Folks in the movie business sometimes argue with me when I tell them that the most powerful executive in Hollywood lives in Philadelphia. But that debate should end if Brian Roberts’ Comcast buys Time Warner Cable. With 30M cable TV subscribers, the colossus based in the City of Brotherly Love would have incalculable power to influence Big Media and entertainment generally. Here are a few potential flash points:
Home video sales. Comcast recently became an important ally for studios that want to sell downloads of movies and TV shows (called EST, for electronic sell-through), their best hope to revive a business that has struggled as consumers lost interest in DVDs. Internet services such as Amazon and Apple’s iTunes were fine. But Comcast stunned some studio execs late last year when it began to sell EST movies and TV shows to its cable subscribers and beat iTunes and Amazon in sales of Universal’s Despicable Me 2. “In the first 2 months of their service, relying only on the content of three studios, including Lionsgate, Comcast has captured 15% of the EST market and expanded the business,” Lionsgate CEO Jon Feltheimer said last week. He added that “there are ongoing conversations with other [pay TV providers]. You will see them enter the EST space. It’s been too successful for Comcast.” One key question is how much of each sale goes to the studio vs Comcast, which also owns Universal Studios. Comcast’s hand in these negotiations becomes much stronger if it controls nearly a third of all pay TV homes including New York and Los Angeles.
Netflix and streaming video. Studios now depend on the cash that they collect when they license movie and TV rights to these Internet-based services. But Comcast has a lot of leverage to derail them — and incentives to do so to prevent cord-cutting. While Comcast says it will abide by the FCC’s net neutrality rules, Netflix and its rivals would have the air knocked out of them if the biggest broadband provider promoted usage based pricing, effectively leading consumers to watch the meter whenever they stream video. Comcast also could rebuff Netflix’s efforts to become part of the pay TV ecosystem: CEO Reed Hastings wants to give his subscribers the ability to access the service through distributors’ set top boxes. Comcast also can use a variety of techniques to slow Netflix streams. “While investors and politicians spend significant time and energy focused on Net Neutrality, we believe peering and interconnection are the issues actually impacting content creators, distributors, [content delivery networks] and consumers today,” BTIG analyst Rich Greenfield noted this week.
Virtual pay TV. Sony and Verizon have raised a lot of eyebrows with their plans to create services that would use the Internet to transmit pay TV channels, now only available from cable and satellite companies. In theory that could pose a threat to Comcast, especially if they can offer a lower priced service with fewer services — for example, one that doesn’t include sports channels. But there’s no reason why Comcast couldn’t top them by taking advantage of the lower than average rates it pays for programming to offer a similar, national Internet service.
Retransmission consent. Last night CBS chief Les Moonves said he expects to collect $2B a year from pay TV distributors in 2020, up from his previous forecast for $1B by 2017. His optimism was easy to understand after CBS won a big rate increase from Time Warner Cable even after the operator allowed CBS stations and channels to go dark on its systems for 32 days last summer. But ask yourself: How would the contract impasse have played out if Moonves faced a merged Comcast and Time Warner Cable? That’s an important question for all broadcasters as ad sales flatten, and could decline as online video services including Google’s YouTube try to win some of the business that now goes to TV. They’re counting on their ability to force Comcast and other pay TV providers to shell out ever rising fees to keep airing TV’s most popular programs. Those payments amounted to about $3.3B last year, and are expected to hit $7.6B in 2019, SNL Kagan estimates.
Other programming costs and issues. Big media companies including Disney, Fox, Viacom, Time Warner, and Discovery are primarily in the business of packaging and selling pay TV channels. And they’ve driven hard bargains with distributors when they negotiate payments — both for conventional platforms and, more recently, for TV Everywhere streaming rights. But they may have to temper their expectations when they negotiate with Comcast after a merger. As the industry’s largest provider, it likely pays the lowest prices for channels and presumably could apply those rates to TWC customers after a deal. Execs this morning declined to say how much programming costs would figure into the expected $1.5B in operating synergies that Comcast says it will see. Still, programmers will have to think doubly hard about the price increases that they want when they negotiate with Philadelphia.
Further consolidation. If Comcast can merge with TWC, then just let your imagination fly. Charter and its largest shareholder, John Malone’s Liberty Media, showed with their TWC offer that they’re prepared to bulk up. Will Cox or Cablevision be next? And how about DirecTV and Dish Network? The satellite companies have said that they’d like to merge but feared that the FCC or antitrust regulators would reject a deal that reduces competition in a business that’s particularly important in rural areas not served by cable. That sentiment could change if they can make the case that they need to merge to keep up with Comcast.
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