Cable merger future-proofs against Internet’s rise

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LOS ANGELES (AP) — When you buy a TV, sales clerks often
pitch you on "future proofing" your set. Turns out, buying a cable TV
company relies largely on the same principle.
Charter
Communications Inc.’s $38 billion bid to take over the much-larger Time
Warner Cable Inc. is an attempt to future-proof its business by getting
its foot in the door of millions more homes wired for Internet service.
As
people use more mobile devices, watch more online video and connect
everything from thermostats to refrigerators to the Internet, delivering
those Internet services will become increasingly valuable.
Gone
are the days when one’s primary reason for hooking up cable was for TV.
Now, it’s the Internet, which enables countless online services known
collectively as the cloud — everything from movies on Netflix to backup
files on Dropbox.
"Broadband is the gatekeeper to the cloud," says
Tony Wible, an analyst with Janney Capital Markets. "There’s insatiable
demand for broadband."
These high-speed Internet services
represent the fastest growing and most profitable line of business for
cable companies. Last year, providing Internet access was 12 percent
more profitable for Time Warner Cable than providing TV packages,
despite taking in a third less revenue. Time Warner Cable has so far
resisted Charter’s overtures, but Charter has vowed to take the bid
directly to shareholders if needed.
A combined Charter-Time Warner
Cable would occupy a crucial position in more homes. With about 16
million customers, it would become the country’s No. 3 provider of both
pay TV services and high-speed Internet.
With more pay TV
subscribers, the company would be able to negotiate better deals and pay
less to carry channels from such companies as Disney, Viacom and
Discovery. And the combined company would have more future negotiating
power over online video providers like Netflix — or even Sony Corp.,
which plans to launch an online TV service this year.
Both
companies rely on Internet service providers to transmit data for video
and games to consumers. After a federal appeals court ruled last month
that cable Internet providers are no longer required to treat all forms
of traffic equally, the door has been opened for providers to charge
streaming companies for priority access and faster speeds.
"Charter
plus Time Warner Cable becomes an entity that is essential from a
distribution standpoint for a Netflix or a Sony to exist," says Susan
Crawford, a telecoms industry scholar and author of "Captive Audience:
The Telecom Industry & Monopoly Power in the New Gilded Age." ”It’s
about access to subscribers they won’t get anywhere else."
For
cable companies, Internet access services will become even more
important if more people drop their TV services in favor of Netflix,
Hulu and other video services. Although subscribers can easily drop TV
to save money, they still need the Internet pipes for those online video
alternatives.
The long-term value of cable operators "will mainly
come from their use to provide broadband Internet service, not a video
programming service which mainly comprises content that (has) been
produced by others and, increasingly, will be available elsewhere on the
Web," writes Andrew Sheehy, chief analyst of U.K.-based research firm
Generator Research.
A combined Charter-Time Warner Cable would
have a favorable service territory. Although Verizon’s FiOS service
offers better download speeds than cable, it would serve only about 10
percent of the combined cable company’s service territory, according to
Charter. That means most households would have to turn to the new
company for the best Internet service, and the company could charge top
dollars.
So far, cable Internet providers have kept fee increases
modest. They prefer having the Internet service become the anchor for
which to sell bundles with TV and voice services.
Ian Olgeirson,
an industry analyst with SNL Kagan, says average cable Internet prices
have risen just 10 percent over the past five years to about $43 per
month at the end of 2013. The number of cable Internet subscribers has
risen more quickly, growing 34 percent to nearly 51 million over the
same period.
"For the most part, operators have still been in that
mindset of gaining subscribers and making sure that they grow market
share," Olgeirson says. "They’ve favored that over being aggressive
about increasing prices for high-speed data service. It’s been a
successful approach."
Yet that could change as people’s demands for greater bandwidth grow.
According to Time Warner Cable, its customers’ use of Internet bandwidth is up 40 percent from a year
ago.
It
aims to double top speeds in New York to 100 megabits per second in
February and has done so in Los Angeles already. This year, it is also
targeting five markets to upgrade to as high as 300 megabits per second
to satisfy user demand, although it didn’t specify which ones. That
faster speed would put it in line with Verizon’s offering.
Charter
is also in the midst of transforming its service so that the slowest
speed across its service territory will be 60 megabits per second —
double the current minimum — by the end of the year.
Having more
customers would increase the benefit of even a small price hike to
consumers. It also sets up cable operators to potentially begin charging
the giants of the Internet world. According to Janney’s Wible, that
sets up a long-term fight between "the collective interests of Google,
Facebook, AOL, Netflix, Amazon, Twitter and many others against the
cable lobby."
"We’re in the very early stages of what will be an intense battle," he says.
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