The Daily Dose: Your Guide to the Cable Deal

 | Feb 14, 2014 | 10:00 AM EST  | Comments
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Here is your poor man's guide to the Comcast (CMCSA)-Time Warner Cable (TWC) deal. Be sure to share it with your love on this Valentine's Day. 

Oftentimes in giant deals, when people list reasons why a combination makes sense, the obvious gets the most attention. In the case of the Comcast/Time Warner marriage, the four obvious reasons include:

1. More subscribers layered on top of a consolidated business should equal higher profits.

2. More sway over cable networks regarding fees and household names over advertising rates, ditto Netflix (NFLX), Hulu, Google (GOOG) and Apple (AAPL). More sway, more profits.

3. More opportunities to offer better tiered packages to subscribers. If the combined company could offer more services under one specific package tier, it becomes an easier sell to charge subscribers a higher monthly rate. The company earns more money.

4. Time Warner would instantly gain access to Comcast's years of aggressive investments in infrastructure and set-top boxes. In 2013, Time Warner increased its capital expenditure by only 3.3%, Comcast ... 9.8%.

However, in large deals such as these, the not-so-visible aspects and angles tend to drive the greatest value over time. Here are four to have handy on this combination:

Comcast/TWC own 30% of the SNY Network (the New York Mets network). So bringing that ownership in house puts them in a better position for advertising and programming across platforms, and perhaps making some form of bid for the Mets. Comcast also owns, through an affiliate, a stake in SportsNet LA, which will run the 2014 Dodgers baseball season. Now the company could distribute that content in more places.

• Time Warner is expanding its high-speed data services quicker than Comcast. It now brings that faster rate of growth, and the expertise behind it, to Comcast.

• Both Time Warner and Comcast are aggressively increasing their services to small and medium-sized businesses and could better take the fight to Verizon (VZ). It is essential for them to be positioned in these markets, as they provide consistent revenue, and it's where the most growth is -- not with large businesses that continue to cut.

• This marriage is very much a bet on the connected home and car. Comcast/Time Warner wants to be the go-to Internet and video solution for a consumer who is connected everywhere, and more so in the future. (Can you imagine an NBC sporting event on an iWatch in a former Time Warner market? I could.)

• The CEO of Comcast, Brian L. Roberts, is a proven value creator, offering certainty of value to shareholders who are uncertain on Time Warner's future, as their company continues to grow quite slowly.

Consider this crazy stat: Since Roberts assumed the role of president at Comcast in 1990, the stock has risen 1,467%, compared with the Nasdaq's gain of 864%. Over the past five years, Comcast's shares have risen 330%, compared with 155% for Time Warner. For cable operators in an era of growing mobile consumption that lowers prices for so many goods and services, their only option is put their egos aside and combine forces.

Regulatory Concerns

I believe we will see the typical antitrust issues and regulators (the Justice Department and the Federal Communications Commission) snooping around. But when you drill into the heart of the deal, the markets in which they operate don't appear to overlap, and Time Warner could really use Comcast's better technology.

The squishy point for them to overcome is whether their combination will give them serious influence with networks, advertisers and even Apple, Hulu and Netflix, where their programming is distributed (and increasingly so, given estimates for mobile growth over the next 10 years), and whether it will give them sway over consumers via broadband services.

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