John Malone’s power play for a Charter Communications’ takeover of Time Warner Cable would leave the nation’s second largest cable operator $60 billion in debt and has already cost creditors holding Time Warner Cable bonds $1.8 billion in value as markets react to the rumors of a leveraged buyout.

Two people familiar with ongoing private discussions report Liberty Media is prepared to borrow against its own or Time Warner Cable’s assets to put the deal together, spiking debt levels into junk territory. Charter itself already has the most debt among junk-rated U.S. cable companies, with $12.8 billion owed, according to Bloomberg.

Malone has structured highly leveraged acquisition deals throughout his history in the cable industry, borrowing heavily to finance merger deals and then raising subscriber rates to boost revenue to cut debt.

Time Warner Cable is highly exposed to a hostile takeover because its bonds lack safety provisions that would discourage the kind of acquisition Malone is attempting. Adam Cohen, founder of independent research company Covenant Review said Time Warner’s bonds are easily transferable to Charter’s name.

“The combined entity will be junk status, and the Time Warner bonds could be even junkier than the Charter bonds,” Cohen said in a telephone interview with Bloomberg. “This could be one of the worst covenant-related disasters ever for investment-grade bondholders.”

Moody’s senior vice president Neil Begley has suggested Time Warner Cable seriously consider “the Moe Green Strategy,” a nod to The Godfather.

‘You don’t buy Moe Green, Moe Green buys you!’

Begley suggested Time Warner Cable could consider putting in a bid to acquire Charter just to keep Malone on the outside looking in. That might be more effective than Time Warner acquiring a number of smaller cable operators like Cablevision, Mediacom, Cable ONE, and others to outflank Malone.

Malone is using an investment in Charter Communications as a springboard to launch his vision of a tightly consolidated cable industry, with just a handful of players providing service, instead of the dozen or so significant cable companies now in business. Malone sees Comcast as untouchable, so rolling up other operators around a Time Warner-Charter deal would be the next best thing, analysts suggest.

Cablevision will officially boost its broadband speed packages next Monday in a move to stay competitive with Verizon FiOS, which has been highly successful getting people to upgrade to 50/25Mbps service for just $10 more than customers pay for Verizon’s standard tier (15/5Mbps).

Broadband Reports obtained an internal memo outlining the new speeds, confirming the details we had been tipped off about by Cablevision employees last month. Cablevision customers on Long Island tell Stop the Cap! the speed upgrades have already been launched in their area. Customers can find out if they have the upgrade by briefly unplugging their cable modem’s power cord, allowing the modem to reset.

Cablevision speeds are far better than those offered by Time Warner Cable, which serves much of the rest of New York City, especially for uploads. Time Warner tops out at 5Mbps for upstream speeds in the northeast. Customers with older equipment will need a DOCSIS 3 modem to get the Ultra-level speeds.

Legacy Boost/Boost Plus customers will see a massive speed hike to 101/35Mbps at no extra charge if the memo is correct. Newer customers signed up for Boost will be upgraded to 50/25Mbps service. We have yet to confirm whether these upgrades have actually occurred yet.

Time Warner Cable won’t engage in an expensive bidding war for ownership of Hulu so it is trying to convince the online video venture’s current owners not to sell.

Sources tell Bloomberg News the cable company has offered to buy a minority stake in the online video streaming service alongside its current owners, which include Comcast-NBC, Fox Broadcasting, and Walt Disney-ABC.

If Hulu accepted the offer, the other bidders’ offers may not even be entertained.

Among those filing binding bids/proposals with Hulu as of the July 5 deadline:

• DirecTV, which reportedly wants to convert Hulu into an online companion to its satellite dish service for the benefit of its satellite subscribers;
• AT&T and investment firm Chernin Group, which submitted a  joint bid, presumably to beef up online video options for U-verse customers.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Bloomberg Plot Thickens in Bidding War for Hulu 7-9-13.flv[/flv]

Bloomberg News discusses how the various bidders for Hulu would adapt the service for their own purposes. It’s all about bulking up online video offerings.  (4 minutes)

Hulu’s new owners could continue to offer the service much the same way it is provided today, with a free and pay version. But most expect the new owners will throw up a programming “pay wall,” requiring users to authenticate themselves as a pay television customer before they can watch Hulu programming. If Time Warner Cable acquired a minority interest and the current owners stayed in place, Time Warner Cable TV customers could benefit from free access to certain premium Hulu content, now sold to others for $8 a month. That premium content would presumably be available to U-verse customers if AT&T emerges the top bidder, or DirecTV could offer Hulu to satellite subscribers to better compete with cable companies’ on-demand offerings.

Hulu’s influence will be shifted away from broadcast networks and more towards pay television platforms regardless of who wins the bidding. That could end up harming the major television networks that provide Hulu’s most popular content. Many of Hulu’s viewers are cord-cutters who do not subscribe to cable or satellite television. Placing Hulu’s programming off-limits to non-paying customers could force a return to pirating shows from peer-to-peer networks or third-party, unauthorized website viewing.

Online video rights are so important to cable operators and upstarts like Intel, which wants to launch its own online cable-TV like service, providers are willing to pay a premium for streaming rights.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/Bloomberg Why Hulu Is Attracting Billion Dollar Bids 7-8-13.flv[/flv]

Richard Greenfield, analyst at BTIG, and Scott Galloway, chairman and founder of Firebrand Partners, discuss Hulu and the ability to stream on multiple platforms. They speak on Bloomberg Television’s “Bloomberg Surveillance.” (4 minutes)

The Los Angeles Times reports that pay TV distributors are in a rush to make deals, not only to offer more viewing options for customers, but to potentially get rid of expensive and cumbersome set-top boxes.

Interlopers like Intel, Apple, and Google who want to break into the business have not had an easy time dealing with programmers afraid of alienating their biggest customers. Even DirecTV, which has done business with some of the largest cable networks in the country for well over a decade still meets some resistance.

Acquiring Hulu could be an important part of DirecTV’s strategy to develop the types of services satellite TV has yet to manage well. On-demand programming is no easy task for satellite providers. But if DirecTV acquired Hulu, satellite customers could find DirecTV-branded on-demand viewing through the Internet. The Times speculates DirecTV could even build an online subscription service for subscribers who don’t want a satellite dish, receiving the same lineup of programming satellite customers now watch.

Distributors that acquire enough online streaming rights could even launch virtual cable systems in other companies’ territories, potentially pitting Comcast against Time Warner Cable, but few expect cable operators to compete against each other.

Moffett

A consolidated cable industry envisioned by Dr. John Malone, currently bidding for a merger between Charter Communications and Time Warner Cable, would feature widespread usage caps and usage billing and could obliterate competition from over-the-top online video providers, predicts a cable industry analyst.

Craig Moffett, now out on his own as co-head of independent Wall Street research firm MoffettNathanson, says broadband usage pricing is the sleeper issue of the last five years.

“I’ve written for years that [usage based pricing] is the single most important issue in all [the telecom sector],” Moffett said in an interview last week. “I’ve always been amazed by how little attention people have always paid to the issue.”

The Street reports that a unified cable cartel limiting consumer access to the Internet or more importantly monetizing that access would immediately devastate streaming video competitors including Netflix, Amazon, YouTube and Hulu.

If usage based pricing were implemented across the cable industry tomorrow, Moffett believes Netflix’s subscriber base would immediately fall from 30 million to 10 million. Nascent video players like Intel and Apple would likely find their business plans untenable, and some analysts believe the sweeping price changes would probably end the shift towards integrating streaming technology into large flat panel television sets.

Consumer backlash

Moffett says the impact would be broadly felt. Other analysts predict it could cause a national consumer uprising, especially at a time when other countries are swiftly moving to get rid of usage limits and consumption-based billing that have never been popular with customers.

“I think it will become clear that over the summer the window may have already closed for the cable operators to move to a usage based pricing theme,” Moffett said.

The Federal Communications Commission has done almost nothing about the issue of usage caps and usage pricing. Former FCC chairman Julius Genachowski even applauded the unpopular price scheme, calling it an important innovation.

Customers call it something else, and an uproar from consumers and competitors alike could overshadow the broadband successes of the Obama Administration. It would represent “a laughable setback for the nation’s communications infrastructure,” predict increasingly pessimistic Wall Street analysts concerned about the inevitable backlash.

The Street:

In a new broadband pricing regime, regulators would have to condone what consumers and competitors would immediately recognize as anti-competitive. Meanwhile, immensely popular content providers such as Netflix, Amazon Prime, Hulu, YouTube and the like would have to lose a Washington lobbying battle to the interests of cable monopolies, their arcane billing and off shored customer service.

Hollywood and broadcast networks would lose marginal new content buyers such as Netflix. Tablet makers such as Apple, Google, Samsung and Amazon would see the value of their fastest growing products put at risk.

Most importantly, it would be an affront to one of the few clear consumer victories for the Department of Justice in the Obama administration.

Time Warner Cable subscribers in New York and New England are receiving letters notifying them their local public access, educational, and government (PEG) channels are being removed from the analog television lineup and switched to a digital-only format.

Time Warner Cable is moving towards a higher quality, digital only experience to provide better picture and sound, more HD channels, and more robust Internet speeds. Delivering channels in digital format is one way we continue to improve the quality of our service.

Starting on or about July 23, local Public, Educational, and Government access programming will be delivered in digital format only. These channels will remain in your existing package, however they will only be viewable with digital equipment, such as a TWC supplied digital set-top box, Digital Adapter or CableCARD.

If you want to view these channels on a TV without digital equipment, you may request Digital Adapters and remote controls free of charge through Sept. 23. Beginning Jan. 1, 2015 each Digital Adapter will cost 99 cents a month.

Time Warner has since had to stress the forthcoming changes will not affect local public television (PBS) affiliates.

QAM-capable sets will be able to continue accessing the channels, although Time Warner provides only basic information about how to find them. If customers want a Time Warner technician to install a Digital Adapter, there is a fee of $39.99.

Time Warner Cable is not following other cable operators that have switched most of their channels to digital-only service. Instead, it is gradually moving a handful of channels at a time and moving others to a bandwidth-saving “Switched Digital Video” format that only delivers certain networks in neighborhoods where those channels are actually being watched. Unfortunately, SDV technology is not currently compatible with Time Warner’s Digital Adapters, so customers without full-featured digital set-top boxes will still lose more than a dozen channels on older sets.