Comcast buys Time Warner: Good for whom?

Comcast Corp. will cut $1.5 billion from payroll and other operating expenses (out of a combined $40 billion) to help pay for its planned purchase of New York-based Time Warner Cable, at a price of $45.2 billion in Comcast stock, or $158.82 a share, Comcast says here. Also, Comcast will spend $10 billion buying back its stock to boost the share price. Read more in Bob Fernandez's Philadelphia Inquirer story here. (See also GigaOm: Deal is 'all about broadband,' extends fast-growing Internet 'monopoly' that keeps 80-90 cents of every consumer dollar (vs 55 cents of every cable video dollar) here. Cable WiFi potential here.)

Comcast claims "multiple pro-consumer and pro-competitive benefits, including an accelerated deployment of existing and new innovative products and services." See Fernandez's update here. Buying Time Warner would add systems around New York, LA, Texas and other big markets, giving the combined company 30 million subscribers (not quite 30% of the national market, after selling some systems, Comcast says). Comcast also promises "higher broadband speeds" plus "more valuable packages to national advertisers." As Fernandez notes, consumer advocates have already asked the federal government to block the deal, which they say gives Comcast too much pricing power and control over Internet and video programming.

Analyst Tony Wible.

Tony Wible, analyst at Janney Capital Markets, says the deal is actually a "defensive" move -- an attempt to cope with what both Comcast and Time Warner see as the threat of Internet-based TV networks. In a report to clients this morning, Wible noted:
- "A merger will help keep programming cost inflation in check" by giving an enlarged Comcast powerful leverage to negotiate rates with other network owners.
- The merger will allow Comcast to fire thousands of duplicate bosses and other employees to cut that $1.5 billion in targeted operating costs. (Amy Yong, cable analyst at Macquarie, the Australia-based multinational investor that owns Philadelphia's Delaware mutual funds, estimates "synergies" from the deal could reach $3-4 billion.)
- The merger will retard possible competition from "virtual multichannel video programming distributors," or online-based video services, by combining two big companies that might have set up their own rival virtual systems
- It will create a vast united "data pipes" network that programmers will need to reach millions of homes and businesses.

"The video business faces an unsustainable pressure," Wible writes, because networks are driving up programming costs even faster than cable companies can boost consumer fees. Virtual, Internet-based video promises competition that could drive down costs to consumers. By creating a super-cable system, Comcast will enjoy a "lower cost structure than competitors," and would be in a position to push virtual video systems to pay more to use cable Internet.  So by buying Time Warner, "Comcast may be taking out a sizable future competitor."

Wible expects a "fierce battle in Washington" between Comcast lobbyists (led by David L. Cohen) vs. advocates and competitors concerned "about one company controlling so much of the country's broadband (Internet) infrastructure." Indeed, prospects for the merged company are uncertain enough that Wible says it's too early to build financial models of what the combined companies will look like.

In Wible's view, "there is a solid argument to be made that a deal helps consumers by keeping progamming costs in check;" that Comcast can accurately claim it doesn't currently compete much with Time Warner (ignoring the potential for future competition); and that there actually is significant video competition (satellite, Internet) that could survive the merger. 

Meantime, one likely result of the deal announcement is that other cable network owners will move more quickly to build "virtual" Internet-based TV networks so they won't have to rely on an enlarged Comcast to reach consumers, Wible concludes.