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.

Comcast will announce later this morning it has reached an agreement to acquire all of Time Warner Cable in an all-stock deal worth $44 billion.

If approved by regulators, Comcast will dramatically increase its size as the nation’s largest cable operator with over 33 million subscribers — vastly outnumbering every other cable company in the country. It also likely means Time Warner Cable broadband subscribers will eventually be subject to Comcast’s usage caps and overlimit fees, now being market tested around the country.

The offer of $159 a share for Time Warner Cable stock – $1 less than what TWC CEO Rob Marcus demanded for a buyout – is far higher than the $133 a share in cash and stock offered earlier by Charter Communications.

Tonight’s revelation that Time Warner Cable and Comcast reached a deal, first reported by CNBC, likely caught Charter by surprise. Charter had tried to acquire Time Warner Cable for months, going as far as nominating candidates for TWC’s board of directors that could have influenced a sale of the company. At the same time, Charter thought it was negotiating a friendly deal with Comcast to divide Time Warner Cable territories between the two companies.

Time Warner Cable management offered no clues they were negotiating with Comcast and delivered a presentation to shareholders last week promising major upgrades for Time Warner customers and future success as a standalone cable operator. All of those plans are now in doubt.

Comcast and Time Warner Cable reportedly believe the deal will quickly pass any antitrust review before the end of the year because neither company competes in the same markets, but Comcast will offer to divest a token three million subscribers from the combined company, according to sources.

The FCC formerly limited cable companies from owning or controlling more than 30% of the cable industry, but Comcast successfully sued to have that ownership cap overturned. A belief the deal would present looming antitrust problems could be grounds for the U.S. Department of Justice to oppose the deal, likely terminating it.

Consumer groups hope the deal gets derailed as soon as possible.

“In an already uncompetitive market with high prices that keep going up and up, a merger of the two biggest cable companies should be unthinkable,” said Free Press president Craig Aaron. “This deal would be a disaster for consumers and must be stopped. No one woke up this morning wishing their cable company was bigger or had more control over what they could watch or download. But that — along with higher bills — is  the reality they’ll face tomorrow unless the Department of Justice and the FCC do their jobs and block this merger. Stopping this kind of deal is exactly why we have antitrust laws.”

The Arris IP805-M DVR, produced for Time Warner Cable

Time Warner Cable customers in New York City and Los Angeles will get a major set-top box upgrade from a next generation DVR allowing six programs to be recorded and once and viewed anywhere in the home.

Arris filed papers with the Federal Communications Commission seeking certification of its new IP805-M set-top, branded with the Time Warner Cable logo.

The new device includes six internal tuners, 1TB of recording space, and a “whole house” platform that will let customers watch recordings from other televisions or portable wireless devices within the home. The new DVR is capable of transcoding traditional QAM channels into IP video.

Time Warner Cable will unveil the new box later this year as part of plans to upgrade service in New York City and Los Angeles under the TWC Maxx project. Customers in other cities may have to wait for the device to become available.

Time Warner has fallen behind many other cable operators, satellite providers and phone companies that offer superior DVR equipment.

Arris’ newest piece of equipment, caught by FierceCable, is just one of the upgrades the company announced last week.

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.

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.