When you buy a TV, sales clerks often pitch you on "future proofing" your set. Turns out, buying a cable TV company relies largely on the same principle.
Charter Communications Inc.'s $38 billion bid to take over the much-larger Time Warner Cable Inc. is an attempt to future-proof its business by getting its foot in the door of millions more homes wired for Internet service.
As people use more mobile devices, watch more online video and connect everything from thermostats to refrigerators to the Internet, delivering those Internet services will become increasingly valuable.
Gone are the days when one's primary reason for hooking up cable was for TV. Now, it's the Internet, which enables countless online services known collectively as the cloud -- everything from movies on Netflix to backup files on Dropbox.
"Broadband is the gatekeeper to the cloud," says Tony Wible, an analyst with Janney Capital Markets. "There's insatiable demand for broadband."
These high-speed Internet services represent the fastest growing and most profitable line of business for cable companies. Last year, providing Internet access was 12 percent more profitable for Time Warner Cable than providing TV packages, despite taking in a third less revenue. Time Warner Cable has so far resisted Charter's overtures, but Charter has vowed to take the bid directly to shareholders if needed.
A combined Charter-Time Warner Cable would occupy a crucial position in more homes. With about 16 million customers, it would become the country's No. 3 provider of both pay TV services and high-speed Internet.
With more pay TV subscribers, the company would be able to negotiate better deals and pay less to carry channels from such companies as Disney, Viacom and Discovery. And the combined company would have more future negotiating power over online video providers like Netflix -- or even Sony Corp., which plans to launch an online TV service this year.
Both companies rely on Internet service providers to transmit data for video and games to consumers. After a federal appeals court ruled last month that cable Internet providers are no longer required to treat all forms of traffic equally, the door has been opened for providers to charge streaming companies for priority access and faster speeds.
"Charter plus Time Warner Cable becomes an entity that is essential from a distribution standpoint for a Netflix or a Sony to exist," says Susan Crawford, a telecoms industry scholar and author of "Captive Audience: The Telecom Industry & Monopoly Power in the New Gilded Age." `'It's about access to subscribers they won't get anywhere else." (continued...)
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