With all the political turmoil surrounding the overly announced merger of Comcast and Time Warner Cable, the chances that this will ever happen decrease week after week…

Craig Moffett, graduated at Harvard Business School with honor and ranked #1 analyst in the U.S. Cable and Satellite sector for the past seven consecutive years, just cut his ratings from “buy” to “neutral”, and lowered his estimate on regulatory approval of the merger from 70% to 60%.

His consideration relies on cord cutting risk, regulatory concerns and the recent rally in stocks

Let’s get to see each one separately..

1)    CORD CUTTING  – cord cutting refers to the decision to abandon cable connection and migrate to over-the-air (OT) free broadcast through antenna, or over-the-top (OTT) broadcast over the Internet (like Netflix, Hulu, Amazon etc).
As TV viewing dropped four percent last quarter, the signals lead to think that the base of cable subscribers will decrease over time, while more and more people will decide to live an “OTT only” life.

2)    THE REGULATORY DEBATE – The Congress gave the Federal Communications Commission (FCC) broad authority “to update its rules to reflect changes in technology and marketplace behavior in a way that protects consumers“. The FCC is now at the center of the debate on the net neutrality, which basically means the role of internet providers and their power to manage the supply of high-speed internet.

In the net neutrality debate converge concerns about both pricing and content distribution.

An unregulated market would see the creation of differentiated pricing with a surcharge for websites that can be loaded faster, it would see at the same time the blocking or diluting of lawful content and services.

Comcast has invested  $17 million on lobbying Washington over last year.

Regulation by the other side is meant to ensure a free, open, fast web.

The FCC stated that it wants to use Title II of the Communications Act to regulate wired and wireless Internet, as this is considered the most protective set of norms for consumers. T. Wheeler, chairman of the FCC, said that “my proposal assures the rights of internet users to go where they want, when they want, and the rights of innovators to introduce new products without asking anyone’s permission”.

In a game of check and balances, Wheeler also intends to modify the Title II to allow bigger incentives to broadband operators to invest in their network. For example, there will be no rate regulation, no tariffs, no last-mile unbundling. Over the last 21 years, the wireless industry has invested almost $300 billion under similar rules, proving that modernized Title II regulation can encourage investment and competition”.

3)    THE STOCK MARKET – Both TWC stocks and Comcast stocks have seen a significant increase in their stock value over the last year, Schermata 2015-02-18 alle 15.48.25Schermata 2015-02-18 alle 15.47.50Comcast closing today at 58.22, TWC  at 147.76. These data represent an increase respectively of totaling +11.5% for Comcast and of +4.8% for TWC towards the stock value in February 2104. The fluctuation of TWC appears to be more broad, while Comcast has kept more stability over time.

Even though with different intensity, TWC and Comcast stocks have been affected by the indecision of FCC and more recently by the prudence expressed by influential analysts.

The two curves follow the same course, with peaks in October and December 2014, and a fall at the very beginning of 2015.

What does the acquisition TWC by Comcast mean?

Comcast is one of the largest television producers and network owners

Time Warner Cable is the nation’s second-largest cable operator.

With this merger Comcast would control 30% of the TV distribution market and 35% of broadband Internet service coverage.

This means that..

the strategic significance of this merger lies in the bargaining power over programming, and sideways over advertising, as Comcast would leverage its size to lower rates paid to TV networks for the distribution of content. This concerns worries content creators and cable competitors, who are currently banding together to obstacle the merger.

Netflix keeps its distance and sees what happens, while pricey law firms and lobbyists do their job. The FCC will vote on Feb 26th on the net neutrality regulation, and the exits of these vote are likely to ultimately determine the business palatability of the merger.

Will a gunshot open the race?


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