Media: Comcast's next act

In sport, as in business, Brian Roberts does not like to lose. The amateur squash player has won five medals at the Maccabiah Games, often known as the Jewish Olympics. At the same time, he scored with Comcast, turning a company co-founded by his father in 1963 into America's largest provider of cable television and broadband internet services.

Comcast's growth has been fuelled by aggressive dealmaking by Mr Roberts, who has masterminded the multibillion-dollar acquisitions of AT&T Broadband and NBCUniversal. But last week, the chief executive's winning touch deserted him when Comcast withdrew its $45bn offer for Time Warner Cable after spending the past 14 months trying to convince regulators to approve it.

The combination of the two largest internet and cable operators would have created a broadband behemoth that controlled the high-speed access of 57 per cent of connected US homes. But from the start, Mr Roberts' deal faced stiff opposition. Open internet advocates and Hollywood writers joined Comcast rivals such as Netflix and Discovery Communications to lobby against the merger, arguing it would have too much control over the broadband and TV markets. The US justice department and Federal Communications Commission concluded that a tie-up was not in the public interest.

"It's not going to happen," a flat Mr Roberts said when Comcast withdrew last Friday. "In the end, we've got to move on."

The question now is where Mr Roberts moves next. With a steady revenue stream flowing from millions of pay TV and broadband subscribers, Comcast has performed well even as the digital revolution has upended much of the media world. But a rapid reshaping of the television industry poses big challenges to Comcast and its competitors, leading some analysts to conclude that the company should push hard into next-generation wireless technology to satisfy rocketing demand for online video. Others say it should look beyond the US for growth.

"Since Comcast announced the TWC deal last February the entire television landscape has changed," says James McQuivey, a media analyst with Forrester Research.

A generation of young "cord-cutters" has drifted away from cable, leading channel owners to, belatedly, try to reach them through other means. HBO, the premium network behind shows such as Game of Thrones and True Detective, recently launched a standalone, "over the top" service that does not require the kind of expensive, bundled subscription that Comcast sells.

CBS, Nickelodeon, the children's network, and the WWE Network are already selling their programmes directly to consumers, with new services also on the way from Comcast's own NBC network and Showtime, the premium cable channel.

And a new set of cheaper, online-only channel bundles is putting further pressure on the cable and broadbandpackages sold by Comcast for between $50 and $200 per month. Sony recently launched PlayStation Vue, an internet TV service that costs $50-$70 a month - much less than a typical cable package - and includes channels such as CBS, Nickelodeon, Fox and Discovery.

Dish Network's $20 a month Sling TV service has also made waves because it includes the sought after ESPN sports channel, as well as AMC, home of The Walking Dead zombie drama. Apple is stepping up its presence in online TV this year after holding talks with broadcasters including Fox and ABC. Verizon, the telecoms group, plans to launch an online video package for mobile devices.

The new services come as digital video has surged in popularity - at the expense of cable TV. Netflix recently passed 60m subscribers, with 41m of them in the US: it is ploughing money into original programming such as Orange is the New Black and Daredevil to complement a broad library of licensed TV shows and movies. Amazon has also got into the digital video business, winning plaudits for original online programmes such as its Golden Globe-winning Transparent and commissioning a comedy series from Woody Allen.

Netflix says its users streamed 10bn hours of video in the first quarter. That accounted for nearly 6 per cent of TV viewing in the US - and represented 43 per cent of the drop in cable and broadcast ratings (audience size), according to MoffettNathanson analysis of Nielsen data. "We believe Netflix's US total streaming hours relative to traditional television will steadily rise," says Michael Nathanson of MoffettNathanson. The trend of lower TV ratings has been "gaining strength over the past few years as Netflix has gained subscribers".

The owners of cable channels are feeling the heat from these viewing trends, with Viacom among the worst hit. Controlled by 91-year-old billionaire Sumner Redstone, it has suffered some of the sharpest ratings declines, with viewing down 18 per cent in the fourth quarter, according to MoffettNathanson's analysis. BET, which is aimed at African-American audiences, fell 22 per cent, Nickelodeon was down 17 per cent and MTV declined 14 per cent.

Lower ratings mean lower advertising revenues. Cable channels owned by Comcast's NBCUniversal are among those feeling the pinch: at NBCU's cable channels, which include CNBC, USA Network and Bravo, revenues from advertising fell 5.6 per cent in the fourth quarter of 2014 from a year earlier.

Meanwhile, online video channels are surging. At a recent presentation to advertisers by Crackle, Sony's ad-supported online video service, comedian Jerry Seinfeld mocked the networks that, two decades ago, provided the platform for his success. "The TV networks are hoping you don't figure out that they are over and there's nothing special about it," he said. He said his show, Comedians in Cars Getting Coffee, which is returning to Crackle for a sixth season in June, attracted 100m total views last month. "What is the internet? It's a way of reaching people - it's just television."

Netflix has built its increasingly global business around the idea that "internet television is replacing linear TV", or watching shows at the time they are broadcast, in the words of chief executive Reed Hastings' recent letter to shareholders.

"The world's leading linear TV networks, such as HBO, ESPN, Canal Plus and BBC, are moving into internet TV," he wrote. "Eventually, as linear TV is viewed less, the spectrum it now uses on cable, fibre, and over-the-air will be reallocated to expand internet data transmission. Satellite TV subscribers will be fewer and more rural. The value of high-speed internet will increase."

Not surprisingly, streaming video consumption is highest among the youngest consumers, with nearly three-quarters of households headed by someone under 35 subscribing to a service such as Netflix or Hulu Plus, according to Nielsen - the same consumers who are least likely to be pay-TV subscribers. Traditionally, advertisers have coveted these younger viewers.

For the world's biggest media companies, including Comcast, reaching that next generation means giving them access to content when, where and how they want to watch it.

Richard Plepler, chief executive of Time Warner's HBO, describes the premium channel's new standalone service, launched this month, as a "millennial missile". HBO says it is targeting the service at the 10m US homes that only have broadband connections - "a large and growing opportunity that should no longer be left untapped," Mr Plepler said when he unveiled it.

The big shift to online viewing explains why Comcast was so keen to acquire TWC. The consumers deserting linear television in favour of on- demand, online viewing still need internet access: a Comcast-TWC combination would have been the main gateway to those new services for more than 30m broadband subscribers. With the purchase of TWC blocked, Mr Roberts needs another route to growth.

He has several options, including investing in new ways to deliver video services to customers Comcast does not currently serve. Comcast is limited to operating in markets where it owns and operates physical cable infrastructure - about 30-40 per cent of US households, according to Forrester. This is why it wanted to increase the size of its available market by combining with TWC.

But new, wireless broadband technology may eventually mean that it can deliver services to US markets without needing any physical infrastructure. If it does not invest in this technology it risks losing out to competitors that do, says Mr McQuivey.

Dish Network, the satellite TV group controlled by Charlie Ergen, has staked a large bet on US wireless spectrum, which could be used to deliver broadband internet. That could open the door to packaging its Sling TV service with a wireless internet connection - giving consumers an alternative to Comcast's cables for their high-speed connections.

"Say you can get television from Sling and broadband from a wireless broadband supplier like Google or Dish," says Mr McQuivey. "Suddenly you don't need Comcast for anything. Comcast is going to be threatened by a new set of broadband providers." He says Mr Roberts should invest some of the funds saved on the TWC deal on wireless broadband, which could be deployed in markets where the company has no physical presence.

The international market is another option for Mr Roberts. Comcast, which also owns the Universal movie studio and theme parks, has a minimal television or internet presence outside the US. With the TWC bid no longer viable, Mr Roberts may look to the "cable cowboy" John Malone for inspiration.

The 74-year-old billionaire was behind much of the US cable consolidation but has spent the past few years on the acquisition trail in Europe, spending €35.3bn since 2010 on cable groups such as Virgin Media in the UK, Kabel BW in Germany and Ziggo in the Netherlands.

Pay TV penetration is much lower in Europe - less than 60 per cent of available households compared with about 85 per cent in the US - so there is more room for operators such as Mr Malone's Liberty Global group to grow.

The European market would be more competitive than what Comcast has been used to. In the early days of the US cable industry, the companies that were first to lay their pipes in a town or city could operate in those markets unchallenged: for rivals, the cost of laying cable in an area that was already served was prohibitive. This led to the regional monopolies that still exist today: TWC is the sole cable operator in large parts of New York and Los Angeles, for example.

But in the UK, operators are allowed to use infrastructure owned and operated by BT, which means multiple operators can serve the same market. A successful bid for Sky, the satellite operator that owns rights to English Premier League football, would give Comcast immediate entry to the UK, Italian and German markets, following the recent three-way merger between Sky, Sky Deutschland and Sky Italia. A bid for Liberty Global would be another option.

Or Mr Roberts could double the bet he made in 2013 when Comcast acquired Universal by buying another content company, such as Time Warner, which owns HBO, or ITV of the UK.

Mr Roberts has proved he is willing to think big, having done some of the largest deals the US media and telecoms sector has ever seen - spending $72bn on AT&T Broadband and $30bn on NBCUniversal. But he has had some misses too, being rejected by Walt Disney after Comcast made a $54bn offer and now, 11 years later, with the failed bid for TWC.

As a hardened squash player Mr Roberts knows all about working the angles to win. But with the rules of the media game evolving rapidly his next shot will need to be well placed.

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation