OTT Driving Pay-TV Consolidation Wave, Experts Say

Big pay-TV companies buy in bulk, which can mean better pricing on everything from set-top boxes to channels of content. But the current slew of consolidations is less about cheaper programming costs than about getting the scope and resources needed to compete with the booming over-the-top (OTT) universe and about responding to the small but growing wave phenomenon of cord cutting, industry experts said. “In the world of delivering video, Roku is a whole hell of a lot bigger than most midsize cable operators,” cable analyst Steve Effros said. “The world is changing.”

Some of the largest pay-TV operators will get even larger in sizable proposed acquisitions and mergers, with Charter Communications seeking approval to buy Time Warner Cable and Bright House Networks, AT&T buying DirecTV, and T-Mobile reportedly in talks to buy Dish Network. All of those followed Altice last month announcing plans to spend $9.1 billion for Suddenlink Communications.

Larger companies can get slightly better terms when negotiating for programming, said Sam Rosen, practice director at ABI Research. They "are buying more content and therefore are a bigger fish and have a little more negotiating power,” he said. However, those price differences aren't big, said Larry Gerbrandt, principal at Media Valuation Partners. “Too much is made out of programming costs,” he said. “For the core services, they’re all paying about the same.”

Smaller multichannel video programming distributors meanwhile get squeezed a bit as big players get bigger, but it’s "not a simple sort of equation that Charter becomes three times as large and get[s] better rates on their programming and then the programmers decide to make it up by charging the smaller guy higher rates,” SNL Kagan analyst Ian Olgeirson said. Smaller operators “already are under tremendous pressure,” he said. “I don’t think they’ll see dramatic change.” Consolidation of some pay-TV companies doesn’t give media companies more leverage over the others, said Ali Yurukoglu, assistant professor of economics at Stanford University’s Graduate School of Business. “If you could get away with charging Mediacom more, you should do that now,” he said, saying, “When we model these things, the effects on non-merging parties … are almost statistical noise.”

Others see a big issue in smaller pay-TV operators bearing higher programming costs. That issue is why small pay-TV companies often weigh in against mergers of larger rivals, said John Bergmayer, senior staff attorney at Public Knowledge. During the TWC/Comcast acquisition talks, Patriot Media -- which manages RCN Telecom Services, Grande Communications Networks and Choice Cable TV of Puerto Rico -- was one such objector, though it said its concerns were largely about the combination of video distribution and production assets the merged company would have -- a combination the Charter/TWC/BHN deal doesn't carry. Pay-TV industry consolidations also can lead to less experimentation and more parallel behavior in the market, Bergmayer said. “It doesn’t necessarily mean the companies are scheming with one another,” he said. “You see what the other guys are doing and you do it.” Larger pay-TV companies also often suffer from complex management and integration difficulties, he said. Pointing to large companies often being rated particularly bad for customer service, Bergmayer said, “I don’t think that’s coincidence.”

HBO, Netflix and Showtime are spending substantially on producing programs exclusive to their subscribers, and “that’s why consolidation happens,” Effros said. “It’s the big companies that can afford exclusivity. If I’m Rocco [Commisso, CEO of Mediacom Communications], I’m looking around and saying, ‘I have to get bigger; I have to get scale to negotiate with the existing programmers and to have the money to compete in the new level of competition coming from Apple and Google and Amazon. These are all guys who are going to be distributing video and competing with unique video. That’s where the competition is going to come and it’s going to cost a lot of money.” AT&T and DirecTV see a similar future: “Going forward, providers must be able to offer access to the OTT video content that consumers increasingly demand,” the two said a year ago in their public interest showing in FCC docket 14-90. “Many consumers now expect broadband access to OTT video as a complement to MVPD service. And for an expanding group of consumers, the use of these OTT services has begun to substitute for purchases of MVPD services, a trend that is widely expected to grow in the future.”

For content providers, the biggest question in such mergers is how it affects existing contracts, such as working out which contract gets enforced in a Charter/TWC/BHN deal, one programming executive said. The rates different cable operators pay content companies are generally similar, with sweeteners like most-favored-nation clauses being bigger differentiators in contracts, he said. “You always want to have more competition bidding on your product [but] consolidation does seem to be the wave of the future,” the programming executive said.

Whether the Charter/TWC/BHN deal presages a large wave of further consolidations is debatable, despite T-Mobile and Dish also discussing a deal (see 1506040051). The TWC situation “is a very special case,” said Mark Fratrik, senior vice president-chief economist, BIA/Kelsey. “They were quote underperforming and their stock price was low -- that put it into play,” Fratrik said. “The other companies are pretty well situated.” On the other hand, the particularly low interest rates could help push companies to explore acquisitions, he said. Consolidation “clearly benefits -- all the big guys are doing it,” Yurukoglu said. “It takes 150 programmers to manage and negotiate rights and all the other things you have to do,” Rosen said. “If you go from doing that for 1 million subscribers to 2 million subscribers, the incremental cost is nowhere near as significant. It’s about efficiencies.” Mergers create “a domino effect,” Bergmayer said. “If the distributors get bigger, the programmers need to get bigger, then the distributors get bigger -- it’s an arms race.”