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.

Hostile Takeover

Charter Communications does not like the resistance it is getting from Time Warner Cable executives over its bid to acquire the company so Charter has nominated 13 new members for TWC’s board of directors in an effort to force executives to reconsider.

Charter calls the baker’s dozen a slate of “independent candidates” that will be willing to evaluate Charter’s offer of $132.50 a share. Time Warner Cable’s current management says it won’t negotiate with Charter unless they offer $160 a share.

“It is clear from our meetings with Time Warner Cable shareholders that there is an overwhelming desire to combine these two companies to increase Time Warner Cable’s competitiveness, grow market share and create shareholder value.  Now is the time for the current Board and management of Time Warner Cable to respond to their shareholders and work with us to complete a merger to the benefit of shareholders while minimizing their execution and market risks,” said Tom Rutledge, Charter’s CEO.  “We are nominating a full slate of highly qualified, independent directors to elect to the Time Warner Cable Board and believe that stockholders will use this opportunity to express their views.  Our purpose in this proxy contest is to enable shareholders of TWC to raise their voice, and to provide a very capable board who will hear them.”

Charter has gotten a lucky break because all 13 current TWC board members are up for re-election at the same time this spring. Many companies avoid that practice to prevent a hostile bidder from taking control of an entire company’s board.

Charter’s roster of nominees includes a number of current or former CEOs, three former Wall Street lawyers and an ex-chief technology officer that used to work for Time Warner Cable. Many were associated with hedge funds, cable operators that sold out to larger players, or companies that either went bust during the Great Recession and were bailed out by U.S. taxpayers.

Charter Communications’ ‘Rescue Team’ for Time Warner Cable

1. James Chiddix: A cable industry veteran who formally retired in 2007, Chiddix worked for Time Warner Cable from the mid-80s until 2001. He now serves as a director at Arris Group, a manufacturer of cable equipment. Chiddix served on the board of Virgin Media, acquired last year by Liberty Global — which also has an ownership interest in Charter Communications;
2. Bruno Claude: Known primarily as a “turnaround” expert, Claude has a record of restructuring troubled telecom operators by cutting jobs and negotiating with the large investment banks that generously loaned the money that fueled overvalued takeovers to write down that debt when banks realize they have no hope of being repaid in full;
3. Isaac Corre: Currently a lecturer at Harvard Law School, where he teaches a seminar on executive compensation and corporate governance, Corre spent a decade at Eton Park Capital Management, L.P., a global hedge fund. Corre specialized in “event-oriented” investments and “distressed corporate debt”;
4. Marwan Fawaz: Spent a year in a leadership role at Motorola Mobility/Motorola Home Division. He has the distinction of serving as an executive at two bankrupt cable operators: Charter Communications and Adelphia. Charter eventually emerged from bankruptcy, Adelphia did not and two members of its founding family are spending 15 years in the Allenwood federal prison, convicted of wire and securities fraud. Charter’s press release says Fawaz would be a valued addition to the board because he has “a deep understanding of the cable television industry”;
5. Lisa Gersh: Lasted less than a year as CEO of Martha Stewart Living Omnimedia. Under her leadership, the company capped a year of turmoil that included layoffs, titles closing and the failure of Martha’s underwhelming Hallmark Channel show, according to Adweek. She was also a co-founder of Oxygen Media, which was sold to NBC;
6. Dexter G. Goei: An investment banker at Morgan Stanley back when it was hip deep in sub-prime mortgages and a taxpayer bailout, Goei was gone by 2009 and became CEO of Altice, S.A., a multinational cable company growing through acquisitions and takeovers. Goei is raising more capital through a stock IPO managed by Goldman Sachs and… Morgan Stanley;
7. Franklin (Fritz) W. Hobbs: In addition to serving as an adviser to private equity firms and director of Molson Coors Brewing Co., Hobbs has served as board chairman at Ally Financial, formerly GMAC, as GM declared Chapter 11 bankruptcy and was bailed out by U.S. taxpayers;
8. Neil B. Morganbesser: An investment banker, Morganbesser worked on mergers and acquisitions at Bear Stearns & Co., until the company’s sub-prime hedge funds sank like the Titanic. The investment firm was seeking taxpayer assistance, but ended up being acquired by J.P. Morgan in a hastily arranged deal instead. Charter claims Morganbesser has 20 years of experience providing financial and strategic advice to a full range of clients, including entrepreneurs, large corporations, governments, etc., but evidently wasn’t much help to his employer during the global financial crisis.
9. Eamonn O’Hare: Served as the chief financial officer of Virgin Media Inc., the UK’s leading cable television business, from 2009 until 2013. Unfortunately for him, most U.K. residents prefer satellite TV. But that didn’t hurt his bottom line. After Liberty Global acquired the operation in 2013, O’Hare got to share over $367 million in cash bonuses with certain other Virgin executives coming from a company that also has a vested interest in Charter Communications;
10. David A. Peacock: Another beer guy, Peacock most recently served as the president of Anheuser-Busch;
11. Michael E. Salvati: Another mergers and acquisitions guy, Salvati has been president at Oakridge Consulting, Inc., which provides interim management, management consulting and corporate advisory services to companies ranging in size from start-ups to multinational corporations, since February 2000. In short, he tries to promote financial growth at companies recently merged or acquired;
12. Irwin Simon: Founder of the Hain Celestial Group, a leading “natural and organic products company.” Brands including Arrowhead Mills, Bearitos, Rosetto and Rice Dream are well-known in organic food sections of local supermarkets, although few customers probably realize they belong to a giant conglomerate. Other divisions, specializing in “woo-woo personal care” offer dubious “calming body washes” costing $13 or more that feature extract of marigold. Charter says Simon would bring “his unique perspective on all aspects of advertising and marketing services” to a newly merged Charter-Time Warner Cable;
13. John E. (Jack) Welsh III: president of Avalon Capital Partners LLC — another private equity investment firm.

“If Time Warner Cable management refuses to negotiate on reasonable terms, we believe Charter will likely secure the votes required to win a proxy fight,” said Jonathan Chaplin, a research analyst with New Street Telco.

“It is clear that Charter is nominating a slate of directors for the sole purpose of pressuring our Board into accepting the same lowball offer that it previously considered and unanimously rejected,” said Time Warner Cable CEO Rob Marcus. “Our Board remains focused on maximizing shareholder value. We are confident in our strategic plan, which was detailed publicly on January 30, and we are not going to let Charter steal the company.”

Marcus may have one last card to play should Charter’s nominees end up on Time Warner Cable’s board of directors. All board members must serve the best interests of the company they oversee, not the company that helped get them elected. An independent evaluation of Charter’s offer must not be influenced by outsiders, or the board members may face lawsuits from angry shareholders. The Wall Street Journal notes this requirement has tripped up hostile bidders before. Air Products & Chemicals Inc. won three board seats at Airgas Inc. which Air Products had tried to buy back in 2010. Once on the board, the new board members recommended against the deal.

AT&T today announced it was selling off its residential wireline network in Connecticut to Stamford-based Frontier Communications for $2 billion in a deal that includes an expanded license for U-verse TV that could eventually be available to Frontier customers nationwide.

Frontier will assume control of the Southern New England Telephone Co. (SNET), a wholly owned subsidiary of AT&T, and its 2,700 employees and 900,000 telephone lines. Included in the deal is AT&T’s U-verse network in the state and the right to expand U-verse TV into all 27 states where Frontier provides service. The deal comes three years after Frontier paid $8.6 billion in stock and cash to buy landline operations in 14 states from Verizon Communications.

In a Stop the Cap! exclusive story published last year, we reported Frontier was interested in acquiring licensing rights to the U-verse brand to potentially offer its customers a unified product suite of television, broadband, and phone service over a fiber to the neighborhood network. Maggie Wilderotter, CEO of Frontier Communications, told the Wall Street Journal the deal between AT&T and Frontier had been on the table for years waiting to be finalized. With today’s announcement, AT&T New England president Patricia Jacobs acknowledged Frontier will use the U-verse name at a secondary brand for video service. Frontier now relies on satellite reseller agreements to bundle video service into its packages for consumers.

Frontier’s acquisition will give the company hands-on experience with AT&T’s U-verse network in Connecticut and offer a path to bring improved service to Frontier customers elsewhere. Company officials also acknowledged a key reason for the transaction was boosting Frontier’s lagging dividend, a critical part of its share price. By taking on nearly 1,000,000 new customers, Frontier will boost its cash flow, returning some of that new revenue in a higher dividend payout to shareholders. But the company will take on an extra $2 billion in debt to manage higher dividend payouts.

JPMorgan Chase & Co. arranged the financing for the acquisition and Frontier will likely raise about $1.9 billion from debt markets by selling bonds. Frontier already has $8.13 billion in debt on the books, much of it acquiring landlines originally owned by Verizon.

AT&T’s departure from Connecticut was no surprise to analysts. AT&T operates most of its landline network in the midwest, south, and in the state of California. The company has focused primarily on serving business customers and its wireless network in the northeast, not residential landlines. Frontier described the deal as a perfect fit for Connecticut residents, because Frontier specializes in residential phone and broadband service.

“AT&T has been trying to sell its rural wireline businesses for some time,” Gerard Hallaren, an analyst with Janco Partners Inc., told Bloomberg News. “It looks to me like Frontier cherry-picked a nice asset at a nice price from AT&T.”

SNET began operations in 1878 as the District Telephone Company of New Haven and pre-dated the Bell System. The company founded the first exchange and printed the world’s first telephone directory. It remained independent of Bell System ownership until 1998, when SBC Communications (formerly Southwestern Bell) acquired the company. In late 2005, SBC purchased AT&T and AT&T Connecticut was born.

Over the past seven years, AT&T has watched customers decline from more than two million customers to fewer than one million. AT&T introduced U-verse to improve its position in the market to mixed results. The company’s investments in fiber upgrades have not been as profitable as its wireless network, likely leading to today’s sale.

AT&T says it is not leaving Connecticut altogether. The company plans to keep business and wireless customers in the state.

Much of the proceeds from the deal will be invested by AT&T in its wireless network, mostly to help pay for 4G LTE upgrades. The rest will be spent bringing U-verse to more customers in the midwest and southern U.S.

The acquisition faces regulator approval from both the Federal Communications Commission and Department of Justice, likely to be forthcoming in the first half of 2014.

Frontier executives promised shareholders the deal will result in $125 million in cost savings over the next three years — code language for layoffs. Some of them are likely to be among the 2,400 workers represented by the Communications Workers of America, which has had a contentious relationship with AT&T Connecticut over job cuts in the past.

Phillip “I Shop Online” Dampier

Last week, JCPenney launched their nationwide redemption tour, apologizing to millions of ex-customers that fled the former retail giant, begging them to come back.

It took over a year for JCPenney to get the message that “disciplining” and “re-educating” customers to accept the wisdom of everyday higher prices with few sales and almost no coupons was hardly the door-busting success “miracle worker” CEO Ron Johnson originally had in mind. The ex-Apple executive was rewarded a $52.7 million signing bonus to take over JCPenney’s tired leadership and in return he dragged sales down 28.4% from the year before, with same store sales down 32%. Johnson’s new vision also steamrolled one-third of JCPenney’s online business.

The day those results became known, he confidently showed Wall Street he did not dwell in the reality-based community: “I’m completely convinced that our transformation is on track!” (For Kohl’s benefit anyway.)

Johnson also believed in a “less is more” philosophy in human resources, overseeing layoffs of 13 percent of the company’s workforce last April, with another 350 let go in July.

Despite the fact his all-new, rebooted vision of JCPenney was about as popular as bird flu, he stayed, even as customers and employees didn’t.

It wasn’t that the company didn’t know customers had a problem with all this. Many complained about the radical, unwanted changes at JCPenney, particularly middle-aged professional women representing one of the stores’ most important business segments. Company executives simply didn’t listen.

A year later, some of the same analysts that cheered JCPenney’s crackdown on discounting now wonder if the company will survive 2013. Many fretted about the real possibility the last customer to brave the “new era” of JCP might forget to turn the lights out when they left for good. Others were mostly furious the board let Johnson go.

Despite the tragic consequences, the conventional wisdom on Wall Street remains: Alienating customers with a revamp nobody asked for and “everyday pricing” designed to boost profits every day was not the problem, how Johnson implemented the strategy was. He just didn’t educate customers enough.

We see the same warped thinking in the broadband marketplace, particularly with usage caps, consumption billing, junk fees and the general ever-increasing price of broadband itself.

On providers’ quarterly results conference calls, the regular questions challenging leaders of the industry are not about providers charging too much for too little. The real concern is that your ISP is leaving too much ripe fruit on the tree:

• Where is the revenue-boosting usage caps and consumption billing, Time Warner Cable?
• Comcast: can’t you raise prices further on those recent speed increases to maximize additional revenue?
• Verizon: why are you spending so much on fiber broadband upgrades customers love when that money could have gone back to shareholders?
• AT&T: Is there anything else you can do to exploit your market share and make even more money from costly data plans?

The best ways a consumer can reward a good broadband provider include remaining a loyal customer, paying your bill on time and upgrading to faster speeds as needed. For Wall Street, the growing demand for broadband is a sign there is plenty of wiggle room for at-will rate increases, new fees and surcharges, contract tricks and traps, customer service cuts, and monetizing usage wherever possible. After all, you probably won’t cancel because the other guy in town is doing the same thing.

This is what sets the broadband marketplace of today apart from most retailers: consumers don’t have 10-20 other choices to take their business to if they are fed up.

Comcast or AT&T? Both charge a lot and have usage limits on their broadband service for no good reason. Your other alternatives? A wireless provider charging even more with an even lower usage cap. Or you can always go without.

While providers may tell you there is a healthy, competitive broadband marketplace, Wall Street knows better. When Time Warner Cable recently announced it would dramatically curtail new customer promotions and concentrate on delivering fewer services for more money, nobody bothered asking whether this would result in a stampede to the competition. What competition?

Although Google is delivering much-needed, game-changing competition in a tiny handful of cities, most Americans will not benefit because the best upgrades and lowest prices are only available where Google threatens the status quo. A larger number of municipalities are done putting their broadband (and economic) future in the hands of the phone and cable company and are building their own digital infrastructure for the good of their communities.

For everyone else, we can dream that one day, someday, the cable and phone company most Americans do business with will be forced to run their own JCPenney-like apology tour for years of abusive pricing and mediocre “good enough for you” broadband with unwarranted usage limits. Time Warner Cable went half way, but until competition or oversight forces some dramatic changes, we should not count on providers to actually listen to what customers want. They don’t believe they need to listen to earn or keep your business.