Cable consolidation isn’t about TV: It’s about broadband

Given the rumors that Comcast (s cmcsa) is talking with regulators to see if it could find a way to buy Time Warner Cable (s twc) and that Liberty Media’s John Malone is eyeing some kind of Charter and Time Warner Cable tie up, this summer’s hand-wringing over cable consolidation is still in play.

As my colleague Om Malik explained in a post in July, Malone may have set this off, but it is an opportune time for the industry to consolidate given the demand for broadband generated by over-the-top services such as Netflix and Hulu. The cable guys don’t compete against each other in a given geographic footprint, but instead, against the telcos. And when it comes to broadband, the telcos are losing. As Om wrote back in July:

But the future isn’t about linear, old-styled video. Instead, it is about broadband and broadband-enabled video. The cable companies — at least in the U.S. — have the fastest pipes into majority of homes. They are faster than phone companies and have a deeper footprint. The new technologies are ensuring that they can keep increasing the speed of their broadband networks.

Netflix, Hulu and YouTube are programming our video watching behavior — any amount of video, anytime, anywhere on any screen, as long as there is broadband. The more we watch internet video, more bandwidth we need. The fact, that cable companies (big and small) have already started to meter broadband and are putting limits on the networks; we are only on the cusp of seeing a big inflation in internet access costs.

So the cable industry, if it can consolidate, gets access to the most important pipe coming into people’s homes (after power and water) and the fewer cable companies there are, the more unified the rate structure might appear. So today Comcast has a cap, but Time Warner Cable doesn’t. However, if Time Warner Cable gets bought by Comcast or Charter, both of which have caps, that unlimited broadband from TWC goes by the wayside.

But consolidation in cable is going to take a lot of creativity, as the regulatory environment is unclear. Comcast may be looking for ways to swallow Time Warner Cable or Malone may make his play with Charter, but whatever deal goes down, the Department of Justice and other regulators will want to have a say. And no one is clear exactly what that say might be yet. From a Stifel Nicolaus research note:

Our sense is the DOJ and FCC would have concerns about the market fallout of expanded cable concentration and vertical integration, in a broadband world where cable appears to have the upper hand over wireline telcos in most of the country (i.e., outside of the Verizon FiOS and other fiber-fed areas). We suspect the government would raise objections about the potential for Comcast-TWC bullying of competitors and suppliers, given the extent and linkages of their cable/broadband distribution, programming control, and broadcast ownership.

Looks like regulators might have some of the same concerns we do.