Comcast's Offer for Time Warner Cable

A few quick notes about the proposed transaction:

• Comcast's offer of $159 per TWC share is very close to TWC CEO Rob Marcus's proposal to sell the company to Charter for $160.
• Comcast's offer has no break-up fee for either side, Comcast can abandon the deal at any time and Time Warner Cable, presumably, can entertain a better offer from Charter or someone else
• Comcast has also offered to divest 3 million TWC subscribers, presumably to address concerns that the merged company would be too big; the "cats & dogs" of TWC's former national division would be likely divestiture candidates, unless some of them are contiguous to existing Comcast systems.
• Comcast has made bold offers before and walked away when investor support for the deal was not there (its 2008 offer for Walt Disney)
• Because Comcast and Time Warner Cable have few systems which compete directly with each other, there would be little direct impact on consumers -- their number of choices of providers would not be reduced. Consumer Reports looks at it this way. Comparing the impact on competition to the stillborn AT&T T-Mobile deal is off-base.
• The deal is good news for the channels of NBC Universal, which now are more likely to gain carriage on Time Warner Cable's systems. NBCSN and Golf Channel, which are carried on digital in Time Warner Cable's New York City system (link is to .pdf), will likely end up with parity (expanded basic) carriage with ESPN.
• The vendors that sell to the companies (non-NBCU programmers, hardware companies, billing systems providers) who will now be dealing with a larger customer and fewer attractive alternatives if they say "no" are the biggest losers if the deal goes through.
• Charter is likely a loser if the deal closes. If it sees increasing its scale a business imperative, the biggest available target will be off the market. Cox and Cablevision are the next biggest available companies and they have rebuffed multiple offers to sell. The cable companies smaller than them (e.g., Mediacom) are much smaller with fewer than 2 million subscribers. Charter would have to buy nearly all of them to increase its scale as much as a Time Warner Cable deal would have.
• Another loser might be Apple. TWC appeared to be creating an app for the Apple TV box; Comcast hasn't been, seeing its X1 guide as preferable.
• Closing price of CMCSA on 13 Feb 2014 (the date the deal was announced) = $52.97. TWC = $144.81. CMCSA x 2.875 (stock exchange ratio) = $152.29. Implies some uncertainty about the deal closing.
• Cablevision will still be the largest cable operator in the New York DMA by subscribers, but the combined Comcast-Time Warner Cable will be a major player in New York and the dominant provider in virtually all of the other top 25 DMAs (exceptions: Cox-Phoenix #12, Charter-St. Louis #21, see Rich Greenfield's chart @ https://twitter.com/RichBTIG/status/433960562309861376/photo/1
• Slate's take on the deal negotiation -- it's not very different from any other time you call the cable company

Update (14 Feb 2014): Mark DeCambre on the website Quartz quotes a Gekko-like Goldman Sachs research note praising the deal for giving pricing power to the new company with the charming pull quote "M&A that drives an industry toward oligopoly is the good kind."
Update (16 Feb 2014): Paul Krugman's column in the New York Times. Barons of Broadband. Pull quote: "The truth, however, is that many goods and especially services aren’t subject to international competition: New Jersey families can’t subscribe to Korean broadband."
Update (18 Feb 2014): Another likely loser with this deal is Netflix. TWC was in talks to carry/sell Netflix to its video customers, something Comcast has rejected. Now, per Bloomberg, "the talks are on hold".
Update (19 Feb 2014): As my former colleague Howard Homonoff astutely notes, Google Fiber's announcement that it will enter additional markets is very good news for Comcast in securing government approval for the deal.
Update (19 Feb 2014): Another loser in this deal may be CBS which would see the TWC systems move from the recently-and-contentiously-negotiated deal to an older, more distributor-favorable Comcast deal, according to this LA Times article. It is standard in cable affiliation agreements for the acquirer to have the right to add one or all "after-acquired systems" to its affiliation agreements and delete the systems from their prior agreement. In fact, Comcast would likely do this for all its agreements that are more favorable than TWC's (and should TWC have any more favorable deals than Comcast, Comcast might be able to move its incumbent systems to those newly-acquired deals).
Update (20 Feb 2014): Bill Niemeyer of The Diffusion Group believes that John Malone may not have really wanted Time Warner Cable for Charter because the Comcast/TWC merger noise creates an opportunity for Charter to act under the radar. Maybe, Dr. Malone does prefer to be out of sight of the regulators, but I find it hard to think that anything Dr. Malone does will go unnoticed.
Update (20 Feb 2014): DirecTV's CEO thinks the deal should get "appropriately scrutinized". In the past, DirecTV has criticized Comcast's dealmaking for its regional sports networks.

Top Five Posts of 2013

In the spirit of Rob from High Fidelity, these were my top five posts of 2013*:

5. UK Retransmission Consent Dispute: BBC versus Sky (3 June)
4. flareWatch: Cox Goes OTT on Itself (1 July)
3. Cox Has Shut Down Its OTT Service FlareWatch (17 September)
2. Virtual MSO - A Look at the Opportunity (19 July)
1. Nimble TV Hits Its First Roadblock -- Dish (23 July)

*based on page views

Cox Has Shut Down Its OTT Service FlareWatch

Cox has abandoned its over-the-top service FlareWatch, which only launched around the start of July (link is to my initial post on Flare). The trial of the service ends 27 September 2013 and "Becky" from Cox Customer Care reports that the company will refund customers for their out-of-pocket costs for the service (e.g., equipment). Confirmation is in the tweet below. I believe this news has yet to be reported anywhere else.

A reader of this site and potential Flare customer, Teddy Wong, contacted Cox about subscribing to the service in early September and reported that his "order was cancelled without notice". Certainly not the response one would expect from the cable incumbent with the top reputation for customer service.

Prior to Cox's tweet, an attempt to access the website for the service, watchflare.com, yielded a page with the logo and the message "Service Unavailable", and a "503 Service Unavailable" error message, although through Google I can still reach the page with the Flare pricing and information about the service.

The Flare index page appears to have been taken down

But the detail and order pages are still accessible

Speculating, here's some reasons that Cox has pulled the service, quickly and in a seemingly unplanned fashion:

• Broadcasters and cable programmers have notified Cox that they have not granted rights for such a service.
• Cox has noticed that the lower-priced Flare service is cannibalizing their traditional cable TV service to a much greater extent than it is adding revenue to Internet-only customers
• Cox is noticing technical problems delivering a high quality version of the service

As I noted in the earlier post, I believe that Flare is an unprecedented service. While many cable operators offer some, most or all of their cable TV lineup to devices other than traditional televisions (e.g., web browser, iPad, Roku apps), all of them are providing it as "added value" to cable TV subscribers who also subscribe to the operator's cable Internet service. None are offering it as an alternative. The major broadcasters and cable programmers like the current pay-TV ecosystem and could be threatened by (and unwilling to support) any new precedent.

The only over-the-top service from a traditional operator is Dish's DishWorld service which is delivered via the Internet to Roku boxes, Macs, PCs and several other devices. DishWorld, however, does not deliver any household name US cable or broadcast services. The closest thing to such a service on its lineup is Bloomberg TV, which itself is streamed online at bloomberg.com. Most of DishWorld's 13 English-language channels are all from international programmers (e.g., France 24, RT [formerly Russia Today], Euronews).

Update (3 October 2013): Erik Brannon of IHS speculates/calculates that Flare was shut down because it wasn't profitable enough. This theory does not ring true to me; Cox certainly knew the margin on the service before its launch and could have priced it higher to address this concern. Brian Santo's post in CED sees through the IHS analysis, and adds quotes from Cox which also deny Brannon's speculation.
Update (1 November 2013): Cox is evaluating a next-generation IP video service (like Flare) per Steve Donohue in Fierce Cable.
Update (4 November 2013): Donohue's interview with Cox's CTO Kevin Hart who said that Flare customers were buying the service in addition to Cox's video, which seems surprising and counter-intuitive.

flareWatch: Cox Goes OTT on Itself

Updated (2 July 2013) with numerous details.

Cox, a major US cable operator, has launched something that I believe is without precedent: an IPTV service that competes with its existing traditional cable TV service (Todd Spangler's article in Variety). Here are the relevant details:

• Customer must purchase Cox's cable modem service
• Cost is $34.99 per month (incremental to the cable modem service cost)
• 97 channels are included with 60 HD channels
• includes all local broadcast channels (update: ABC, CBS, NBC, Fox, Uni, PBS, Ion, CW, etc. and, it appears, all of the digital multiplexes carried on the system -- more than 25 channels)
• includes a cloud or network DVR with 30 hours of storage; update: playback only within the home
• works with Fanhattan's Fan TV set-top box
• does not incorporate Netflix or Hulu Plus (at least not currently)
• is not available outside of the home
• does count against the cable modem service bandwidth cap
• cable channels include: ESPN, ESPN2, TNT, Disney, ABC Family, Fox Sports West, TWC SportsNet, CNN, CNBC, Nickelodeon, A&E, Discovery, Bravo, USA, TLC, MTV, Fox News and Syfy (update: also FX, TBS, WGN, MundoFox, QVC, HSN, MSNBC, Headline News, Galavision, BET, VH1, Weather, Spike, Travel, Food, HGTV, Lifetime, E!, Comedy Central, History, Fox Sports Prime Ticket, AMC, TCM, TV Land, Cartoon, Animal Planet, Speed, CMT, Golf, TWC Deportes, C-SPAN, C-SPAN2, National Geographic, Palladia, Velocity, The OC Channel, Cox 3/California Channel). This lineup appears similar to a typical expanded basic with the addition of a few purely HD services that are usually bundled with expanded basic for customers with HD boxes, namely Palladia and Velocity.
• update: free on-demand is "coming"

demo image of the flareWatch interface

Some thoughts:

• Cox is certainly taking the position that the cable TV rights that it has are suitable for this IPTV service. While it is new for an operator to offer IPTV service as well as traditional cable on the same system; it is not unusual for operators to offer IPTV service (AT&T and Google Fiber offer IPTV service exclusively; many other distributors offer it on some systems).
• Why are any of the channels carried in SD?
• Typically cable operators break out the broadcast channels in a separate tier from the cable channels to minimize their copyright royalty payments (e.g., a $20 basic broadcast tier is available, then a $40 cable program service tier --that 90%+ of subscribers purchase -- is available above that -- copyright fees are based on the $20 price, not the $60 price). Is this package subject to a different (or no) copyright royalty payment scheme?
• This package appears to contain most, if not all, of the most expensive cable channels -- usually cable operators are trying to create new packages which exclude those services (like Cox's own TV Economy package).
• What is the complete channel lineup? (I have searched cox.com, but haven't been able to find reference to flare or flareWatch yet). Update: flareWatch has its own website that does not mention Cox, except in the fine print at the bottom. Is Cox's brand name an impediment to selling the service? The branding of the service is inconsistent. The URL for the site is watchflare.com. The service name is styled "flareWatch" on the site and simply "flare" on the demo.
• If the target for this service is customers who have Cox Internet service, but do not have Cox TV service, why is the lineup so traditional in its selection of services?
• Update: the consumer has to buy the box (and remote) for $99; live TV pausing is not a current feature of the service (from Rich Greenfield's blog post includes video demonstrating the -- notably easy -- sign-up process and captured video of the flareWatch promotional video)

screenshot of flareWatch sign-up screen with pricing

Update:
Cox's site for "flareWatch" -- watchflare.com (includes a :34 unembeddable video)
Michael Greeson's take (The Diffusion Group) with some interesting notes about the price point and services included

The Bullied Becomes the Bully

Stop me if you think you've heard this one before. Someone pays a lot for the local sports rights to a professional team and starts a new regional sports network. The cable operators (and other distributors like DirecTV, Dish Network, AT&T U-Verse and Verizon) complain that the channel is too expensive and that they can't possibly pass through this increase to their customers and they should be able to carry the new channel on a secondary tier, a sports tier or on an a la carte basis.

Today's example is the new regional sports network featuring the Los Angeles Lakers of the NBA. In a twist on the usual Time Warner Cable, the largest cable operator in the Los Angeles DMA is the owner of the rights. Cox, the largest cable operator in the San Diego DMA is complaining about the cost.

In February, Time Warner Cable was making the exact same complaints about the cost of MSG Network, the home of the disappointingly short-lived Linsanity-era New York Knicks.

There are three ways these disputes end. The most common is that the distributor agrees to carry the new sports channel on basic, possibly getting some sort of price break, sometimes after a long hold out (e.g., YES Network on Cablevision). Less commonly, the distributor decides not to carry the channel at all (but a critical mass of other distributors do agree to carry it -- the YES Network has never been carried on Dish Network). Still even less commonly, the new rightsholder throws in the towel and sells the rights to someone else (e.g., Victory Sports One, a venture of the Minnesota Twins).

So it goes.

Crown Media 1Q11

Hallmark Channel's ratings rank decline from 22nd total day/21st prime time to 30th total day and 29th in prime time (versus 1Q10), yet advertising revenues were up 8.5%.  That's a better advertising market for you. (Note the revenues include ad sales on the much less distributed Hallmark Movie Channel, too).

One of the issues for a public company with a single network is the materiality of an agreement with any major multichannel distributor.  Note the following disclosures about its relationship with Cox:

"A distribution agreement with Cox ended on December 31, 2010.  Our Channels continue to be distributed by Cox under the terms of the expired agreement through four extensions to that agreement that expired on April 30, 2011, while renewal negotiations continue.  The Cox distribution agreement covers approximately 5% of our subscribers for the Hallmark Channel and 2% of our subscribers for the Hallmark Movie Channel."

Crown did not mention that negotiations were continuing with AT&T, which dropped Hallmark Channel and Hallmark Movie Channel last September.


Crown Media 10-Q