Digital Developments Could Undermine Comcast/NBCU's Power

Comcast's proposed takeover of NBC Universal is the first mega media merger attempted with the digital interactive revolution in full swing. Opponents seeking to restrain such a powerful new player underestimate two critical factors: The rapid changes afoot will likely compromise any restrictions and dramatically alter Comcast's core triple-play cable business.

Much of the public debate about the $30 billion deal assumes that Comcast will be unfairly advantaged by controlling NBCU. There has been scant acknowledgement that the merged entity will struggle with raging digital options that will diminish much of its traditional primary businesses: cable and broadcast.

While NBCU's broadcasting business (and its rivals) is clearly up for grabs, Comcast's indefinite stranglehold on bundled video, data and voice also is far from given. For instance, Bernstein analyst Craig Moffett points out that the small business boost Comcast and other major cable operators have long expected may not be as robust as originally believed.



With more than one-quarter of U.S. households already cutting the cable cord in favor of online streaming video and wireless alternatives, cable operators have expected small businesses' clients to pick up some of the slack. Recessionary pressures have caused many to defer service upgrades -- and find less costly digital alternatives to meet their voice and data needs.

With small- and medium-sized businesses comprising a large portion of businesses, spending as much as two-thirds what larger enterprise companies do on telecommunications-related services, they are "structurally more attractive than the residential (cable) markets," Moffett notes.

Although Comcast has been growing its commercial business since 2007, it generates less than 20% of its overall revenues. Picking up businesses with 20 or less employees is not likely to offset any swift bottom-line blow from declining video and bundled subscribers opting for the Internet bypass options that Comcast and NBC insist are not a problem.

The lack of certainty about cable's status quo will make the tricky integration and financial success of the $30 billion deal all the more tenuous.

In the five or so years it takes for Comcast to fully digest its creeping takeover of NBCU, many of the financial assumptions made by the merging companies, as well as opponents and regulators, could be severely compromised by the digital interactive options.

Credit Suisse analyst Spencer Wang has said there are no new growth scenarios built into the "strategically questionable" union, which could garner Comcast a 10% ROI over time based on what we know. It's what we don't know that will make a difference. After investing an estimated $160 million on infrastructure, cable operators are unsure whether a new national broadband policy will be a friend or foe. And don't forget the estimated $500 million swing factor in NBC's declining ratings, among other things.

Instead, many vocal opponents remain largely fixed on the lack of competition and consumer protection policies governing burgeoning online video. They seek assurances that Comcast-NBC does not move the World Series or Super Bowl to pay TV.

"As it stands, there are not currently any broadband network nondiscrimination principles in place to ensure that broadband providers, such as Comcast, cannot prefer certain content over other content in their delivery to home consumers," Rep. Hank Johnson (D-Georgia) recently wrote in a letter to the Federal Communications Commission and the Justice Department.

Conversely, the outmoded government regulations in place do nothing to protect or advance virtually any media-related company's interests under digital's evolving new rules of play.

The FCC recently gathered a group of economists behind closed doors to discuss the potential ramifications of the merged company's expansive marketplace reach. It will be interesting to discover whether they evaluated the digital impact at all levels of Comcast's and NBC's businesses -- even those that are not so obvious -- or whether they opted to continue assessing merger pros and cons based on a fleeting status quo. That misstep could prove to be the most damaging kink in Comcast-NBCU's armor.

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