WASHINGTON — Soaring TV programming costs — combined with a slowly shrinking base of video subscribers — could drive a new wave of cable operator mergers, according to a panel of Wall Street analysts.
Doug Mitchelson, managing director at Deutsche Bank Securities, said that to the extent increases in TV content pricing “becomes abusive, the industry will consolidate.” He suggested that eventually there could be three large U.S. MSOs, with two other big players besides Comcast, a trio that would have much more leverage to keep rates down.
Cable mogul John Malone, whose Liberty Global took a 27% stake in Charter Communications earlier this year, is likely evaluating the prospect of using Charter to merge with Time Warner Cable, Bloomberg reported Sunday. Industry sources have independently confirmed to Variety that Malone is interested in TWC, with the caveat that he is surveying the entire cable landscape for potential deals and has not engaged in formal due diligence on such a deal.
“John Malone coming back into the industry is a big vote of confidence,” said Jessica Reif Cohen, managing director at Bank of America/Merrill Lynch.
Malone’s interest in gaining scale by combining Charter and TW Cable is driven by programming costs, said Marci Ryvicker, managing director at Wells Fargo Securities.
“I think it’s a big focus to get leverage back to cable distribution side. I don’t know how realistic it is. I don’t if it could happen. But I think It could be a positive,” she said.
Even before Malone’s investment in Charter, the industry seemed ripe for consolidation, Morgan Stanley managing director Benjamin Swinburne said. “I’m surprised we haven’t seen more consolidation in the past few years,” he said.
However, among the challenges in a large-scale cable operator merger is that it’s harder to integrate cable systems today than it was 10 or 20 years ago, Michaelson said. “Now you have so many promotions and different products, customer integration is a huge challenge,” he said.
And aggregating video subscribers in a rollup play is not necessarily a solution to increasing programming costs, said Jason Bazinet, managing director at Citi Investment Research, who noted that even DirecTV with 20 million TV subscribers is suffering from higher carriage and retrans fees. The satellite operator said programming costs rose 6% in the first quarter of 2013.
Meanwhile, pay TV penetration will likely drop about 1% annually over the next few years, putting even more pressure on the sector, Bazinet said. The assumption among most investors in cable operators is that gross profit “just gets sucked out of your video business,” Bazinet said. As far as rising TV programming fees, “nobody sees a line in the sand where ultimately it stops.”
Cord-cutting is worse for programmers than operators, Ryvicker said, because cable providers have the option of offsetting video losses by increasing broadband pricing.
The rising fees associated with sports programming in particular could lead cable operators splitting out sports nets from the core bundle, Reif Cohen said.
“The negative in the past year, the scary thing, is the trend line for programming prices,” Reif Cohen said. “There are these pressures on pay TV, not just cable, but satellite and telco as well. It’s not clear what the solution is.”
The cable analysts remain bullish on MSOs’ opportunities to grow business voice and data services, particularly for small and midsize companies.
The penetration of cable’s business services is still relatively low, Reif Cohen said. “It feels like the very beginning and the margins are really interesting,” she said.
Sesh was moderated by Time Warner Cable CFO Arthur Minson.