A Cynical Comcast Outsmarted Itself

Shareholders of both Comcast and Time Warner Cable have no near term reason to fret.

Time Warner Cable will end up in a merger with another company, most likely Charter, but it might
itself also become an acquirer.

Comcast should instead concentrate on improving its customer service reputation and spend less
time and money trying to game the political system.

Net neutrality restrictions are in the long run poisonous for every company playing in this field,
and that includes Netflix and Google.

When the Comcast deal to acquire Time Warner Cable was announced in February 2014, a
round of cheers and high-fives went up all over Wall Street. Major investment banks were licking
their chops and bankers were already counting future bonuses. Institutional investors were also
delighted by the prospect of making a respectable 20% or more return on not only the TWC
target, but also on a bulked-up and even more powerful Comcast, with sway over maybe 30% of
the nation's cable subscribers and 40% of the Internet traffic.

After all, Comcast management was filled with one smart legal cookie after another and had all
the right ducks lined up. The executive in charge of political arrangements personally knew all of
the key Washington movers and shakers. And in private hosted events he'd raised tens of millions
in support of the president and the Democrats. CEO Brian Roberts even golfed with the
president. And Comcast swore and promised in local community meetings to be nice and fair to
all.

Indeed, to line this deal up, Comcast spent (wasted) many millions of dollars in hiring 130
lobbyists (for $25 million in 40 firms) and spent countless thousands of hours on merger planning,
public relations, and meetings with regulators at both the FCC and the DOJ. But in part because it
all looked to be too slick and good to be true and in part because of my skeptical streak, I wrote at
the time that the deal would not be the slam dunk that most people at the time thought it would
be. (See SA Feb 20, 2014, Comcast-Time Warner Cable Deal: Far From A Sure Bet)

At least no breakup fee was involved! And in my opinion Comcast is

not in the short run but

in the long run better off than if the deal had been completed. There are several reasons for this
view.

First and foremost, on the cable (MSO) side, even though Comcast thought it would be beneficial
to have an almost national footprint, the boldface fact (with Amazon, Netflix, Hulu, HBO Now, etc.)
is that cable MSOs use an already rapidly fading twentieth century technology. So maybe half of
the deal would have involved investment in an enterprise that could only become less valuable
over time. Who needs it, especially at a rather generous relative multiple of projected cash flow or
enterprise value. The cord-cutters and shavers and cord-nevers are gaining the upper hand.

The much more valuable and rapidly growing segment of the deal involved the Internet
infrastructure assets. But Comcast had to take the bad along with the good, which probably
meant that it was probably overpaying for TWC. Yet even on the Internet side, the deal was
fraught with problems in the form of net neutrality restrictions and regulations.

Net neutrality has over the past year turned into an important political talking point for the leftleaning Democrats, with the president becoming the cheerleader in chief for regulation of
something (the Internet) that wasn't broken and was doing well without government regulation.
Washington politics being what it is, the FCC bowed to White House pressure and used Title II to
reclassify broadband as a utility and impose common carrier rules on providers. Initially, net neut

all sounds so good for consumers: No one will be allowed to charge more for higher speeds.
Equal access for all!

But this is untrue. Wait till hamstrung video providers impose data caps that make it impractical to
replace video subscriptions with only online services. Please explain to me, FCC, how this helps
consumers and leads to technological innovation and ultimately lower prices.

Also observe that without any regulation at all, no one is currently denied access and no one
would be denied such access were net neut regs to disappear as a result of court challenges or a
political change in 2016.

Imposition of Net neut policies also defy all basic elementary economics. For instance, in an
airplane you can fly to any destination and arrive at the same time whether you are in coach
(steerage seating) or in first class. But you pay more in first. You go to the theater to see a play,
but you pay a different price if you watch it in orchestra seats than if you watch it in the upper
balcony. Same airline, same plane

but different and better experiences if you pay up. Why

shouldn't there be a pay-up for speed differential on the Net? Is that because Netflix might have
to incur higher costs, lower profit margins, and maybe charge subs higher prices? Probably right
but so what? By enforcing net neut rules, the economic balance and the price signals are
distorted and innovation is slowed at every turn.

Another point is that many megamergers of this CMCSA-TWC type do not fare well from an
operational standpoint. Just integrating all of the organizational procedures, rules, operating and
capital budgets requires years of conflict resolutions and adjustments.

So my take on this is that both Comcast and TWC are in the long run better off for having the deal
fall apart, even though bankers will naturally lament its demise as they will be unable to reap their
anticipated bonuses (until they devise another set of deals, which is soon).

Comcast will also benefit in the long run from not having to as much adhere to net neut
restrictions and regulations, though according to the FCC there will still be plenty of those
imposed and fought over in the courts. It is enough that with the NBCU acquisition of a few years
ago, Comcast is still somewhat locked into net neut commitments till early 2018.

As for the near term, it's clear that a politically cynical Comcast (and also Google) got thrown
under the bus by the president and the party stalwarts that they so generously funded. And
Comcast also comes off as being a bit of a corporate bully with a less than stellar public relations
and customer service image. Reputational damage is evident as CEO Brian Roberts again, as in
the case of the takeover run at Disney in 2004, has failed to go the distance.

Although these issues might for a while dim Comcast's Wall Street aura, they open the possibility
that Comcast can grow more steadily and stably by acquiring smaller chunks of distribution and
content providers. Shareholders of CMCSA and TWC ought to rejoice at the deal's demise.