Time Warner Cable Mergers and Net Neutrality Expectations for Charter

Charter Communications and Time Warner Cable logos combined.

A little over two months ago a proposed merger between Comcast and Time Warner Cable (TWC) was called off. Almost no time passed before Charter Communications entered into an agreement to purchase TWC for roughly $57 billion. As the calendar turns to July, there remains a certain level of uncertainty surrounding the details of this proposed purchase, as well as how the FCC will respond to the bid.

 

Early after its announcement in 2014, the bid by Comcast to purchase TWC was considered a long shot. Claims from within the broadband community, consumer advocate groups, and the public all made it clear that they were concerned with the creation of what would have been the largest TV operator in the United States. Even the Chairman of the FCC, Tom Wheeler, expressed his opposition to the merger. Wheeler’s main point of contention, however, was that if the purchase were allowed to proceed, it would create an unfair competitive advantage for Comcast in the broadband market. In particular, the company would have enjoyed a controlling share of almost 60% among broadband providers. Ultimately it was this near monopoly, coupled with the lack of any penalty fee for ending the agreement, which caused Comcast to back out of the deal.

 

Drawing lessons from the failed deal between Comcast and TWC, Charter has begun to promote how its proposed purchase of TWC will not alter the television or broadband playing field on the national stage. The CEO of Charter, Tom Rutledge, has stressed that even if his company is successful in acquiring TWC and Bright House, the newly expanded company will still be only the second largest provider of cable and high speed internet services behind Comcast. At most, Charter would supply about 20% of all TV customers and 29% of all broadband customers. Another issue that Charter does not need to address is that unlike Comcast, which has a financial interest in Hulu, there is no concern that Charter may regulate speeds for video streaming services, such as Netflix or Amazon Prime.

 

Charter is also drawing on the FCC ruling which made broadband a Title II utility as a reason for why its proposed merger should be approved. Rutledge made clear that the footprint of the expanded company would not overlap geographically and that there would remain competition for broadband services offering 25 Mbps in all of its coverage areas. Additionally, he stated that since the majority of the company’s investment is in broadband, not television, it would encourage the expansion of Over the Top (OTT) streaming video services and not impose any sort of data cap on customers. Indeed, subscribers with the new Charter, if the merger is approved, could see significant savings on their broadband subscriptions as their speeds are tripled while their monthly bill is lowered.

 

While the merger works its way through regulatory checks, industry analysts appear confident that the deal will occur. The latest suggestions are that there is a 75% chance that the deal is approved. The FCC has announced that they hope to have this process decided, in favor or opposition of the merger, by the end of 2015.

 

Confirmed and Potential Changes to Sports Bundles and Television Providers

Logos for MLB, the NBA, the NFL, and the NHL.

Continuing the trend of breaking apart cable packages, the NBA announced after the 2015 NBA Finals that beginning next season they will be making changes to their League Pass. In existence since 1994, the League Pass for the 2014-2015 season cost $200 and provided subscribers access to over 1,000 games that were not already available on a local sports network in the region. This plan was offered through TV providers and directly from the NBA via their own online video platform designed for iOS, Android, and desktop computers.

 

The changes in the NBA League Pass bundling will allow subscribers to purchase season-long access for a single team or purchase access to individual games. Although the official pricing tiers will not be released until July 2015, industry experts expect that following a single team for the season will range in cost from $50 to $100, while individual game prices will be in the $2 to $5 range. The latest speculation is that the prices for these tiers will be consistent across markets and teams, regardless of their size or popularity. However, the one restriction will be that this unbundled package will only be offered through the NBA’s video platform, rather than through the television providers. In light of this announcement, there have been discussions to resolve some areas of concern between the NBA and their broadcast partners, including ESPN, Turner Networks, and regional sports networks, such as the Los Angeles Lakers’ SportsNet.

 

While analysts praise the NBA for making this decision, and stress the new growth this move is bound to bring to Commissioner Adam Silver’s league, the NBA is bucking the trend of the other professional sports leagues in how they offer their products. MLB and the NHL also have sports packages, while the most famous, and controversial one, is the NFL’s Sunday Ticket Package, which has also been in existence since 1994. Offered exclusively through DirecTV, a lawsuit was filed recently claiming that the NFL’s package structure and use of blackouts are in violation of federal law and need to be overturned. While this lawsuit is just beginning, a recent development in a case involving NHL blackouts and bundled packages may ultimately impact the case against the NFL. The settlement in the NHL case means that for the next five years fans will be able to purchase a package online, known as Game Center Live, that allows them to follow a single team at prices more than 20% below the current cost of bundled packages. Legal experts expect the lawsuit against MLB to be resolved in the same way. All of this suggests that while television providers may be unhappy with the NBA’s voluntary decision to provide a non-bundled package, it may spare the NBA costly legal battles in the future.

FCC Reclassification, Broadband Access, and OTT: Does it Mean Anything?

Collection of rainbow-colored internet cables

One of the biggest hassles that people experience when they move is finding new cable and internet providers. While there are a bevy of cable packages to choose from, the options for broadband providers are not always as plentiful. With the recent FCC decision to reclassify broadband as a Title II utility, coupled with its change in what constitutes broadband, services with speeds of 25 Mbps or higher, the process of selecting a provider by a new homeowner has gotten even harder. The issue at hand is that for the vast majority of American households, there is only one, if any, Internet Service Provider (ISP) that can supply true broadband. The latest statistics are that 19.7% of American households do not have access to an ISP offering the 25 Mbps speed, while 54.3% have access to only one such ISP.

 

While the broadband provider issue appears to be changing with the development and expansion of fiber networks throughout the country, Roger Lynch, CEO of Sling TV, is stressing that consumers may see an increased strain on their finances as they purchase internet access. In particular, Lynch believes that those consumers who are broadband-only subscribers, the type who thrive in the expanding Over the Top (OTT) ecosystem of Netflix, Amazon Prime, and Hulu Plus, will feel the pinch as cable companies attempt to offset their loss of TV subscribers by raising the price on single-use consumers. While OTT-only dwellings remain a small part overall, the percentage is growing and has now reached 10.5 million households, up over 15% from 2012. This expansion is occurring at the same time that pay TV subscriptions have declined over 0.5% since the start of 2015, the largest decline ever recorded.

 

Although Lynch’s claims must be taken with a grain of salt, considering that Sling TV is a subsidiary of Dish Network and a competitor to the cable companies, there is no denying that the new OTT offering is seeing early growth. Since its February 2015 launch, the $20 per month service has expanded to over 250,000 customers. While this is a fine showing, it is not a surprise to industry analysts who predicted a fast start but see Sling TV’s subscription numbers slowing down quickly. With its focus on offering smaller channel bundles and the option to add other thematic bundles for an additional cost per month, Sling is trying to develop its own niche, no doubt assisted by the existing relationships that Dish Network enjoys with broadcasters. However, Sling’s sustained growth, especially from those consumers interested in a variety of sports offerings, of which the OTT service has limited access, remains the question.

 

Ultimately, all of the talk about falling pay TV customer totals, increasing costs for broadband-only subscribers, and the increase of OTT offerings means that consumers need to be aware of what services are available in their area before they sign a lease or close on a home.

Video Streaming Services Cut into Cable Subscriptions

Hulu Plus and Netflix logos

The way that consumers watch television and movies is changing. For the last few years attention has focused on the members of the ‘cord cutting generation’ who do not want to pay for cable television service. To fill in this void there have been two major developments: Subscription Video on Demand (SVOD) services, like Netflix and Amazon Prime, and Advertising Video on Demand (AVOD) services, like Hulu. Although these are the services most people are familiar with, there are other providers in the ever-growing Over The Top (OTT) service industry. Recent statistics related to this burgeoning industry suggest that cable companies need to act quickly and change the way they present their future content if they want to remain viable in the face of OTT competition.

 

Cable providers have looked cautiously at the latest  quarterly earnings release for the industry which the Leichtman Research firm says provides no concrete evidence that consumers are preparing to switch over completely to OTT and leave behind pay TV. However,  other experts claim that these findings undervalue the record low customer growth of only 10,000 across all the major cable companies. Parks Associates, another research firm, believes it has evidence that cord cutting has reached a new level. The latest estimates are that around 7 percent of American households, approximately 8.5 million homes, have high speed internet and OTT services, yet they are not subscribed to a pay TV service. With this number set to increase there is little wonder that upwards of 84% of all internet usage in the United States by 2019 will involve video streaming. Further supporting the belief that cord cutting is a growing trend, Limelight found in a recent survey that over 50% of the 1220 people they interviewed were willing to go completely OTT and cancel their cable subscriptions.

 

It comes as no surprise in light of all of these recent polls and studies that cable providers are attempting to find new ways to engage with this cord cutting generation. Although TV Everywhere systems have been developing for the last half decade, new providers are throwing their hats into the ring, including Sky, Rogers Communication, and Dish Network. The hope of these companies is that they will be able to tap into the OTT market while recent changes in local regulatory practices will allow them to lure some consumers back to traditional cable packages. With less overview necessitating uniform programming packages in the same geographic region, it is possible that cable providers will create even smaller, more focused packages to convince people to not cut the cord. In the meantime, it is a prime market for consumers to shop around and determine what channels and programs are most important to them, whether or not they need a cable subscription, and if they can go fully OTT.

 

FCC removes local regulation rules

FCC logo

While the much-discussed March 2015 decision by the FCC upheld the idea of Net Neutrality, there is a change taking place at the local level that cable providers are hailing as a victory for streamlining the distribution of content to their customers. For the last twenty-two years, local, city, and state committees have possessed oversight of the basic programming packages provided by the cable companies. Now, after a unanimous 5-0 ruling by the FCC to remove this restriction, the providers will be able to determine all the details of their programming packages without having to receive the approval of local authorities.

 

Up until now, the oversight provided by the local committees as part of the 1992 Cable Television Consumer Protection and Competition Act not only dictated which channels could not be excluded from the basic programming packages, but also how much those packages could cost. The new FCC ruling determined that the regulation was no longer necessary because of changes in the market that have created an elevated level of competition for the cable providers, in particular through the expanding footprint of services provided by companies like DirecTV and Dish. Another factor in the FCC’s decision was that since 2013, 220 of 224 requests for exemption from local rate-setting restrictions were approved. With such a high success rate for receiving exemptions, the FCC believes that it is simply removing an unnecessary level of red tape.

 

Cable providers state that with the removal of uniform package requirements, they will be able to present consumers with a variety of service and channel packages, ultimately providing more choices for service packages that don’t include the higher cost premium channels. At the same time the cable providers have cheered the latest FCC decision, broadcasters have been critical of the claims that satellite companies provide reliable enough competition to all parts of the United States to justify this victory for the cable providers. As a result of this rule change, and contrary to the cable companies’ claims, there is a fear among broadcasters that basic TV station signals will now be placed in costly service tiers, ultimately lowering the viewership of local programming.

 

The concern over the FCC ruling is not confined to just local regions, but also the halls of power in Washington D.C. A representative for the National Association of Broadcasters remains perplexed why the one defense available to safeguard consumers from skyrocketing prices has been removed so easily. Furthermore, members of Congress have questioned the FCC’s ruling, stating that this decision will result in increased prices and fewer channel choices for residents in rural and remote areas.

Fiber footprint increases while prices drop

A bundle of optical fibers.

 

As the review process for the proposed Charter purchase of Time Warner Cable continues to advance slowly, internet users around the United States are seeing more rapid gains in the expansion of fiber options. While Google Fiber has been one of the major leaders in this expansion, CenturyLink and AT&T have also been making gains. Throwing its hat into the ring now is Comcast, which is trying to differentiate itself from the competition.

 

While the current speed people can expect from fiber is around 1Gbps, Comcast is doubling this and offering speeds of 2 Gbps. Known as Gigabit Pro, these services will be offered to households in parts of Tennessee, Florida, California, and Georgia. Ultimately, the goal is to bring these services to around 20 million homes by the early part of 2016.

 

The latest reports indicate that Comcast is expanding its Gigabit Pro service area to include more of the Midwest and western United States. Regions of Minnesota, Texas, Colorado, Utah, Washington, and Oregon will soon be able to enjoy speeds twice as fast as other service providers in the state. This latest round of expansion has industry insiders buzzing that Comcast has invested more heavily in its fiber infrastructure than previously believed. In addition to their Gigabit Pro service, Comcast plans to launch Extreme 250 by the end of the year. This service will offer speeds of 250 Mbps.

 

Although their speeds may lack what Comcast will soon offer, CenturyLink continues to offer its 1 Gbps services in certain parts of the United States. By the end of 2015, they hope to have finished connecting over one million businesses and households to their fiber service. The same is true for AT&T which is expanding its U-verse fiber footprint in Illinois and Tennessee.

 

As more of these services are being offered, prices have been dropping. Initially, AT&T had been pricing its services in the $120 range, but competition has caused them to drop prices in some areas, including in the southern United States, by up to $50 per month. Google Fiber is currently offering its services for $70 to $100 per month. Even though Comcast’s Gigabit Pro provides speeds twice as fast as its competitors, the proposed price of $299 per month may turn off many consumers. What is clear, however, is that unlike AT&T, Comcast has no plans to establish a usage cap on anyone using Gigabit Pro.