• Comcast-TWC Deal Highlights Importance of Scale In the Broadband Age

    Comcast has announced that it will acquire Time Warner Cable in an all-stock transaction valued at $45.2 billion. Comcast is already the biggest video and broadband provider in the U.S. and will now get even bigger, assuming the deal is approved. Comcast has committed to divest around 3 million of TWC's video subscribers to stay below 30% of the total U.S. pay-TV market, so the combined company would have approximately 30M video subscribers. Broadband subscribers would be a little less than 30M.

    For me, the big takeaway from the deal is that in the broadband era, scale matters a lot - and to compete effectively, a company simply has to have it. Nearly ubiquitous broadband and wireless connectivity, plus massive proliferation of devices, have enabled online-only players to have easy access to massive global audiences. This context has helped fuel the rise of companies including Google, Facebook, Amazon, YouTube, Netflix, Twitter and many others. With innovative services and solid execution, it's now possible to create huge businesses quicker than ever.

    The result is a clear shift in the balance of power in the video business. Consider 2 examples: Netflix vs. HBO and YouTube vs. smaller cable networks. Netflix only began streaming in a significant way approximately 5 years ago, yet already has more U.S. subscribers than HBO, which has been around for 40 years. Admittedly, Netflix's profitability is still far lower than HBO's, but especially now with international expansion, Netflix's growth prospects are far higher. Meanwhile, more than half the U.S. population now watches something on YouTube each month, with some of its most popular channels outdrawing smaller cable networks. And YouTube was only started about 10 years ago.  

    Simply put, there is more innovation happening in video today than ever. Just yesterday I highlighted how Jerry Seinfeld - a world-class entertainer with opportunities galore - is focusing his creative energies online. Today there are real and existential threats to the pay-TV industry, whose traditional gatekeeper role has been completely disrupted by broadband delivery. Yet we're still only in the early innings of longer-term changes playing out - witness how cord-cutting and cord-nevering are still nascent, despite the hype.

    Comcast understands this new competitive dynamic well, and more than any other operator has pursued a product development strategy of making its video services more like what consumers have come to expect in online. These include the rollout of X1, TV Everywhere, Streampix, cloud DVR, extensive VOD, etc. All of these are meant to add more value to an evermore expensive monthly multichannel subscription, which itself feels increasingly anachronistic given a la carte, specialized options in everything from music to news to shopping.

    Innovating in the video industry now takes tremendous resources and huge subscriber bases over which to amortize investments. Massive efficiencies are required to effectively market and promote new services. Critically, to attract the best talent (especially technical), it's essential to have market-leading products and a corporate reputation that's highly pro-innovation.

    By acquiring TWC, Comcast enhances itself across all of these dimensions. One big intangible Comcast also gets in TWC is the NYC market. There it gains access to a significant new swath of small and large business customers, an increasingly important segment for the company. But it also gains tremendous visibility in the country's leading media market, and therefore a prime opportunity to influence financial analysts and journalists who shape broader market opinions every day.

    With the deal, Comcast has once again asserted that it will not be steamrolled by the changes sweeping the video landscape. Rather, it will continue to increase its own scale to defend its turf and play on others'.