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Comcast and Time Warner Cable: What Could Go Wrong?

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The sheer scale of the merger deal has a myriad of implications for customers.

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What do you get when you merge the two least-loved companies in one of the country's most disliked industries? You get "a superior customer experience within the highly competitive and dynamic marketplace in which we operate," according to a statement by Comcast (NASDAQ:CMCSA) Chairman and CEO Brian Roberts, released with the announcement of its proposed purchase of Time Warner Cable (NYSE:TWC).

Okay, let's not parse that statement too fine, or someone will ask how "highly competitive" these two companies are, given that each stayed out of the other's geographic territory until now.

A broad translation might be this: Comcast just picked up another 11 million subscribers to its cable television and Internet services, most of them in the coveted markets of New York City and Southern California.

If the deal goes through, Comcast will get to pitch those 11 million people, and their neighbors, on premium Comcast offerings such as its video-streaming service XfinityTV, its mobile streaming-video apps, and its new X1 "cloud DVR" service.

Its sheer scale puts it in a strong negotiating position with programmers regarding its licensing of content to show its subscribers. Comcast already owns one of those major content providers, NBC Universal. (Time Warner Cable is a spin-off from Time Warner (NYSE:TWX) and has no relationship with the parent company's television properties such as HBO.)

In the future, that negotiating position also puts it in a good place to put together a package of Internet-only streaming channels for marketing in any zip code in the US or, for that matter, internationally. That package does not exist, but is rumored to be in the works at Comcast.

For the moment, the deal creates a Cable Guy of gigantic proportions, which will control 30% of the nation's cable television and Internet services market.

Subject, of course, to federal regulatory review.

Comcast, the nation's largest cable and Internet provider, agreed to buy Time Warner Cable, the second-largest, in an all-stock deal worth $45 billion. Comcast agreed to pay $159 per share, an $18% premium from TWC's Wednesday closing price of $135.31.

Comcast intends to sell 3 million subscriptions to another, yet-unnamed buyer, in order to keep its share of the market down to about 30%. It clearly hopes that level is safer in terms of defending the deal before regulators.

Consumer groups are gearing up for a fight. FreePress.net sent this tweet on Thursday: "No one woke up this morning wishing their cable company was bigger..."

The group, which advocates diverse media ownership, has already posted a petition for delivery to the FCC and the Justice Department opposing the deal on the grounds that it will lead to less consumer choice, less diversity, and higher cable bills.

It's safe to say that consumers, at least those who speak loudest online, are appalled.

Comcast and Time Warner Cable came in dead last among all television subscription services in the latest American Customer Satisfaction Index, which is based on interviews with customers. The two also appear at the bottom of the group's index for Internet service providers. They scored comparatively well in the survey of customers of fixed-line phone services, appearing roughly at the mid-range in the rankings.

The business view of the deal is that it will help Comcast do battle with its competition for delivery of video entertainment, which includes satellite delivery services, like DirecTV (NASDAQ:DTV), and streaming services, such as Netflix (NASDAQ:NFLX)

The consumer viewpoint is the flip side of the coin: It will allow Comcast to crush all competition, leaving consumers with limited choices, higher monthly bills, and a supplier with no incentive to improve customer service.

Comcast's "economies of scale," that classic benefit of corporate mergers, will keep costs down for Comcast. But it also may keep down smaller and potential rivals seeking to compete against it.

There also is a very real Internet-business angle to this story: Can a mega-Comcast be expected to play fair in its delivery of streaming entertainment content by its Internet-based competitors? That is the question most likely to be addressed by regulatory conditions placed on the deal.

The announcement promises "technological advances" to its customers.

Time Warner customers may actually see some improvement. Comcast's set-top box is considered superior to Time Warner's. It also has a wider choice of programming to offer its customers.

Current Comcast customers will get a couple of features developed by Time Warner: StartOver, a function that rewinds a live program, and LookBack, which allows customers to watch shows up to three days after they air.

Like it or not, the merger is expected to force more mergers, as competitors scramble to form their own alliances that are big enough to compete alongside the mega-competitor.
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No positions in stocks mentioned.
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