Charter’s bid to buy Time Warner Cable comes at a time of sharp and rising competition in the broadband Internet and pay-TV business. For the consumer, that promises faster and faster Internet speeds and more and more high-definition channels.
It means further advances toward “TV everywhere,” with consumers watching pay channels on their smartphones and tablets far from home.
But it doesn’t mean lower prices, analysts say.
Competition has cable, phone and satellite companies scrambling to sign up customers with cheap initial prices that last a year or so. Companies hook customers, then hope they hang around when the prices jump.
Jump they do. A typical Charter introductory package of phone, Internet and TV starts at $110 a month, climbs to $130 after a year and $150 after two years, according to a Charter Communications Inc. presentation to analysts.
But the battle hasn’t had much effect on the full retail prices that long-term customers pay, analysts say. Instead, there’s been an upward creep in bills around the country, analysts say.
“Prices have been rising 5 or 6 percent a year, and consumers now pay about double what they did 10 years ago,” said Jeff Kagan, an independent telecommunications analyst in Atlanta.
Meanwhile, this month’s court decision striking down “net neutrality” raises the possibility of higher prices for over-the-Internet competitors such as Netflix and Hulu.
Such services let customers bypass the cable to watch shows on demand, and they have prompted some to cut the cord and cancel cable TV.
“The cable TV industry is in transition. It’s under threat from new competitors,” Kagan said. “There is new technology, exciting new companies and new ways to watch TV.”
Part of the motivation is on display in Kansas City, where Google is experimenting with fiber-based Internet service at 1,000 mbps. “It’s set a new bar,” said Alan Breznick, video-cable practice leader at Light Reading, a telecom news and research service.
Few think Google will move nationwide with such service, but it has competitors worried, Breznick said. They see where speed is headed.
“Customers finally have choice, but not all customers and not in all markets,” Kagan said. “Where we have choice, the traditional cable TV companies have had to quickly get better.”
Nationally, phone companies have about 10 percent of the market for pay TV, compared with 55 percent for cable. That’s because the phone company geographical footprint is still much smaller than the cable companies for fast Internet and TV.
Meanwhile, DirectTV and the Dish Network are selling satellite TV to people who don’t like the cable and phone companies.
An arms race isn’t cheap. Charter says it has spent more than $2 billion on system upgrades.
It’s unclear what effect the hostile takeover of Time Warner Cable might have on customers – if the takeover happens.
Charter is a company with relatively heavy debt and great need for capital spending. The merger – which would be financed with both debt and stock – would leave Charter a much larger company with relatively heavy debt and a great need for capital spending.
Charter is a shark pursuing a whale. Time Warner is nearly three times Charter’s size. The smaller company claims it can make the whale swim more efficiently. It pledges to improve management, systems and sell better products.
Charter also says its larger size would give it the clout to demand discounts from the owners of cable stations and other content providers. Those costs now eat up about 40 percent of Charter revenue.
Charter executives declined to be interviewed for this report.
Because of its size, Time Warner already swings much weight with the providers, Breznick said. Any benefits from squeezing harder are likely to go to the company’s bottom line, not in price cuts to customers, he noted.
Charter expects more than $750 million in cost reductions from the merger. Part of that comes from programming savings, while the rest comes from “rationalizing” operations.
As the phone companies grow their footprint, cable companies are seeing a slow drain of pay-TV customers. Many move to phone company services as they become available.
“It’s pretty constant. You see AT&T and Fios (Verizon’s competitor to cable) taking share on quarter after quarter,” said Ian Olgeirson, analyst at SNL Kagan.
On pay TV, it’s coming closer to a zero-sum game. “Video is essentially a mature market. There’s not a tremendous amount of growth left in that space,” Olgeirson said.