Phillip “Ouch!” Dampier

Spending the day watching cable business news channels gush approval of last night’s surprise announcement that Comcast would acquire Time Warner Cable is just one excellent reason this deal should never be approved.

CNBC, owned by Comcast, particularly fell all over itself praising the transaction. Some of the reporters — many Time Warner Cable customers — actually believed Comcast would be a significant improvement over TWC. It is, if you want higher modem rental fees, higher cable TV bills, and faster broadband speeds you can’t use because of the company’s looming reintroduction of usage caps. CNBC didn’t bother to mention any of that, and why should they? CNBC reporter David Faber was the first to break the story of the merger last evening and among the first this morning to score an extended, friendly interview with the CEOs of both Comcast and Time Warner Cable, pitching softball questions to the two of them for nearly 15 minutes.

That’s a problem. How often do you hear news reports that include the fact the parent company of the channel has an ownership interest in one of the players. Do you think you are getting the full story when a Comcast employee asks Comcast’s CEO about a multi-billion dollar deal on a network owned and operated by Comcast. Incorporating Time Warner Cable and its news operations into Comcast only makes the problem worse.

As far as cable business news networks and the parade of Wall Street analysts are concerned, this is a fine deal for shareholders, consumers, and the cable business. Ironically, several on-air reporters and commentators defended the merger claiming it isn’t an antitrust issue because Comcast and Time Warner Cable never compete with each other. They never asked why that is so.

They’re here!

Comcast is hoping the government will give its merger a pass with few conditions for the same reason, without bothering to note the cable industry has existed as a cartel in the United States for decades, each company with a territory they informally agree not to cross. With this deal, Comcast’s fiefdom will now cover about half of all cable subscribers in the U.S., covering 43 of the 50 largest metropolitan markets, and have about a 30% total market share among all competing providers — by far the largest. An 800 pound gorilla is born.

Three million current Time Warner Cable subscribers will not be coming along for the ride and will likely be auctioned off to Charter or another cable operator in a token gesture to keep Comcast’s total market share at the 30% mark the FCC formerly insisted on as an absolute ownership limit — before Comcast successfully sued to have that limit overturned.

The rest of us can say goodbye to our unlimited broadband plans and get ready to pay substantially more for cable and broadband service. Despite claims from remarkably shallow media reports, an analysis of Comcast and Time Warner Cable’s rates clearly show TWC charges lower prices with fewer “gotcha” fees.

Reviewing some recent promotional offers for new customers, Comcast customers pay nearly $35 more for a triple play package than Time Warner customers pay:

Time Warner Cable’s Rob Marcus gets a $56.5 million golden parachute after 43 days on the job as CEO.

The Comcast Starter plan costs $99 per month for the first 12 months with a 2-year agreement that includes a nasty divorce penalty. After 12 months, your price increases to $119.99 for the remaining year. The $99 plan accidentally doesn’t bother to mention that customers renting a Comcast cable modem/gateway will pay an extra $8 a month, which raises the price. Since many cable subscribers also want HD DVR service, that only comes free for the first six months, after which Comcast slaps on a charge ranging from $16-27 a month for the next 18 months. Assuming you are happy with the limited channel lineup of the Starter package (and many are not), you will pay up to $154 a month. Oh, we forgot to mention the Broadcast TV surcharge just introduced that increases the bill another $1.50 a month.

Time Warner Cable’s new customer promotions typically cost around $96 a month, including their annoying modem rental fee. DVR service can range from free to $23 a month depending on the promotion, making your monthly rate around $119 a month for 12 months, with no contract and no penalty if you decide to cancel.

“It is pro-consumer, pro-competitive, and strongly in the public interest,” said Comcast CEO Brian Roberts, defending the deal.

Actually, it is in Comcast’s interest. If approved, the biggest investment Comcast will make is spending $10 billion — not to upgrade Time Warner Cable systems — but to launch a major stock buyback program that will directly benefit shareholders.

“On a personal level, it’s never easy to cede control of a company,” said Rob Marcus, Time Warner Cable’s chief executive. “However in this case, it just makes too much sense.”

Before reaching for a Kleenex to wipe any tears away, consider the fact Marcus will do just fine giving up his leadership of TWC just over a month after taking over. His generous goodbye package is worth $56.5 million, not bad for 43 days of work. Time Warner Cable employees won’t share that bounty. In fact, with $1.5 billion in promised savings from the deal’s “synergies” — code language for layoffs, among other things — a substantial number of Time Warner Cable employees can expect to be fired during the first year of the combined company.

The biggest impact of this deal is a further cementing of the duopoly of cable and phone companies into their cozy positions. Instead of encouraging competition, Comcast’s new size-up will guarantee fewer competitors thanks to the concept of volume discounts. The largest providers get the best prices from cable programmers, while smaller ones pay considerably more for access to CNN, ESPN, and other popular channels. Comcast will benefit from reduced pricing for cable programming, which we suspect will never reach customers through price reductions. But any potential startup will have to think twice before selling television programming at all because the prices they will pay make it impossible to compete with Comcast.

Another satisfied customer

Frontier discovered this problem after acquiring FiOS systems from Verizon in Indiana and the Pacific Northwest. When Verizon’s volume discount prices expired, Frontier’s much smaller customer base meant much higher programming costs on renewal. They were so high, in fact, Frontier literally marketed FiOS customers asking them to give up fiber optic television in favor of satellite.

Unless you have pockets as deep as Google, offering cable TV programming may be too expensive for Comcast’s competitors to offer.

Broadband is already immensely profitable for both Time Warner Cable and Comcast, but now it can be even more profitable as Comcast persuades customers to adopt their wireless gateway/modems (for a price) and imposes a usage cap of around 300GB per month. Yes, Comcast will deliver speed increases Time Warner Cable couldn’t be bothered to offer, but with a pervasive usage cap, the value of more Internet speed may prove limited. It’s a case of moving away from Time Warner’s argument that you don’t need faster Internet speed to Comcast’s offer of faster speed that you can’t use.

Customers hoping for a better customer service experience may have been cheered by this misleading passage in today’s New York Times:

Nonetheless, about 8 million current Time Warner Cable customers will become Comcast customers. That may be a good thing for those customers, as Comcast is seen as an industry leader in terms of providing high-quality television and Internet services, while Time Warner Cable has a reputation for poor customer service.

It may be seen as an industry leader by Comcast itself, but consumers despise Comcast just as much as they hate Time Warner Cable. In fact, the American Consumer Satisfaction Index found Comcast was hardly a prize:

• ACSI’s lowest rated ISP
• Second-lowest ranked TV service
• Third-lowest ranked phone service

Comcast consistently scores as one of the lowest rated companies across all the segments it participates in. It has the dubious description of being the lowest rated company in the lowest rated industry.

Higher prices, usage caps, surcharges, and fewer channels for more money. What’s not to love about that?

Just about a week ago, Rob Marcus unveiled his vision of an upgraded Time Warner Cable that looked good to us, and retained unlimited use broadband service. Apparently this is all a case of “never mind.”

The fact is, a merger of Comcast and Time Warner Cable will only benefit the companies, executives, and shareholders involved, while doing nothing to improve customer service, expand broadband, increase speeds, cut prices, and give customers the service they want. It is anti-consumer, further entrenches Comcast’s enormous market power (it also owns NBC and Universal Studios), and gives one company far too much control over content and distribution, particularly for customers who don’t have AT&T U-verse or Verizon FiOS or a community-owned provider as an alternative.

This deal needs to be rejected. When T-Mobile found itself out of a deal with AT&T, it survived on its own even better than expected. So can Time Warner Cable, with the right management team.

Phillip “Follow the Money” Dampier

“In the 1990s, U.S. policymakers faced critical choices about who should build the Internet, how it should be governed, and to what extent it should be regulated and taxed. For the most part, they chose wisely to open a regulated telecommunications market to competition, stimulate private investment in broadband and digital technologies, and democratize access.” — Will Marshall, guest columnist

Is competition in Internet access robust enough for you? Has your provider been sufficiently stimulated to invest in the latest broadband technologies to keep America at the top of broadband speed and availability rankings? Is Net Neutrality the law of the land or the latest victim of a Verizon lawsuit to overturn the concept of democratizing access to online content?

I’m not certain what country Will Marshall lives in, but for most Americans, Internet access is provided by a duopoly of providers that must be dragged kicking and screaming to upgrade their networks without jacking up prices and limiting usage.

Marshall is president and founder of the Progressive Policy Institute, a so-called “third way” group inspired by centrist Democrats led by President Bill Clinton in the 1990s. Unlike traditional liberals suspicious of corporate agendas, these Democrats were friendly to big business and welcomed the largess of corporate cash to keep them competitive in election races. It was under this atmosphere that Clinton signed the bought-and-paid-for 1996 Telecom Act, ghostwritten by lobbyists for big broadcasters, phone and cable companies, and other big media interests. Long on rhetoric about self-governing, free market competition but short on specifics, the ’96 law transformed the media landscape in ways that still impact us today.

Media ownership laws were relaxed, allowing massive buyouts of radio stations under a handful of giant corporations like Clear Channel, which promptly dispensed with large numbers of employees that provided locally produced programming. In their place, we now get cookie-cutter radio that sounds the same from Maine to Oregon. Television stations eagerly began lobbying for a similar framework for relaxing ownership limits in their business. Phone companies won their own freedoms from regulation, including largely toothless broadband regulations that allowed Internet providers to declare victory regardless of how good or bad broadband has gotten in the United States.

Marshall’s views appeared in a guest column this week in The Orlando Sentinel, which is open to publishing opinion pieces from writers hailing from Washington, D.C., without bothering to offer readers with some full disclosure.

Marshall

While Marshall’s opinions may be his own, readers should be aware that PPI would likely not exist without its corporate sponsors — among them AT&T, hardly a disinterested player in the telecommunications policy debate.

Marshall’s column suggests competition is doing a great job at keeping prices low and allows you – the consumer – to decide which technologies and services thrive. There must be another reason my Time Warner Cable bill keeps increasing and my choice for broadband technology — fiber optics — is nowhere in sight. I don’t have a choice of Verizon FiOS, in part because phone and cable companies maintain fiefdoms where other phone and cable companies don’t dare to tread. That leaves me with one other option: Frontier Communications, which is still encouraging me to sign up for their 3.1Mbps DSL.

“The broadband Internet also is a powerful magnet for private investment,” Marshall writes. “In 2013, telecom and tech companies topped PPI’s ranking of the companies investing the most in the U.S. economy. And America is moving at warp speed toward the ‘Internet of Everything,’ which promises to spread the productivity-raising potential of digital technology across the entire economy.”

Nothing about AT&T or the cable companies is about “warp speed.” In reality, AT&T and Verizon plan to pour their enormous profits into corporate set-asides to repurchase their own stock, pay dividends to shareholders, and continue to richly compensate their executives. It’s good to know that PPI offers rankings that place telecom companies on top. Unfortunately, those without a financial connection to AT&T are less optimistic. The U.S. continues its long slide away from broadband leadership as even developing countries in the former Eastern Bloc race ahead of us. Verizon’s biggest single investment of 2013 wasn’t in the U.S. economy — it was to spend $130 billion to buyout U.K.-based Vodafone’s 45% ownership interest in Verizon Wireless. Verizon’s customers get stalled FiOS expansion, Cadillac-priced wireless service, and a plan to ditch rural landlines and push those customers to cell service instead.

AT&T financially supports the Progressive Policy Institute

“A recent federal court decision regarding the FCC’s Open Internet Order has prompted pro-regulatory advocates from the ’90s to demand a rewrite of the legal framework that allowed today’s Internet to flourish,” Marshall writes in a section that also includes insidious NSA wiretapping and Internet censorship in Russia and China.

Marshall’s AT&T public policy agenda is showing.

Net Neutrality proponents don’t advocate an open Internet for no reason. It was AT&T’s former CEO Ed Whitacre that threw down the gauntlet declaring Google and other content providers would not be allowed to use AT&T’s pipes for free. AT&T has since patented technology that will allow it to discriminate in favor of preferred web traffic while artificially slowing down content it doesn’t like on its network.

“Pro-regulatory advocates” are not the ones advocating change — it is AT&T, Verizon, and Comcast, among others, that want to monetize Internet usage and web traffic for even higher profits. Net Neutrality as law protects the Internet experience Marshall celebrates. He just can’t see past AT&T’s money to realize that.

Verizon FiOS expansion is still dead while cash cow Verizon Wireless will continue to get the bulk of Verizon’s attention this year, according to a top executive.

Verizon chief financial officer Fran Shammo delivered the latest quarterly financial results to Wall Street analysts Tuesday and had few specifics about how the Cadillac of wireless carriers will handle increasingly meddlesome competition from T-Mobile, which has torn up the comfortably profitable mobile industry’s business plan and threatened to launch an all-out price war.

Verizon Wireless remains a major earner for Verizon, delivering nearly $18 billion in revenue and $8.3 billion in adjusted profitability during the last quarter alone. Verizon is relying on the quality of its network to keep customers from bolting to less expensive competitors. This month, T-Mobile announced it was prepared to cover the early termination penalty of AT&T customers ready to switch. It’s only a matter of time before Verizon customers are treated to a similar offer and that worried investors enough to send Verizon’s share price downwards even though the company beat analyst’s earnings estimates.

Clues about Verizon’s game plan for 2014 became clearer as Shammo took questions and outlined the company’s strategy.

Wireless Will Get Most of Verizon’s Attention

Again this year, Verizon Wireless will get the bulk of Verizon’s attention and financial resources. Verizon Wireless finished 2013 with $81 billion in wireless revenue — up $5.2 billion from 2012 — which represents two-thirds of Verizon’s total earnings. The wireless business has delivered a profit margin of 49% or higher for five of the last seven quarters.

Where do the increased earnings and profits come from?

“Service revenue growth continued to be driven by more customers and devices, increase of data usage, and smartphone penetration,” said Shammo. “Our Share Everything Plans are doing exactly what we expected — driving device adoption and stimulating higher usage — resulting in increases in both the number of devices and revenue per account.”

Shammo said little about the spectrum shortages Verizon claimed were responsible for an end to unlimited use data plans in favor of usage-capped, consumption-based billing. On the contrary, Shammo admitted Verizon expects to grow average revenue per account and profits on the back of usage billing as customers boost wireless data usage and have to upgrade to higher-priced plans in the future. Shammo also noted the company’s restrictions on early upgrades and charging upgrade/activation fees have delivered more revenue to Verizon and deterred customers from phone upgrades, which saves Verizon money.

Verizon Wireless customer bills rose an average of 7.1 percent during the fourth quarter to more than $157 per month.

“We have seen consistent growth in this metric,” said Shammo. “For the full year, average revenue per account was up nearly $10 or 6.9%.”

Some of that increase is attributable to Verizon’s higher cost Share Everything plans, which often cost customers more than the plans they abandon.

Share Everything = a higher Verizon Wireless bill for many customers.

“In just 18 months more than 46% of our postpaid accounts are on these plans,” said Shammo. “In 2013 we effectively doubled the number of accounts on Share Everything from 8.1 million to 16.2 million.”

In the coming year, Verizon plans to spend up to $17 billion on network maintenance and expansion, but the bulk of it will be spent on the wireless side of the business. Verizon has again cut investment in its wired networks.

Shammo noted Verizon Wireless plans to repurpose some of its 3G spectrum to 4G LTE service this year, which cuts costs for Verizon while stimulating usage which will eventually force many customers into data plan upgrades.

“If you look at a 3G usage moving to a 4G, we know that — and we have seen it in our base — as soon as you get on the 4G with video consumption and the quality of video your usage goes up,” said Shammo.

Verizon FiOS Expansion is Still Dead

Verizon has no plans to expand its FiOS fiber network beyond the areas where the company previously signed franchise agreements several years ago. In fact, Shammo is already reallocating money that in years past targeted FiOS expansion, shifting it to Verizon Wireless.

Verizon’s FiOS expansion is still dead. No plans for further expansion in 2014.

Shammo added Verizon will continue upgrading to fiber and decommission its copper network within existing FiOS areas, pushing customers with traditional landline service to basic FiOS phone service.

For those bypassed by FiOS, Shammo indicated it will be business as usual for Verizon, still selling DSL and phone service. But he hinted that within three years, Verizon might be open to selling off wireline customers in non-FiOS areas if a company approached Verizon with a lucrative deal. Verizon is under increased regulatory scrutiny in states like New York where there is concern Verizon is diverting resources away from deteriorating landline infrastructure in favor of its unregulated wireless network.

Shammo admitted Verizon stepped back from competing as hard as usual with cable competitors during the third quarter, believing consumers don’t want installers in their homes during the holiday season. As a result, the number of new FiOS customers was down from October-December. But with recent rate increases and voluntary upgrades, revenue remains up. With less than one million potential customers in the FiOS footprint still waiting for the fiber network to arrive, Shammo was comfortable stepping back from promotions temporarily.

Verizon FiOS has been highly successful for Verizon’s wireline division, now representing about 73% of Verizon’s consumer revenue. More than half of Verizon’s FiOS customers have upgraded to FiOS Quantum Internet speeds, starting at 50Mbps. With that kind of success, what holds Verizon back from further expanding FiOS? Verizon’s current CEO Lowell McAdam comes from a Verizon Wireless background and seems preoccupied with the wireless business. Wall Street is also firmly against Verizon increasing investment in fiber when diverting that spending to high-profit wireless can earn a much faster, more lucrative return.

Those lucky enough to have FiOS will continue to see upgrades in 2014. Chief among them is a new proprietary router that will assure Wi-Fi service in the home more closely matches the broadband speeds customers are buying, up to 100Mbps or more.

Verizon’s Intel OnCue Acquisition Doesn’t Mean Online Cable Competition is Coming

Despite a piece in GigaOM suggesting Verizon’s acquisition of Intel’s OnCue technology was all about competing head-to-head with Comcast, Shammo downplayed any expectation Verizon was about to declare war on  that cable company or anyone else:

Shammo

As far as the OnCue acquisition, look, the focus here is really to accelerate the availability of the next-generation IP video service which we will integrate into the FiOS video service. And really what we are trying to do is differentiate this even more so with fiber to the home versus others with the TV offerings and reducing the deployment costs. And this really accelerates us from if we were trying to build IP TV versus buying the IP TV technology.

From an FiOS customer perspective, we expect the benefits that they will have more elegant search and discovery activity and cost stream ease of use. But also keep in mind, with the acquisition of Verizon Wireless and becoming 100% ownership of that we also plan to take that platform and integrate it more deeply with our Verizon Wireless 4G LTE network. So that really was the strategy behind this.

 Verizon Wireless Has Enough Spectrum for the Next 3-4 Years

Shammo told investors Verizon Wireless has plenty of wireless spectrum to meet customer needs for the next 3-4 years, but he did outline Verizon’s short-term plans on spectrum management:

As far as our portfolio, obviously we like the 700 megahertz for the coverage of the LTE that we did. AWS is our sweet spot at this point in time, which is the spectrum that we have been swapping for [with competing carriers], so we have a very efficient portfolio of spectrum and I think we have shown through the years that we are very efficient on how we use spectrum.

Keep in mind that, as I said, we will participate in the auctions because we will need more spectrum, but right now our current position is that with the AWS that we have and that we are launching in markets that you know in New York and San Francisco, Chicago we are lighting that spectrum up. It is pretty much completed in New York. We will continue to add to that, but keep in mind though too that we will also re-appropriate our 3G spectrum to 4G.

So we will take that PCS spectrum that has been running in our 3G network — as the volume of that network continues to decrease as we move more 3G phones to 4G, we will bring re-appropriate that spectrum over to the 4G LTE. So three to four years we are in very good shape from a spectrum holding position, but we will participate in the upcoming auctions.

Canadian investment analysts are recommending that Canada’s telecom giant Bell (BCE) should explore buying out Bell Aliant, Inc. the largest telephone company in the Maritimes, to further consolidate Canada’s telecommunications marketplace.

Bell already effectively controls the phone company serving provinces east of Quebec through its 44 percent stake in the venture. Picking up the rest through a takeover would make financial sense, said Maher Taghi, a telecom analyst at Canada’s Desjardins Securities.

The Globe and Mail reports Yaghi explained in a note to investors a buyout would boost overall free cash flow for Bell (BCE), primarily from the increased revenue paid by customers for phone, television, and Internet service.

Bell Aliant has been one of Canada’s most conservative telecom companies serving the country’s smallest provinces in Atlantic Canada, as well as parts of rural Ontario under the NorthernTel brand and Télébec, which serves rural Quebec.

Unlike Bell (BCE), Bell Aliant has aggressively deployed fiber to the home service in New Brunswick, Prince Edward Island, and Nova Scotia to stem landline losses. Bell Aliant’s FiberOP customers avoid stingy usage caps that are pervasive across the rest of Canada. Its fiber network delivers strong competition to cable operators.

Bell (BCE) is already a major player in Canadian telecommunications, both with its landline operation and Fibe — mostly a fiber-to-the-neighborhood service — wireless phone and broadband, owner of more than two dozen specialty cable networks, a satellite TV service, owner of the CTV television network, new owner of Astral Media, and a few dozen radio stations across Canada. With this level of media concentration, Bell (BCE) would have a tough time trying to buy any additional media assets, but with its current de facto control, Bell would likely have little regulatory scrutiny merging Bell Aliant into its existing operations.

[flv]http://www.phillipdampier.com/video/Bell Aliant FiberOP Intro Video 1-2014.flv[/flv]

Bell Aliant’s FiberOP introductory video explains the network and its features for Atlantic Canada. (2:20)

Dr. John Malone’s Liberty Media is moving to acquire the 48 percent of SiriusXM it does not already own in a $10 billion all-stock deal that could have future implications for Malone’s interest in merging Charter Communications with Time Warner Cable.

Malone’s company has effectively controlled the satellite radio venture since bailing the company out with a loan during the Great Recession. Since assuming control, SiriusXM has raised prices and is earning more revenue from its subscribers in the U.S. and Canada.

Malone’s initial $1 billion investment is already valued at more than $10 billion, but as full owner Liberty will control a company worth $21.5 billion.

Malone

Through a carefully constructed transaction, the deal will be entirely tax-free for both companies and their shareholders. When complete, Liberty will be able to free up additional capital and flexibility which could prove useful to its ongoing investment in Charter Communications.

Should Charter formally bid for a Time Warner Cable takeover, Liberty Media may be called on to help finance the transaction expected to be worth at least $40 billion.

But don’t expect Malone’s Liberty Media to keep ownership of SiriusXM forever. Malone has a long history of increasing the value of his media assets for shareholders, usually with rate increases and cost cutting, and then spins the companies off in tax-free transactions.

Liberty Media has done exactly that with its former properties, including Discovery Communications, Starz and DirecTV.