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.

Next generation cable or a spray-on solution to a really bad quarter?

Time Warner Cable has a plan for multi-gigabit broadband speeds over a state of the art network that, for the first time, might include fiber to the home service.

TWC Max is Time Warner Cable’s code name for selected markets where customers will be given first class treatment and provided what incoming CEO Rob Marcus calls “best-in-class reliability and service.”

Marcus made it clear in a conference call to investors this morning that TWC Max will only be available in specially chosen markets, most likely those facing intense competition from Google Fiber (Austin, Kansas City), Verizon FiOS (New York, parts of Dallas, etc.) or upgraded AT&T U-verse.

TWC Max might also be offered in cities where community-owned fiber-to-the-home providers best TWC’s broadband speeds and prices. North Carolina, in particular, would be a logical choice as Time Warner Cable recently acquired DukeNet, a major commercial fiber broadband provider headquarted in Charlotte, also a major hub for Time Warner Cable’s data services. Wilson, Salisbury, Mooresville, Davidson and Cornelius are all served by publicly-owned broadband providers.

Beginning next year and over the next several years, those chosen will get major broadband speed upgrades — up to several gigabits, totally new customer equipment, and an all-digital experience.

“We will replace modems with state-of-the-art DOCSIS 3 modems and advanced wireless gateways, so we can meaningfully increase broadband speeds,” said Marcus. “And by the way, we’re not talking about tweaks here but rather quantum changes to our speed tiers. We’ll also replace standard definition and older HD set-top boxes and roll out new DVRs, better user interfaces and more advanced versions of our TWC TV apps to fundamentally improve the video experience.”

If the competition is DSL, you may have a really long wait to be considered a TWC Max city.

Marcus added that in some mixed business/residential areas, fiber to the home service is increasingly possible because of declining costs and pre-existing fiber infrastructure already serving commercial customers and cell towers.

But Marcus was quick to stress that his philosophy about upgrades is to provide them in focused markets, not share them with every city where Time Warner Cable provides service.

“The goal here is, really, to fundamentally change the customer experience in a given market, said Marcus. “So rather than spread our efforts like peanut butter throughout the footprint, I’m very anxious to deliver a complete experience.”

“That means not only going all-digital but also ensuring that we have state-of-the-art modems in every customer’s home, ensuring that they have the best video and that the overall experience is really optimal,” Marcus added.

“So we’re going to concentrate market by market rather than take individual components and run them through the entire footprint.”

So what are the chances your city will be designated a TWC Max target area?

After reviewing the transcript for this morning’s conference call,  Stop the Cap! has created this handy-dandy, simple to use guide:

• If your community has or was chosen for Google Fiber: A VIRTUAL CERTAINTY!
• If your community is served by Verizon FiOS or AT&T’s Next Generation U-verse: EXCELLENT
• If your community has a fiber to the home provider competing with Time Warner Cable: VERY GOOD
• If your community is served by copper-based DSL from the phone company with no prospect of getting U-verse or FiOS: WHEN PIGS FLY!

Time Warner Cable has lost between 10-15 percent of their analog cable television customers over the past year, according to Time Warner Cable president and chief operating officer Rob Marcus.

Speaking at this morning’s Goldman Sachs Communacopia Conference, Marcus noted the economic downturn has continued to cost the cable operator “single play” subscribers. Marcus noted that roughly 60 percent of the cable company’s customers are now on discounted or retention plans, and the company has no plans to reduce aggressive retention offers and promotions in the immediate future. Time Warner Cable will also exercise caution when customer promotions expire, an allusion to the company’s practice of gradually resetting rates to retail prices over an extended period of time to avoid antagonizing customers into switching providers.

Marcus acknowledged broadband is now a key service for Time Warner Cable, one that the company will continue to exploit to drive earnings. Some investors have complained Time Warner has only managed an increase of 2-3 percent in Average Revenue Per User (ARPU) for broadband, a key metric for Wall Street. Marcus was asked why Time Warner, with its superior market share over telephone companies, was not “exercising the price lever a little bit more” in a marketplace lacking serious competition.

Marcus

“I think it is fair to say that as the utility of the [broadband] product increases in customers’ minds, their willingness to pay for it (assuming they are able) goes up, so I think it stands to reason that we can continue to increase rates on high speed data,” Marcus said.

But even more important to Time Warner Cable is its differentiated broadband speed tiers, which the company is refining to pick up additional revenue and price-resistant customers. Broadband usage caps will be a part of that equation.

Marcus confirmed that Time Warner Cable will provide unlimited broadband packages to its premium tier customers, but will introduce usage-limited service on its budget tiers. Currently, the company only imposes a usage cap of 5GB on its Internet Essentials package, which offers a $5 discount off regular prices. But Marcus seemed to acknowledge that the company plans to experiment further with additional limits.

“We are going to deliver very fast speeds, unlimited consumption, and now mobile capability via our Wi-Fi network to those customers who demand it and are willing to pay premium prices for those tiers of service,” Marcus said. “At the other end of the spectrum we are going to have budget products as we do today that offer lower speeds, more limited consumption like our Internet Essentials product, and those probably won’t have access to our Wi-Fi hotspots. We think that is the best way to drive revenue and profitability.”

Marcus also told investors the company was working on the next generation of the company’s electronic program guide, which he said will be cloud-based. Time Warner Cable continues to signal it is willing to work with third party set top box manufacturers to let customers dump traditional set top boxes, but only so long as Time Warner Cable gets the credit in the minds of customers. The company is also working on rolling out video-on-demand for its online video apps.

While perusing the latest investor conference call with Time Warner Cable executives, this question from the always-admiring Craig Moffett at Sanford Bernstein & Associates popped up, directed at Rob Marcus, president and chief operating office (underlining ours):

Craig Moffett – Sanford C. Bernstein & Co., LLC., Research Division

[…] Rob, I know how competitive you are. As you look at the results at Comcast and their greater success in — particularly in the video product, I’m sure it has to sort of get the competitive juices flowing. Can you talk more about where that is on your priority list? And what are the levers that you think you can pull to improve the results in basic video?

Robert D. Marcus – Time Warner Cable

Yes. So let me start by saying, I don’t really want to take anything away from Comcast performance, they had a nice quarter. And I think the fact that both we and they posted really good results this quarter probably speaks most to the fact that we’re in a terrific business, so that’s point number one. Second, I always sort of shy away from these comparisons between the two of us on any particular metrics given that there are differences in our disclosure practices.

[…] The truth is, I want to win, but I want to win relative to the guys we’re facing in the markets that we’re competing with. So all of the initiatives I described in my prepared remarks really relate to our performing even better than we have been, independent of any comparisons you might make to Comcast. So we’re hard at work on product, we’re hard at work improving our marketing. I think we’ve made great strides there. We’re definitely doing things on the customer service side to make doing business with us easier and better. And we’re always trying to improve on logistical things like improving sales processes and retention processes. So you’re right in characterizing me as competitive. I absolutely want to win. And I think we’re initiating the right processes to get there.

It’s just one more fact of life for American cable subscribers — cable companies never compete against each other. Comcast has carved out its territory, Time Warner Cable has theirs. The two will never meet in head-on competition.

So we’re wondering just how “competitive” Time Warner Cable (and Comcast) really are. Apparently not much, based on the hearts and flowers moment cable executives have praising the financial performance of each other.

Hobbs

Landel Hobbs tendered his resignation today, leaving as Time Warner Cable’s chief operating officer after serving nine years at the cable operator.

The Wall Street press is characterizing Hobbs’ departure as a leadership shakeup created as the company explores who will eventually succeed CEO Glenn Britt.

Hobbs lost out to Rob Marcus, the company’s current chief financial officer.  Marcus joined Time Warner Cable in 2005 from then-parent company Time Warner Inc., where he led mergers and acquisitions.

Marcus will assume Hobbs’ former position almost immediately, also becoming Time Warner Cable’s president.

Marcus

Hobbs was deeply involved in Time Warner’s 2009 attempt to impose Internet Overcharging schemes on its broadband customers.  Hobbs was a major defender of the company’s plans to charge customers up to three times more for their existing level of broadband service, telling customers the need to impose such pricing was “urgent.”

“If we don’t act, consumers’ Internet experience will suffer,” he wrote. “Sitting still is not an option.”

Time Warner Cable shelved those plans and has since embarked on a broadband upgrade program, introducing DOCSIS 3 technology which provides a much larger broadband pipeline to customers.  The company is expected to upgrade most of its service areas, including the cities where it tested its Internet Overcharging scheme, by the second quarter of 2011.

Marcus’ primary task is expected to be addressing the ongoing loss of Time Warner Cable customers, who have been disconnecting service at a greater rate than the company is adding customers to replace them.