by Daniel Frankel
Regardless of whether it was ever going to be approved by the FCC and U.S. Justice Department, the long-awaited conclusion of the just-scuttled $45.2 billion merger between Comcast (NASDAQ: CMCSA) and Time Warner Cable (NYSE: TWC) was always going to have a major impact on the U.S. pay-TV business.
From pay-TV to online video to cable access technology to programming, industries had been kept waiting, while the federal government repeatedly started, stopped and restarted its review of the deal over an arduous 14-month period.
"This rocks the world of television," said analyst Laura Martin of Needham & Co. "We'll be talking about this for six months. What will Comcast do next? What happens to TWC? How does this affect Disney, Fox, CBS and Viacom? What's Charter's move?"
Now, with the big regulatory question out of the way, a lot of change seems to be ahead of us in the near term.
Based on conversations with--and investor notes from--top media analysts, and various news leaks, here are a few of the things we'll be watching for in the coming weeks or months:
Charter may drop Bright House once it goes after TWC--but it might not be alone in the bidding
With Charter Communication's (NASDAQ: CHTR) lead investor, John Malone, stating his infamously emphatic "Hell, yes!" when asked last year if he'd go after TWC again should Comcast's bid fail, there was no surprise when, on the very day Comcast finally walked away from the deal, it was leaked that Charter was already thinking about a new bid for TWC.
And it probably isn't too surprising that TWC, which openly resisted Charter's overtures in 2013 and 2014, is now reportedly open to the transaction, having seen what happens when a larger company tries to acquire it.
In fact, the dance between the two cable companies has progressed so fast, TWC is now offering "Charter related materials" on its investor relations site, right on top of "Comcast related materials."
But as Charter circles for yet another pass, there are issues to ponder. For example, will Charter be alone this time in bidding for TWC?
Asked if Charter should expect any competition, Martin responded, "Nope, I don't expect any."
But it has already been reported that TWC has approached Cox Communications to see if the privately held MSO is interested in a merger. TWC has publicly denied this.
Meanwhile, there's the issue of Charter's $10.6 billion proposal in March to buy Bright House Networks, which some analysts believed was a precursor to another TWC run. As part of its long-standing ties between TWC and Bright House, TWC has the right to block any sale of the company, a factor that now comes into play with TWC remaining, at least for now, an independent company.
Asked if she thinks Charter will end up with Bright House, Martin coyly remarked, "That depends if they get Time Warner Cable."
For its part, a combined Charter/TWC/Bright House would control nearly 18 million video and high-speed Internet users. And the federal government could see this larger entity as a countering force to the dominance of Comcast and a deal that enhances competition.
"We think this bodes well for Charter and Time Warner Cable by creating a company with sufficient scale to rival Comcast in how it deals with subscribers, competitors and others," said Paul Gallant, a media analyst at Guggenheim Securities.
Comcast could buy Netflix ... or Cablevision ... or license X1 to another operator
To hear some analysts talk about it in the wake of Comcast's big concession on TWC, the conglomerate actually got lucky that the mega-deal fell through.
"Once it became clear that regulators were going to treat this deal like we were still living in 1985, Comcast executives were smart to realize that wasting a year trying to accommodate regulators' concerns is a colossal waste of time when there are other, more pressing issues to confront," wrote James McQuivey, VP and principal analyst at Forrester Research.
Indeed, as McQuivey also notes, the pay-TV world has changed quite a bit since February 2014, when Comcast first made its bid for TWC. There was no Sling TV, for instance, or HBO Now or "cord cutter" package from Cablevision (NYSE: CVC). And he argues that acquiring TWC would give Comcast a dominant position in broadband for only as long as it takes for a company like Google (NASDAQ: GOOG) to come along, recognize the profit Comcast is making, then disrupt the market with some kind of wireless broadband technology.
As prospects for Comcast-TWC began to dim, fellow analyst Richard Greenfield has been saying for several months that Comcast, unshackled from the deal, would be free to execute on a broad number of equally ground-shaking acquisitions, suggesting the conglomerate could buy Netflix (NASDAQ: NFLX), T-Mobile (NYSE:TMUS), Time Warner Inc., or any combination of the above.
"Netflix could provide Comcast with an incredible team and platform to learn from, which could accelerate Comcast's virtual MVPD efforts," Greenfield wrote. "Not to mention, Comcast could further the reach of Netflix domestically by integrating the service into its set-top boxes."
As for T-Mobile, he added, "While we do not envision mobile broadband replacing wireline broadband anytime soon, given how much time consumers spend with their mobile devices, how can Comcast not have interest in being a large wireless provider?"
Finally, Greenfield suggested there are other means to achieving the big-city toehold Comcast has sought with its TWC purchase. Buying Cablevision, he said, would achieve some of the same objectives.
"While a failed merger with Time Warner Cable implies that Comcast simply cannot get bigger subscriber wise, they could voluntarily divest a few million subscribers to Charter and attempt to buy Cablevision to gain the New York City exposure they coveted in the TWC transaction."
There is also Comcast's desire to expand its X1 cloud-based video delivery platform behind its own confines, with reports circulating that Comcast has had talks with Cox Communications about licensing the technology. Had the TWC merger gone forward, this kind of dealmaking would have almost undoubtedly been restricted under federal approval mandates.
Mergers among pay-TV vendors will accelerate
When Rupert Murdoch and 21st Century Fox circled Time Warner Inc. last summer, it appeared the programming world was set for its own wave of consolidation in response to the marriage of the two biggest cable companies.
Since then, Murdoch has moved on, and Time Warner has engaged in talks with numerous other conglomerates, CBS Corp. among them, that have haven't gone anywhere.
But while significant consolidation has yet to unfold in the programming business, pay-TV vendor markets like cable access technology are seeing a definite merger trend, highlighted by the April 22 acquisition of Pace LLC by Arris.
Mergers were "definitely part of that," noted Infonetics analyst Jeff Heynen, "especially when Comcast and TWC represent such a significant portion of Arris's revenue."
But even with Comcast-TWC off the board, Heynen suggests "there are other larger issues at play" in the cable access tech market, such as reduced capex by major operators, and there's reason to expect more consolidation.
Meanwhile, as cable operators look to migrate to cloud/IP-based video delivery systems, and larger vendors like Arris and Cisco look to keep up with demand, newer technology companies are getting swallowed up. A prime example: Charter teaming with Arris in mid-April to pay $135 million for ActiveVideo, which supplies cloud-based software to Charter.
Arris chairman and CEO Bob Stanzione, meanwhile, said Pace's cloud-based software was a key reason why Arris bought that company, as well.
"We expect this merger will enable Arris to increase its speed of innovation," he said.