Charter-Time Warner deal reflects changing TV industry

May 28, 2015, 8:00 PM UTC

Charter Communications’ move to acquire Time Warner Cable (TWC) for $56.7 billion has raised several questions about what the deal would mean for subscribers, but more importantly why both companies – and Comcast for that matter – don’t compete in the same markets?

During last year’s failed merger talks between Comcast and TWC it was noted that the two companies rarely overlap in service areas. In fact, few cable companies compete with each other in general, except in rare cases.

The reason for this has to do with the way the cable industry was formed. Just 40 years ago cable was in its infancy and was largely the only option for those with limited access to over-the-air signals. Only in the 1980s did cable transform into something with a wide plethora of channels including pay TV options, with pay-per-view and DVRs following years later. More importantly cable was truly local and cities gave contracts to cable providers that also built infrastructure, meaning those that laid and maintained cables.

“Historically, small cable operators set up operations in towns and only with the various waves of consolidation have we ended up with the large MSOs (multiple system operators) that we have now,” says Greg Ireland, research director of the multiscreen program at IDC. “There was an element of co-existence rather than competition within the early cable community that continued as territory was carved up.”

These early cable franchise agreements included provisions where cities and towns extracted certain concessions or benefits from providers in exchange for a cable monopoly. The result was that many adjacent towns had different cable providers. Even as consolidation occurred there was little competition between the larger cable operators.

“The major cable operators today still don’t typically overlap, because it is expensive to lay cable,” says Professor Ira Kalb of the USC Marshal School of Business. “The cable providers in the early days were provided a monopoly in exchange for providing the infrastructure.”

These agreements of course cost cable operators millions of dollars and in most cases also required that they serve a majority, or nearly all, residents. Consumers benefited from the Cable Communications Policy Act of 1984 that required all areas, but the most rural places in the country, had cable infrastructure. This tradeoff gave cable operators a virtual monopoly and in exchange municipalities received infrastructure investment.

As consolidation increased and a handful of cable giants emerged – including Comcast, Time Warner Cable, Cox Communications and Charter Communications – the monopoly has remained largely unchallenged. However, a few startups (such as Netflix and Hulu) have attempted to offer alternative cable choices through online services.

The real challengers to the cable monopoly have been Verizon and AT&T, which through their respective TV and broadband offerings proved that consumers had an appetite for alternatives to incumbent cable providers and satellite TV operators, says Ireland. “Verizon and AT&T at least were dealing with existing subscriber bases in those wireline [operating] territories.”

The barrier for entry into the cable market has remained high over the years, because new players must also wire 100 percent of a community, before trying to chip away at the established cable company’s market share.

“Taking on the behemoth is a challenge to say the least,” says Kalb. “The bigger guy can fend off the competition by lowering the price and offering deals that the upstart can’t match. When the competitor is driven out the behemoth can respond with a price hike. The lower prices do tend to drive the small guy out of business or at least out of town.”

Even the larger players have largely stayed out of each others’ backyards. As of last year Comcast and Time Warner Cable only overlapped in three major markets including New York City, Louisville and Kansas City. While these companies may have greater resources to go head-to-head with one another, the tactic thus far has been to share the market.

This is largely because these companies are facing competition not with one another but with telecos including newcomers like AT&T, Verizon and satellite providers who now provide cable offerings.

“These companies are now vying for the Internet business, where there is overlap with other rivals,” adds Kalb. “The way that many younger people are watching TV is changing and that means the market has to evolve. Cable as an industry could find itself at odds with the ‘Gang of Four’ that includes Amazon, Apple, Facebook and Google as these companies are looking to get into this business. The bigger threat is the Gang of Four as they are more vertically integrated.”

Google has already been deploying its fiber optic service to select markets and given approval to do so in a way that lets them select what areas to connect and could be a real game changer for the industry.

“Unlike build-out in the past that was required to pass all homes and not exclude certain areas due to various socio-economic factors, Google has been able to move forward with a ‘cherry-picking’ approach in which it builds only when there is a certain level of demand,” explains Ireland.

“Perhaps with an easing of these types of requirements we may see more competition, but that competition will be likely centered in more affluent neighborhoods which will leave the ‘haves’ with more choices and the ‘have nots’ with the status quo.”