Comcast (CMCSA) and Time Warner Cable (TWC)

I laughed out loud when I heard the press report that the Roberts family, which controls Comcast, is concerned that customers are not giving them credit for their attempts to improve service.  On virtually any metric you’d care to choose, and for as long as I’ve been watching the company–both as an investor and as a customer–CMCSA has consistently ranked at or very near the worst in customer satisfaction.  It’s the only reason TWC isn’t in last place.

Hence the legislative and regulatory concern about consolidating the bottom of the pile into one low-service mega-company.   …and, I presume, the claim that customer service is now a priority for CMCSA.

I have only limited experience with TWC.  My impression is that no one is in charge.  This contrasts with CMCSA, where I don’t think incompetence is the issue.  Instead, I believe the profit-maximizing strategy of the firm is to:

–find the line where customer dissatisfaction turns into revolt and make the minimum investment necessary to stay just above it.  I’ve never discussed this with CMCSA management–in fact, I can’t recall ever having spoken with them.  But companies all have personalities.  And that’s the way CMCSA acts.

CMCSA wouldn’t be the first to do this.  Marriott (MAR) had  similar thinking at one time.  It built its hotel rooms with the ceilings an inch or two lower than other companies and the rooms, say, 10% smaller in total area.  The hot water was never really hot.  MAR managment argued to that these deviations from the norm all saved money and were too small for anyone to notice.  People would, at worst, only be vaguely uncomfortable.  And then they wondered why they were never able to attract (lucrative) business customers.

Eventually, the lightbulb came on for the Marriotts. The family ousted the management that thought up this approach.  (Those guys decamped to Disney, where then created the Eurodisney fiasco, and, after being pushed out the door again, went on to severely clip the wings of Northwest Air.)  MAR began to build more comfortable hotels and built a thriving corporate business (by the way, I own MAR shares).

The difference between MAR and CMCSA is that the latter is a semi-monopoly.  Customers have very few other choices.  That’s why a customer-unfriendly strategy continues to work.  It’s also why the question of whether regulators should encourage this behavior is coming up.

I’m not a CMCSA customer any more.  I use FIOS now.  Superstorm Sandy did me in.

The week after the storm, Verizon (VZ, another stock I own) trucks were all over our neighborhood, repairing their mobile and wired internet infrastructure.  CMCSA trucks didn’t arrive for a month!!  Nevertheless, CMCSA continued to charge for the service it was not delivering.  The customer service representatives I spoke with on more than one occasion explained that I could get a refund for the time the service was unavailable.  To do so, however, I would have to submit proof that my electric power had been restored.  And I would not get a refund for any time (a week, in my case) that the electric power was out.  Yes, CMCSA cable and internet weren’t available for a month after the storm.  But for CMCSA that was irrelevant.  Their argument was that without electricity I couldn’t receive the service CMCSA couldn’t provide.  So I had to pay for the non-service anyway.   Talk about through the looking glass.

Anyway, like most everyone else on our street, we switched to FIOS.

It will be interesting to see how the regulators treat the possible merger of CMCSA and TWC.

Netflix and Comcast

Netflix just agreed to pay Comcast an undisclosed amount to ensure that the video rental company’s customers can access subscription content rapidly through the Comcast network.  In doing so, Netflix belatedly joins high internet traffic-generating firms like Google, Yahoo and Amazon in paying ISPs to get enough bandwidth that their offerings function correctly on subscribers’ computers or tablets.

Terms have not been disclosed.

why now?

Three factors are likely at work:

–a Federal appeals court recently ruled that the rules for net neutrality laid down by the FCC in 2010 exceed that agency’s authority, meaning it’s not clear what obligation, if any, Comcast has to make sure Netflix works right.

–inability of Netflix subscribers (like me) to access “House of Cards” when it first came out led to numerous customer complaints.

–Comcast has bid for Time Warner Cable.  If the deal survives Federal anti-trust scrutiny, Comcast will have considerably more market clout than it has today.  If so, terms would probably be better today than after the merger closes.  Also, in the meantime, Comcast presumably doesn’t want Netflix arguing against the combination.

what changes?

My guess is that in terms of profits the deal makes little difference to either Netflix or Comcast.  Before, Netflix didn’t pay Comcast and Comcast didn’t allocate capital to improving its ability to transmit Netflix.  Now, Comcast gets money, but will have to spend on equipment to support Netflix.  Presumably some people who had avoided Netflix previously will become customers.

I’m not sure whether I’d bet the farm that this is so, but given that as outsiders we have very little information, I think the safest assumption is that the deal doesn’t move the profit needle much for either party.

What I find interesting, though, is the way that Comcast wants its relationship with Netflix to evolve.  Until now, Netflix has been using third parties to route traffic.  They also attempt to smooth traffic’s flow as they connect Netflix to “last mile” ISPs like Comcast.  According to press reports, both Netflix and Comcast want to stop using such intermediaries.   Although the precise form of, and rationale for, the new working arrangement isn’t clear (to me, at least), the gist is that money formerly paid to middlemen will now go into Comcast’s pockets.

Maybe the structure of the new deal will unfuzzy itself after the government rules on the proposed Time Warner Cable merger.  Maybe not.  But the main investment conclusion I see is that Comcast is true “owner” of its internet customers and will continue to use that power to shift money away from middlemen and toward itself.

CBS vs. Time Warner Cable: what’s at stake

CBS and TWC have settled their differences, but only after a month-long blackout of CBS (and Showtime) on TWC.

The dispute got ugly as time passed.  Toward the end, CBS personalities were appearing in ads offering to help TWC customers switch to other providers.  TWC was helping introduce customers to Aereo, the antenna company, as an alternate source of CBS content.  (The latter seems to me to have a strong shoot-yourself-in-the-foot aspect to it, although the networks hate/fear Aereo, so maybe it did something.)

According to SNL Kagan, the media guru that’s the source of most of the hard data in this post, in New York City, Verizon FIOS boosted its customer base by 16%+ during the struggle, presumably all coming from TWC.

The ferocity of the dispute and the length of time it took to resolve indicate the core issue–retransmission consent–is a key subject.  I think negotiations also underline the precarious position of the traditional cable content sales model.

background

Cable companies pay the traditional free over-the-air broadcasters for permission to retransmit network content to cable subscribers.  NFL football is probably the most important item, since lots of people watch.  They watch it live, too–commercials included.  For a long time, the networks regarded the fees they got as “found” money.  All they really cared about was ad revenue.

Not any more.  Over the past few years, as ad revenues have begun to wane, networks have become increasingly aggressive in pushing retransmission payments up.  In the aggregate, the ota networks will collect about $3 billion in retransmission fees in 2013.  That could balloon to $12 billion five years from now.

CBS vs. TWC

According to SNL Kagan:

–CBS had been charging  TWC $.65 – $.75 per subscriber per month for retransmission consent.  It was aiming to raise that to $2/sub/month by 2018

–the reason the previously doggy local affiliate stations are being scooped up in large numbers by predators is their share of the retransmission loot.  SNL estimates that local stations’ share of retransmission revenues has risen by 50% since 2011 and now accounts for a third of EBITDA for many of them.  The way things are going, retransmission will be the dominant source of income for them before the decade is out

TWC was ok with $2 a subscriber/month.  Digital rights were the main sticking point.  “Digital rights” is a broad concept.  It covers on-demand rights and online rights–everything from on-demand over the internet, to ads in on-demand, to fast-forward disabling of broadcast content.  During the years when it wasn’t paying much attention, CBS had apparently granted TWC wide latitude in this area for free.  Now it wants those rights back–presumably so it can charge extra for them in later contracts with cable operators.

no one’s leaking settlement details

That suggests that one party made the lion’s share of the concessions.  My money would be on CBS having come away from the table as the big winner, if I had to make a bet.

a tipping point for cable?

As monthly cable/broadcast satellite/telco video bills approach $100 a month, subscribership is beginning to decline, albeit slowly.  Although an extra $1.50 a month doesn’t sound like much–$6 a month when multiplied to account for all the major ota networks–passing along these new costs may trigger a disproportionately large loss of subscribers.

Cable’s response?

The nuclear option, to put little ota antennas in cable boxes, is probably too expensive.  Partnership with Aereo would be iffy, given the unclear legal status of the service (a Federal court in New York has ruled in favor, one in California has ruled against).

Maybe the retransmission issue forces a rethink of cable’s whole current pricing philosophy.