A Year of Mergers

Bell_logo_1969Our industry has seen many mergers over the years between the biggest companies in the sector. But for the most part big mergers that change the face of the industry have been sporadic. We had AOL buying Time Warner in 2000, Alcatel buying Lucent in 2006 and CenturyLink buying Qwest in 2011.

But now it seems like I can’t read industry news without seeing discussions of a new merger. During the last year or so we saw AT&T gobble up DirecTV, saw Alcatel-Lucent grabbed by Nokia and saw Charter buy Time Warner Cable and Bright House Networks. And we are now watching the regulators sorting out mergers with Verizon trying to buy both XO Communications and Yahoo, with CenturyLink wanting to buy Level 3 Communications and AT&T wanting to acquire Time Warner.

From reading Wall Street speculation it seems like the current merger mania in our industry is not over. The rumors are strong that CBS and Viacom will soon announce a merger. There is rampant speculation that several companies might try to outbid CenturyLink for Level 3. There are rumors that Comcast, Charter and Altice are interested in buying T-Mobile or Sprint. There are continuing rumors that Verizon wants to buy Dish Networks to get permanent access to the huge swatch of spectrum they own. And there have been rumors for the last year that somebody ought to buy Netflix.

And these giant mergers aren’t just happening in telecom. We see Bayer buying Monsanto, Microsoft buying Linked-In, Marriott buying Starwood, Tyco buying Johnson Control, Protection 1 buying ADT, Sherwin-Williams buying Valspar and Fortis buying ITC Holdings.

It’s really hard in the telecom world to know if mergers are good or bad for the industry. Some mergers are clearly bad because they eliminate competition and create oligopolies at the top of the market. The rumored merger between CBS and Viacom is one such merger. Today there are only five major programmers in the country and this reduces that to four. A lot of the woes in the industry today are due to the greed of programmers and consolidation at the top of the industry can’t mean anything good.

But other mergers might be beneficial. Consider the impact of Comcast or Charter buying T-Mobile or Sprint. I just saw an article this week that showed that the wireless operations of AT&T and Verizon are still showing a gross margin of over 50%. It’s been clear to every consumer that cellular service is overpriced due to lack of meaningful competition. Perhaps one of the big cable companies could drive down cellular prices in an attempt to grab market share.

But on the flip side, letting these huge cable companies develop a quad play product is bad for anybody else that tries to compete with them for broadband. A new fiber overbuilder in a city would have an even bigger challenge if they try to displace a cable competitor that offers cellphone service bundled with their broadband. It’s been clear for a long time that lack of broadband competition is bad for consumers.

The underlying theme driving all of these mergers is that Wall Street has a never-ending appetite for increased earnings. That alone is often a good thing. Many times the companies being acquired are underperforming for some reason and mergers sometimes wake them up to do better. Many mergers promise improvement earnings due to the effects of consolidation and a reduction in the management and overhead drags.

But consider what mega-mergers in the telecom space more often mean. They mean that fewer and fewer companies control the vast majority of the market. And those giant companies are driven by Wall Street to increase earnings quarter after quarter forever – and at a pace and level that exceeds general inflation. You only have to do the math on that basic concept to realize that this means price increases for residential and business customers year after year to keep meeting higher earnings targets.

Years ago we had Ma Bell that controlled 95% of the phone business in the country. AT&T would have acted like any other commercial company except for the fact that their prices were heavily restricted by regulators. But stockholders of these big companies today do just the opposite and they pressure management to increase profits no matter the consequences. It is the chase for bigger earnings that has seen programming costs and cable TV rates climb much faster than inflation for the last decade to the point where the cable TV product costs more than many households are willing to pay.

I doubt we will see the end to these mergers, but if we don’t find a way to curb them the inevitable results will be a tiny number of companies controlling the whole sector, but with none of the restrictions in the past that were put on companies like Ma Bell. It scares me sometimes to think that broadband rates are going to increase in the same manner that cable rates increased in the past. But when you look at what the big ISPs have to sell it’s hard to not picture a scenario where earnings pressures are going to do the same thing to broadband that has been done to cable rates. That is going to do great harm the country to the benefit of the stockholders of a few big companies.

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