3 + 2 + 6 = 2    The logic behind the New Charter deal

Charter’s victory follows Comcast’s defeat

The patience of Charter Communications Inc., the USA’s third largest cable operator, will have been well rewarded. Almost one year after announcing its intention to acquire Time Warner Cable Inc. and Bright House Networks, the regulators have given their conditional blessing to the mega-merger which will create New Charter, the country’s second largest cable operator. Big figures underlie such deals, notably the USD 78 billion cost of acquiring Time Warner, and  further USD 10.4 billion to add Bright House into Charter’s shopping basket; but the small figures are interesting too. In this deal, the USA’s third largest operator is acquiring the country’s second largest as well as the sixth largest to become … the second largest. Well, that’s what Time Warner already is today, so where is the big magic?

Whereas it has at times over the past decade been hard to identify a clear and constant logic behind some of the US regulators’ decisions, the case of New Charter appears to have been used by these same regulators to realize two important principles. The first one, in line with their core mission, is to prevent a market from being irreversibly dominated by one single player. The second is to prevent the stifling of other related sectors of business and industry – in this particular instance video streaming.

The regulators’ refusal a year ago to allow Comcast, the market’s number one cable operator, from acquiring Time Warner Cable and creating an unsurmountable size gap between itself and its followers, paved the way for the market’s numbers two, three and six to collude and almost match the size of Comcast, thereby narrowing the gap by totalling 24 million customers compared to Comcast’s 27.2 million. Rather than having one single giant that can almost dictate the rules, the market now has two who can really compete on price, service and good practice, and this should be in the interest of consumers.

Ironically, the outcome is the exact opposite of what Comcast had hoped to achieve, and must be the worst case its strategy team would have imagined on 13th February 2014 when they announced their bid for Time Warner.

“Conditional” clearance – with harsh conditions

We are more than used to the regulators’ clearance being subject to the disposal of part of the acquired business. In the case of New Charter, the conditions are fundamental because their also anchor a key principle which had been the subject of fierce debate and is still contested by some: the notion of internet neutrality. In short: Charter, Time Warner and Bright House can unite, but with the huge proviso that they will not be allowed to link their tariffs to the volume of data used by their customers, nor cap that volume, and that they will not be allowed to charge content providers a fee for being linked to their customers.

This means that New Charter will have to implement the principles of net neutrality, in which customers enjoy internet access regardless of their volume usage, and importantly it also means that Time Warner will no longer be able to charge providers such as Netflix a fee for connecting them to consumers through their network.

The concept of “neutrality” goes one step further, Time Warner Cable will have to cease another of its restrictive practices, which was to contractually prevent its local cable programmers from distributing its content further through on-line video distributors.

Breaking the “infrastructure and content” alliance

The restrictions imposed upon New Charter are due to last seven years, which is long enough to break a model that emerged at the dawn of the millennium but is no longer relevant today: that of the combination of infrastructure and content. The model made sense in the days when a physical link was a prerequisite to accessing digital content. Rather than fighting exclusively on price and bandwidth, cable network providers could gain a competitive advantage by offering richer content, much of it exclusive, hence the coming together of infrastructure and media content in groups such as Time Warner Cable or Comcast who own NBC Universal.

But this was before the emergence of Wifi and GSM telephony which were initially regarded as a mere backup solution to connect to the internet but have since become one of the main means of accessing data, in particular music and video content. Every advance in cable broadband speed is followed by similar advances in wireless connectivity and consequently the access to content is no longer dependent on any single type of infrastructure. The regulators’ decision is an effective means of ensuring that restrictions resulting from former technological limitations are not perpetuated by equally restrictive commercial practices.

What if internet neutrality really becomes a reality?

True internet neutrality is what the likes of Netflix, HBO GO, Amazon and Hulu are waiting for, to compete on an equal footing without any access restrictions. Meanwhile, in a world in which consumers and corporations expect internet data transmission speeds to double every two to three years and do not see why this performance improvement should cost them a single penny, internet providers and their infrastructure suppliers such as Nokia Alcatel or Huawei are struggling under intense cost pressure whilst trying to satisfy the market’s ever growing appetite for digital data transmission.

The restrictions imposed upon New Charter will force internet providers to re-focus on the true differentiator as a means of setting their pricing policies. That differentiator is not the volume of data that is transmitted, but indeed the bandwidth made available to any particular customer, because that is where the providers’ physical constraint lies, a constraint that can only be lifted through massive investment to deal with the exponential growth of demand.

If the regulators manage to enforce those restrictions during the coming seven years, there is a chance that some transparency might prevail on the market, and that rather than offering consumers frustratingly complex and restrictive schemes based on a combination of bandwidth, content and a cap on usage, internet providers will at last provide consumers and businesses what they actually want: access to the internet at a data flow rate that meets each user’s needs.

The New Charter case is turning out to be the regulators’ opportunity to be more than the market’s policemen, by actually contributing towards re-shaping an industry and correcting some of the bad practice that has been allowed to flourish over the past decade.

About Paul Siegenthaler

Paul J Siegenthaler has helped numerous merging or acquired companies to integrate successfully, and has driven major business transformation programmes across Western Europe and North America, ensuring they deliver the business case their shareholders had been promised. Following a Masters degree in Economics from H.E.C. Lausanne and an MBA at London Business School, Paul spent the first 17 years of his career as Managing Director reshaping the companies acquired by an international group, before focusing solely on the business integration of broad scale international mergers and acquisitions, across a number industries.

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