Comcast Abandons Time Warner Deal: What Now?

News broke late last week that Comcast (NASDAQ: CMCSA) officially ended its attempt to acquire Time Warner Cable (NYSE: TWC). The deal, worth $45 billion, was scuttled by Comcast’s board of directors after more than a year of pursuing Time
Interestingly, both stocks rose on news that Comcast had abandoned the Time Warner deal, with shares of Comcast rising around 0.7% while shares of Time Warner rose more than 4.5%.
In the wake of the abandoned Time Warner deal, there are two questions to ask. What happened? And what’s next for the cable industry as a whole?
First, let’s take a look at what led to a 15-month acquisition process collapsing in a matter of days.
Comcast is widely known to be one of the strongest lobbying forces is Washington. It has flexed its lobbying muscle a lot lately, both in opposition to the FCC’s proposed net neutrality rules and also in support of its proposed acquisition of Time Warner.
Despite Comcast’s efforts, it became increasingly clear that lawmakers would not support the deal, and that regulators would ultimately block it on the grounds that it would be anticompetitive.
And for good reason.
The reality is that the cable industry is hardly competitive. The chart below, sourced using data from the National Cable and Telecommunications Association, illustrates the small number of key players that control the majority of the market.
Comcast Merger Before 4.28.15
Comcast and Time Warner alone control 57% of the U.S. cable market. Add in Verizon (NYSE: VZ), AT&T (NYSE: T), Cox Communications, Charter Communications (NASDAQ: CHTR) and Cablevision (NYSE: CVC), and you have seven companies that control 93% of the market.
Had the Comcast acquisition of Time Warner gone through, the combined company would have controlled nearly two-thirds of the U.S. cable market.
Though there are several key players in the space, there is considerably less competition than you might think. These companies have carved out regional footprints and don’t generally compete against each other. In fact, Comcast and Time Warner don’t actually compete in any market.
Considering that these are the two largest cable providers in the nation, this helps explain why you probably only have one – or, at most, two – viable options for high-speed Internet or cable service at your home.
In short, the Comcast acquisition of Time Warner fell apart because Comcast realized it could not convince the government that the deal would be good for consumers. Frankly, it would probably be terrible for consumers.
What’s next for the industry?
Just because the union of Comcast and Time Warner wouldn’t be good for the U.S. consumer doesn’t mean that the industry isn’t ripe for consolidation.
Charter Communications had previously attempted a hostile takeover of Time Warner before the latter company was wooed by Comcast.
Some form of Charter-Time Warner merger or acquisition is on the table once again. Comcast could also try to buy one of the smaller cable companies. Cox, Charter, Cablevision or a spun-off cable division of AT&T or Verizon would all make suitable targets for Comcast.
Am I surprised at news that Comcast abandoned the Time Warner deal? Not at all. And I think giving one company 57% market share in a notoriously low-competition industry would prove to be terrible for consumers. Especially if that company is Comcast, which is consistently ranked by Temkin Ratings as the worst major company in terms of customer satisfaction ratings.
I think Comcast might buy one of the smaller providers or, more likely, two or more of the other providers might team up to challenge Comcast. This is an exciting time for cable investors.

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