Enterprise Communications

Cable Merger Maddness

by Colin Berkshire

So the merger between Comcast and Time Warner is off.

Now we have Time Warner and Charter proposing to merge.

Why do these cable companies feel the need to merge? Well, it has more to do with bankers and MBAs than it has to do with consumers or economies of scale.

When smaller companies merge, there are good economies of scale. Two companies need less back office staff such as accounting and HR. There is a fixed overhead that can be saved. An HR department grows minimally even though staff can double. The savings go to the bottom line as profits or lower prices. Buying power increases, lowing costs.

But those economies are really only there for smaller companies. After a while, everything becomes linear. A big company adds HR people and accounting people roughly in direct proportion to their bulk. A large company already has sufficient economies of scale to get the best pricing.

With companies the size of Time Warner, or Charter or Comcast there just isn’t a true economy of scale. Things are roughly linear.

So why do they do it? There are a couple of reasons.

  • Eliminating competition eliminates pricing pressure. Even if two companies don’t overlap and serve the same customers, they are still compared to each other. If one is appreciably more expensive it looks like it is gouging customers. So buy your competitor and it no longer looks like you are gouging because there is nothing comparable.
  • Eliminating competition also eliminates costly innovation. If another company introduces DVR service, then your customers will also want DVR service. They didn’t demand DVR service until the other company in the other market introduced it. Now that they have done so, your customers are screaming for it. So buy the other company and tell them to stop innovating.
  • Eliminating competition increases political power. If there were 1,000 equal sized cable companies in the US, they could be effectively regulated. It would be possible to introduce net neutrality rules, etc. But when there are only a handful of very powerful companies, you can lobby, and buy politicians, and it’s extremely difficult to coerce these companies through regulation.

Mergers between companies like Time Warner and Charter or Comcast are more about political power than they are about being more efficient, or better for consumers.