Comcast Cable, the largest cable company and home Internet service provider in the United States, announced a merger with Time Warner Cable on February 13, displeasing several shareholders and government officials.
One day after the $45 billion all-stock acquisition was announced, shareholder Breffni Barrett Filed in the Supreme Court of New York (read it here) a class-action suit accusing TWC, its chairman and CEO Rob Marcus, former Sen. John Sununu and other members of the company’s board of fattening their pockets while breaching a fiduciary duty.
While it is easy to file an action such as this one, it is very hard to prove that a board acted as badly as Barrett alleges. However, Barrett may have just cause because not only is the merger subject to approval by shareholders from both companies, but also by the Federal Communications Commission and the Department of Justice, which already is observing a conflict with anti-trust law.
Anti-trust law is a competition law in the United States that supervises the mergers and acquisitions of large corporations which may threaten the competitive process.
Since Comcast is dominant in the cable industry and Time Warner is the second largest cable company in the U.S. , the merger raises an anti-trust issue, said the plaintiff’s lawyers at NYC firms Wolf Haldenstein Adler Freeman & Herz LLP and Robbins Arroyo, LLP.
"Any bid for Time Warner Cable would have to be approved by both the Federal Communications Commission and the U.S. Department of Justice, which have a record of bringing anti-trust enforcement actions against would-be mergers that they believe will harm competition,” said the team of lawyers.
According to BusinessWeek.com, "merging with Time Warner Cable will increase Comcast’s subscriber base by 50 percent, from 22 million to 33 million homes, giving it access to about 70 percent of U.S. households and a bigger base over which to spread its on-demand investment.”
Government bureaucrats use the Herfindahl-Hirschman Index (HHI) to evaluate monopoly status. The HHI is a dated metric that looks solely at market share and fails to take into account any other competitive factors.
Comcast is offering to divest 3 million Time Warner subscribers just to keep Comcast at 30 million homes – which is below the 30 percent HHI market share threshold.
While some agree it may give Comcast an unfair advantage, AT&T, Verizon Communications, and Dish Network all offer high-speed broadband and are poised to capture both the divested and the dissatisfied Comcast users. Internet services mega company Google is even testing an option —Google Fiber—that could provide speeds up to 100 times faster than Comcast.
The rationale of this merger may have more to do with the aforementioned competitors than you think.
According to Yahoo Finance, "this merger is part of an essentially defensive strategy by the "legacy” cable operators to cut costs, constantly reinvest in their network infrastructure and absorb ever-higher content costs – all with declining subscriber ranks.”
After the CBS blackout six months ago caused TWC to lose 300,000 subscribers and the "cord-cutters” of Generation Y have left to explore internet-based television options, the merger may be big cable’s only way to fight back.
For perspective, Netflix now has 29 million subscribers in the U.S. and 44 million worldwide. More than 2.3 million new American households signed up for the streaming service last year, its best quarterly performance in three years.
And Netflix growth is not burdened by the operating and maintaining a clunky cable wiring system for product delivery, so it can invest more dollars in original content such as the popular show, House of Cards, starring Academy Award-winner Kevin Spacey.
However, Comcast also owns NBC Universal, one of the largest TV network operators, and this type of vertical integration with another big player and content originator might also draw some FCC concerns or conditions.
If the merger goes through, Time Warner customers would likely see no immediate changes in terms of their channel lineups or Internet service. Yet, in their announcement, both companies indicated that some of Comcast’s broader array of video-on-demand offerings and programming accessible on mobile devices could be rolled out to Time Warner customers.
Comcast is in a leading position for its breadth of programs, with 50,000 video on demand choices and 300,000 streaming offerings on its XfinityTV.com and a new cloud-based DVR system.
Comcast said it expects regulatory review to take nine to 12 months.