Last month, I’d gotten fed up. My Comcast DVR only held 10 hours of HD programming, and I was tired of being its valet. So I did my research, found out about my old friend Tivo’s new products, and decided to buy one. Tivo was still cool, just as in the days when I owned an early one before passing completely into the Comcastic fold.
Then, I saw some note somewhere on the web that Comcast was rolling out high-capacity DVRs in the East. Almost as a lark, before planning to buy my Tivo Roamio, I stopped by the local Comcast office, across from Whole Foods. “I’ve heard about these high-capacity DVRs and I’m wondering when they might be coming to Santa Cruz,” I asked at the counter. After a minute of computer screen-staring time, the helpful rep shocked me with: “We can give you one right now. Just bring in your old box, and we’ll swap it out.” Two weeks ago, I did, and have retired from my valet duties. The Tivo stays on the Amazon “Saved For Later” list.
That’s an illustration of the promise and the peril in Comcast’s $45 billion buyout of Time Warner Cable.
The promise: a huge company that’s so far done enough to stay ahead. It’s offering (kind of, not much marketing here) bigger DVRs, pushing ahead with all-access Xfinity, and speeding up its broadband. None are state-of-the-art plays compared against numerous smaller competitors. Many, though, are good enough to keep its customers, given the other advantages of its Triple Play (cable, broadband, voice) services.
The peril: Now Comcast is playing in a bigger field. It has acquired NBC Universal, and if it swallows Time Warner Cable (pending regulatory approval), having outwitted John Malone and Charter Cable, Comcast is poised to play with the biggest media companies. It would find itself at the top of the cable heap, competing most directly, it would seem, against two other legacy companies that have climbed to the top of the telecom heap: Verizon and AT&T. Going forward, though, its new competitors include Apple, Amazon, Facebook, Microsoft, Google, Netflix, Sirius, and Hulu, among many others. Comcast wants to be a media company, and that puts it into increasingly direct competition with the gnarliest competition it will have ever seen.
The Roberts family has been hard-driving and prescient in its building of the giant — and will need to double down on those qualities against its new foes.
Let’s look at the landscape. Comcast’s acquisition is the latest sign of legacy consolidation, in this case in cable. Last year saw the biggest consolidation of local broadcast TV in history, as Gannett, Tribune, and Sinclair put themselves on the top of that increasingly troubled industry. Magazines are fairly well rolled up, as are newspapers. That’s what you do in a maturing industry: consolidate to reduce cost and increase bargaining power with suppliers. Check.
Where to find growth, though, then becomes the universal question. For Comcast, it’s a recognition that its legacy cable business is slowly endangered. Cord-cutting is a slow-moving reality; broadband is already fairly penetrated. Comcast’s financials are excellent, providing $8.5 billion in free cash flow in 2013. But it believes it must become a media company to find growth. That’s what was behind that big acquisition of NBC Universal last year. It’s testing à la carte deals with HBO. It’s also begun selling and renting movies in addition to offering them through its cable subscription, as Xfinity offers products.
Overall, it’s now competing for the new consumer digital wallet, a wallet that was pretty empty five years ago. Think about what’s trying to get into our digital wallets, and having success:
Amazon and Apple are extracting regular dollars from music, movies, and more. That’s just the top of the paid entertainment landscape. Then there’s the new digital pricing of newspapers and magazines throughout the land, through all-access.
How much are you paying for digital news and entertainment this month? Any idea? We’re spending more than we used to, and soon we’ll be budgeting those dollars more smartly.
Comcast must approach this new reality. It must suit up two plays: defensive and offensive. The defense: protecting of that $100 to $200-plus bill it sends to its 22 million cable subscribers. As we begin to go à la carte, adding those other services, we necessarily view that one-size-fits-all cable bill more skeptically. The offense: taking as big a share of the new money to be made from movies and TV (probably to be followed by music) as the comfort with digital wallet spending becomes more mass. The offense, of course, is the flip side of the defense. It’s in that digital competition (the Time Warner deal is more a broadband play than a cable one, as Om Malik has pointed out) that Comcast will win or lose its future, as “TV” and digital content blend seamlessly over the next decade.
Let’s understand where Comcast’s money comes from. Of its cable revenues, at least 82 percent come from consumers, with only 6 percent coming from advertising; the rest is “other.” Get the next-stage consumer proposition right, and Comcast becomes a huge winner. Get it wrong, and it’s a route to decline.
How effectively can Comcast compete? Its legacy cable culture and clunky Xfinity experiences say it may have a tough time. Its entrepreneurial drive to remake the company and its cash say it may figure out a way forward. It can reskill itself to compete with fast-moving, smoother, and cooler customer experiences — or it can use cash to buy companies that have figured out parts of the equation. (Why not buy a Pandora or a Roku next?)
Clearly, Comcast has its thinking right. It is some combo of access (the pipes) and content that drives the new customer proposition. Now it must execute on that vision.
The consumer proposition that drives the Comcast logic here creates a key question for regulators. How fair is the aimed-for dominance? (Comcast would control 37 percent of broadband and 28 percent of cable TV households in the country.) How does such marketplace heft affect such key issues as net neutrality and the current run of buffering issues we’re seeing as we gorge on Netflix and the other services? How much can the new Comcast favor its own products (which in only grew in direct competition to everyone else’s with this deal), and how “legal” is that? Antitrust and regulatory provisions have always struggled to keep up with the mind-bending change in “competition” wrought by digital disruption. Expect this question to be similarly confusing to those doing the regulatin’. (Good Quartz explainer on some of these questions.)
For instance, in New York, a key base for Time Warner Cable, Comcast has made a point that it’s in the public interest for area advertisers to get improved advertising services, which it says would be brought about by the merger. That’s a semi-laughable “public good” claim; advertisers in New York City have a glut of digital, paper, and broadcast choices. Further, Google and Facebook have got to be taking lots more ad dollars out of that market via their targeting than cable has — or will.
Can Comcast’s scale improve our customer experiences? In what ways — specifically, and when?
There’s another key opportunity for regulators: broadband speed and access. The U.S. is 31st in broadband speed. That’s pathetic and sapping economic vitality. (My local Comcast office told me that, some time this year, Santa Cruz broadband would move to 50 Mbps from 25 Mbps this year, which will still rank us well behind the average in Hong Kong, South Korea, and Romania.) Isn’t this the time to mandate state-of-the-art broadband speeds, a further move on the president’s broadband-for-education program announced in the State of the Union?