Tuesday, May 26, 2015, 10:50 AM ET|Posted by Will Richmond
Charter Communications will acquire Time Warner Cable in a $78.7 billion deal, while also continuing its plan to acquire Bright House Networks for $10.4 billion. Assuming the deals close, Charter would become the 3rd-largest pay-TV operator/broadband ISP in the U.S. with a total of approximately 23.9 million subscriber relationships.
Like the prior Comcast-TWC transaction, these deals are driven by the desire for greater scale which supports the huge investments required to innovate in video and broadband services. In this morning's analyst call, Charter CEO Tom Rutledge repeatedly referenced the ability to spread investments over the larger subscriber base as a key benefit of the deals.
There is more innovation happening in video today than ever, and it's occurring in every part of the market, including content development, business models, cloud-based delivery, user interface, advertising, devices and more. Importantly, there is a generational shift occurring in how video is consumed - moving from traditional living room, linear TV network-based experiences to on-demand, mobile and social-based experiences.
As a result, the multichannel pay-TV bundle is under intense pressure. In Q1 '15, the pay-TV industry lost 31K video subscribers, vs. a gain of 271K in Q1 '14, indicating a tipping point for cord-cutting/cord-nevering has likely arrived. That was all but inevitable given the improving quality of content on inexpensive OTT services like Netflix, Amazon, Hulu, plus the variety of video now found on YouTube, Facebook, Snapchat and others. While their success increasingly makes broadband the growth driver of companies like Charter, video is still a huge contributor of both revenue and operating income.
To keep pace with the broader changes, pay-TV operators, such as Comcast, have been introducing new features such as TV Everywhere access, stronger VOD, hybrid set-top boxes, cloud services, faster broadband, public WiFi, etc. In discussing Charter's deals this morning, Rutledge mentioned many of these as core to its investment agenda.
Regardless of Charter's size, the biggest issues facing pay-TV industry remain sub-par customer experiences and expensive multichannel bundles that are out of synch with many consumers' emerging expectations. Rutledge talked a lot about improving the customer experience through domestic call centers and improved technology. Meanwhile Sling TV, Sony, Verizon and others are experimenting with "skinny bundles" of channels, though none of these have yet demonstrated broad appeal.
Bottom line, Charter's deals will give the company much more scale to cost-effectively innovate, yet but the uncertainties created by larger industry dynamics mean holding its own in the video business is anything but assured.