Cablevision, which provides service in the important suburban New York City market. Of course, the Dolan family is notorious for not selling to anyone, and a considerable number of extended family members are employed as executives in the company.

Cable operators have returned to a strategy of hedging their content costs by spending billions to acquire content producers and sports teams in hopes of moderating their price demands. In the 1980s and early 1990s, large cable operators insisted on owning a piece of nearly every cable network shown on their systems. Today, having an ownership stake in the cable networks one negotiates with at contract renewal time is a helpful advantage.

Comcast has several attractive acquisition targets Greenfield believes it can consider:

• Time Warner (Entertainment): Not affiliated with Time Warner Cable, owning Time Warner (Entertainment) would gain Comcast important cable networks like TNT, HBO, and the Warner Bros. studio.
• Netflix: Acquiring one of the best assets cord cutters have might prove difficult with regulators in Washington, but buying the ultimate TV Everywhere experience could deliver a digital platform that puts Comcast’s own online content portal to shame. The deal would also come with the talent that made Netflix an international success. If Comcast were to acquire Netflix, it would combine a superior streaming platform with an enormous content library.
• Acquire online video content sites and producers: Linear live television continues to be challenged by an array of on-demand content and video clips from various websites like Vice — videos that could be further monetized by matching Comcast’s advertising sales team with online media.
• Next generation online video set-top box manufacturers: The traditional cable box is dead to a lot of subscribers who prefer the simplicity (and price) of Roku and other similar alternatives. Current cable boxes are huge, expensive, and simply lack the creative imagination of the competition. If Comcast can’t beat Roku, it could buy it.
• Buy Sprint or T-Mobile: Greenfield believes Comcast lacks a wireless component in its product lineup as consumers increasingly move towards portable devices. Comcast would be financially foolish to build a network from the ground up, so acquiring an existing one makes more sense. AT&T and Verizon Wireless are likely out of reach, but Sprint and T-Mobile are not. Both carriers’ parent companies seem ready to sell, if the price is right. Of the two, Sprint might be willing to sell first. Sprint’s owner — Japan’s Softbank — has discovered the United States is a huge country that can swallow up endless amounts of investment and still leave it saddled with a second-rate network.

Greenfield is only speculating and there are no indications Comcast is seriously considering a next move should the Time Warner Cable deal be killed in Washington. But it does signal Wall Street does expect Comcast to do something.

“We did try, but it’s over now.” — Barry Diller, a major investor in Aereo

The multibillion dollar broadcasting conglomerates that control over-the-air television and most cable networks got everything they wanted today from a 6-3 decision in the U.S. Supreme Court that declared Aereo, an independent provider of online over-the-air television streams, illegal.

The court’s liberal justices joined Chief Justice John Roberts and moderate Anthony Kennedy in a complete repudiation of the legality of Aereo’s business model — selling over the air television signals received by individual tiny antennas and streamed over the Internet — without seeking permission from the stations involved. In a sweeping ruling, the court found that no matter the technology involved, any effort to resell access or copies of television programs without the permission of the copyright holders is illegal. “We conclude that Aereo is not just an equipment supplier,” Justice Breyer wrote in the opinion. “We do not see how the fact that Aereo transmits via personal copies of programs could make a difference.”

Aereo CEO and founder Chet Kanojia quickly released a statement declaring the decision “a massive setback for the American consumer.”

“We’ve said all along that we worked diligently to create a technology that complies with the law, but today’s decision clearly states that how the technology works does not matter. This sends a chilling message to the technology industry,” Kanojia said. “We are disappointed in the outcome, but our work is not done. We will continue to fight for our consumers and fight to create innovative technologies that have a meaningful and positive impact on our world.”

That is news to Barry Diller, perhaps Aereo’s biggest investor. He has said for months if Aereo loses in the Supreme Court, the service will be shut down. He repeated that today on CNBC.

“We did try, but it’s over now.” Diller said.

Image: Wall Street Journal

Reed Hundt, former FCC chairman under the Clinton Administration, said despite the fact the ruling may inconvenience Aereo subscribers, the court wasn’t wrong in its decision.

“Aereo has very little chance surviving in the business and Barry Diller got his hands caught in the regulatory cookie jar,” Hundt said. “You can’t use technological tricks to bypass [cable network] rules and regulations. I think that’s a very reasonable decision.”

Observers worried about the impact the Aereo case might have on ancillary services unintentionally caught up in any broad legal language, but the court appeared to carefully avoid those complications.

The ruling leaves antenna manufacturers unaffected because antenna users simply capture over-the-air signals for reception in the home without paying the kind of ongoing subscription fees Aereo charged its customers.

The decision also protects the legality of cloud computing, DVR recordings, and other new technologies not directly related to the lawsuit. “We agree with the Solicitor General that “[q]uestions involving cloud computing, [remote storage] DVRs, and other novel issues not before the Court, as to which ‘Congress has not plainly marked [the] course,’ should await a case in which they are squarely presented,” Breyer wrote.

The court’s liberal wing shared Breyer’s opinion. Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan all voted in favor of broadcasters including Walt Disney (ABC), Comcast (NBC), CBS Corp., and FOX.

Conservatives slammed the majority ruling against Aereo, claiming the court was bending over backwards for Hollywood and giant broadcasting conglomerates. Justice Antonin Scalia’s dissent ripped the majority’s ruling, claiming it would “sow confusion for years to come.” Scalia predicts there will be plenty of new litigation before the courts on issues related to online transmission of copyright works as a result of today’s decision.

Although Aereo was still pre-registering customers as of this afternoon, that isn’t likely to stay true for much longer. Aereo’s only bid to stay alive is to seek licensing agreements with the stations it distributes over its service. With broadcasters’ strengthened hand, it is unlikely they will be receptive to pricing agreements that would allow Aereo to continue providing service for $8 a month. Major cable and satellite operators are signing retransmission consent agreements with volume discounts that run above $1 a month per subscriber for each television station in a local area. In most cities, that would amount to at least $5 a month, but Aereo will likely face even higher costs because it lacks access to discounts.

[flv]http://www.phillipdampier.com/video/CNN Supreme Court rules against Aereo 6-25-14.mp4[/flv]

CNN attempts to explain the meaning of the Aereo case to its less-informed viewers with mixed success. But the story explains why this is relevant to cord cutters. (4:41)

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Bloomberg News reports the Aereo case was a decisive victory for programmers who now have a strengthened hand asking for more compensation during retransmission consent negotiations with cable and satellite providers. (1:55)

[flv]http://www.phillipdampier.com/video/Bloomberg Aereo Ruling Gets Positive Response from Broadcasters 6-25-14.flv[/flv]

Broadcasters called today’s victory “pro-consumer” but that is open to debate. Bloomberg News digs deeper into what this case means for DVR and cloud storage services as well. (5:26)

[flv]http://www.phillipdampier.com/video/Bloomberg Aereo Violating Broadcaster Copyrights Stocks Up 6-25-14.flv[/flv]

Wall Street is rewarding big television networks and station owner groups with higher stock prices after winning a decisive victory against Aereo, Bloomberg reports. (2:35)

For years, cable operators have denied they have a problem.

But new evidence suggests Americans are cutting back on their cable television habit as prices continue to rise and alternatives become available.

One of the worst affected by cable cord cutters is Time Warner Cable, which has been consistently losing video customers month after month since 2009:

Disputes with programmers and competition from satellite and telephone companies may not be enough to explain away the trend of subscriber losses. It also does not explain why Americans under 35 are increasingly unlikely to sign up for cable television at all.

Cable cord cutting — fact or fiction?

Nonsense, replies Bloomberg opinion columnist Matthew C. Klein:

It is tempting to think that the declining number of subscribers at the U.S.’s biggest cable-television companies is a symptom of the industry’s malaise as it slowly slides into obsolescence. Don’t buy it. The losses are accounted for in the gains by smaller and nimbler rivals.

[…] The customers who have been abandoning Comcast and Time Warner Cable in droves haven’t given up on paid TV content, however. Focusing on the travails of the biggest cable companies obscures the reality that, according to Bloomberg Industries, the total number of pay-TV subscribers is slightly higher now than it was at the end of 2008 and that there were probably more people paying for television subscriptions at the end of 2013 than at the end of 2012.

To the extent that individual company results tell us anything, it could be about where Americans are moving, or the relative quality of service offered by the various companies. In the 12 months ended Dec. 31, AT&T Inc. added 924,000 subscribers to its U-verse TV service, while Verizon Communications Inc. added 536,000 subscribers to its FiOS TV service. Since the end of 2008, the two companies best known for their wireless services have added about 8 million pay-TV subscribers — far more than Time Warner Cable and Comcast have lost.

Klein’s views mirror those of many cable industry executives who blame the economy for deteriorating cable television subscriber numbers. Many suggest multi-generational households are responsible — stay at home kids and older parents are sharing a single cable television subscription. Others claim discretionary income is squeezing some to downgrade, but not cancel, cable television service.

Klein’s accounting does not tell the entire story. Competition from telephone companies, especially AT&T’s U-verse, is not as pervasive against Time Warner Cable and Comcast as Klein suggests. In fact, Charter Communications is among the cable companies facing the biggest onslaught of competition from AT&T. U-verse has picked up many of its newest subscribers not because of a sudden urge to switch, but rather because the service has only just become available in several new markets as a result of AT&T’s expansion effort. Verizon FiOS is still slowly expanding within its current franchise areas as well. Neither Comcast or Time Warner Cable consider either service much of a serious competitive threat.

AT&T U-verse, the larger of the two telephone company services, has a TV penetration rate of just 21 percent of customer locations. FiOS, which serves a smaller customer base, has a 35 percent penetration rate for television. Cable remains dominant for now, even as it loses subscribers and market share.

Another way to measure cord cutting is to look at the subscriber numbers of major basic cable networks that are most likely to be a part of any channel lineup. ESPN, for example, lost around 1.5 million subscribers between September 2011 and September 2013. Most of that loss came from cord cutting or downgrades to tiers like “Broadcast Basic,” consisting mostly of local television stations. ESPN’s numbers include all pay television platforms — satellite, telco TV, and cable.

In spite of the subscriber losses, cable industry profits remain healthy. Revenue growth these days comes from broadband service and rate increases.

Comcast rates are going up again this fall in the Pacific Northwest, now exceeding $70 a month.

At least 600,000 cable customers in Oregon and southwestern Washington will pay 4.4 percent more for 100-channel television service beginning this October, raising the cost of Standard basic cable to $70.49 a month.

Despite threats of cord cutting, customers in the Pacific Northwest have remained loyal to the idea of paying for television, according to Fred Christ, policy director for the Metropolitan Area Cable Commission in Washington County.

“Subscriber numbers remain steady,” Christ told The Oregonian. “People still don’t see an easy alternative to Comcast, Frontier (FiOS TV), or the satellite providers, all of which cause more or less the same amount of pain.”

The newspaper notes sports programming may not be the cause of this year’s rate increase.

The cost of Comcast’s discounted “Digital Economy” cable package, which excludes most expensive sports networks, is rising at nearly double the rate of Standard Cable, up 8.6 percent this fall to $37.95 a month.

For those who cannot afford traditional Standard cable television, Comcast’s limited basic service, which primarily consists of local TV channels, runs $12-22 a month depending on the customer’s location. It also increased in price by about $1.30 a month in August.

Comcast may not mind cord cutters too much, because it reaps significant profits from the broadband service that powers online viewing. Comcast raised speeds from 15 to 20Mbps last spring along with the price. The popular “Performance” tier now costs $53.95 a month.

Comcast is testing the reintroduction of usage caps in a handful of service areas, typically providing up to 300GB of usage per month before overlimit fees kick in. But those Internet usage limits do not yet apply in the Pacific Northwest.

Comcast blamed the rate increases on network enhancement investments including faster Internet speeds, more multi platform video and better customer service. Comcast is currently introducing its new X1 cable box that makes finding programming easier.

Customers can avoid the worst of the price increases by choosing a bundled service package, which will see a lower rate increase. Current customers can also call Comcast to negotiate a better deal by threatening to cancel service.

Pay television providers forced Al Jazeera to remove or block its online video content from American viewers in return for launching its new news channel on cable systems this week.

The Qatar-based news network had maintained a loyal, but small online audience for its English language news programming, using video streaming to reach American audiences that could not watch on cable or telco-TV.

For Time Warner Cable and AT&T U-verse customers, neither of which carry the new Al Jazeera America network, the move effectively cuts off viewing of the news channel’s English language programming.

The removal of Al Jazeera video content began with the termination of its live global English language stream within the United States. That was followed by blocking the network’s video clips on YouTube. The only way for viewers to watch the network now is by paying a cable, telephone, or satellite operator, assuming they are willing to carry it.

AT&T U-verse suddenly dropped predecessor Current TV just hours before Al Jazeera America was scheduled to launch in its place. The loss of five million potential viewers came as a complete surprise, culminating in a lawsuit filed against AT&T for violating its contract.

“Unfortunately, AT&T’s decision to unilaterally delete Al Jazeera America presented us with circumstances that were untenable — an affiliate that has willfully and knowingly breached its contractual obligations,” Al Jazeera America wrote in a statement issued Tuesday night. “Al Jazeera America’s strong hope is to resolve this matter quickly.”

AT&T issued its own statement stating the company “could not reach an agreement with Al Jazeera that we believed provided value for our customers and our business.”

Riyaad Minty, Al Jazeera’s head of social media has fielded complaints from loyal viewers who never got to watch the channel through their pay television provider and now can’t access the network without one. Minty tweeted the network was considering a new online offering within weeks, but it would not include Al Jazeera America.

The news channel is forced to tread carefully because of restrictive terms in its carriage agreements, designed to cut off cord cutters who refuse to pay for cable television. Most cable contracts forbid allowing cable networks to stream their programming online unless they offer it only to those who can prove they already pay an authorized provider.

Time Warner Cable is reportedly still negotiating with the news channel, which usually asks for less than five cents a month per subscriber. But no decision had been reached. Time Warner dropped predecessor network Current TV hours after news stories reported Al Gore, Jr. and other owners had sold the channel to the Qatar news organization.