Sutanto_QuantitativeAnalysis_APA

Running head: Quantitative Analysis: Comcast and Time Warner Cable Merger 1
Quantitative Analysis: Comcast and Time Warner Cable Merger
Samuel Sutanto
MBA 531
February 16, 2014
Ryan Gunhold

Quantitative Analysis: Comcast and Time Warner Cable Merger 2
Quantitative Analysis: Comcast and Time Warner Cable Merger
Introduction
Comcast announced on February 13, 2014 an agreement to acquire 100 percent of Time
Warner Cable’s 284.9 million shares outstanding for more than $45 billion in equity value. The
transaction will generate $1.5 billion in operating efficiencies; increased Internet speed for Time
Warner Cable customers, more high-definition offerings, and cheaper future service deployment.
This means the deal would merge the biggest and the second-biggest cable television
operators in the U.S. The merger will combine their customers, reaching 30% of all American
subscribers in 19 out of 20 U.S largest metropolitan regions and provides them with immense
power against content providers. The deal could face an uphill battle against the antitrust law,
which some has called on federal regulators to reject the merger. Comcast and Time Warner
Cable need to gain approval from Federal Communications Commission (FCC) and either
Department of Justice or Federal Trade Commission.
Comcast and Time Warner Cable are the largest providers to offer the “Triple Play”, a
service that combines TV, Internet and phone services. Both companies do not compete with each
other because none of their customer markets overlap; instead they mainly compete with DirecTV
and Dish Network which partner with local telephone companies to offer DSL connections.
Comcast Company Overview
Comcast Corporation is a Philadelphia-based media, entertainment, and communications
company, mainly involved in the cable system operation through Comcast Cable, and production
and distribution of media content through NBC Universal. Apart from a broadband infrastructure,
Comcast is an expertise in Video on Demand (VoD) services, digital telephone and high speed

Internet. Since acquiring NBC Universal in 2011, Comcast is the world’s largest media
corporation, owning 26 TV Stations, 20 Cable Channels, and several production facilities.
At the end of FY2012, Comcast’s cable systems served 22 million video customers, 19.4
million high-speed Internet customers and 10 million VoIP customers in 53.2 million homes and
businesses in 39 states. This makes Comcast the largest cable company in the US without any
close competitors to its scale and reach.
Time Warner Cable Company Overview
Time Warner Cable is a provider of video, high-speed data and voice services to
residential and business customers, over its broadband cable systems. Based in New York, the
company’s business services include networking and transport services, managed and outsourced
information technology (IT) solutions, and cloud services. Increasing adoption to cloud
technology placed Time Warner Cable (through its subsidiary NaviSite) to offer enterprise-class,
cloud-enable hosting, managed applications and services.
Time Warner Cable is the second largest cable company, serving 12.2 million video
subscribers; 12.3 million high-speed data subscribers; and 5.2 million voice subscribers across 29
states.

Antitrust Law Issue
The two cable giants merger will likely face scrutiny from antitrust enforcers because of
the deal’s potential to reshape pay TV and broadband markets in the United States.
Even though the merger between Comcast and Time Warner Cable will create a
behemoth, it would not reduce competition in any relevant market. Comcast owns cable systems
in Chicago, San Francisco, and Seattle among many other cities, while Time Warner Cable owns
cable systems in key areas, including New York City, Southern California, and Texas. Out of the
top 50 market areas in the country, Time Warner Cable and Comcast only overlap in 3 cities:
New York City, Kansas City and Louisville, but operates in different zip codes.
If the merger is approved, Comcast will acquire Time Warner Cable’s customers in New
Jersey and Connecticut and add major markets such as Los Angeles and Dallas. In return,

Comcast will extend open Internet access rules to Time Warner Cable customers and offer
affordable broadband access to low-income families, schools, and communities.
Satellite TV companies such as Dish, DirecTV, Verizon’s FiOS and AT&T’s U-verse will
still compete with one company in many of the regions.
The merger won’t affect the customers much, however Comcast plan to divest 3 million
subscribers in exchange for regulatory approval so their combined customer base of 30 million
would represent just under 30% of the U.S pay television video market.
The most significant impact will affect media providers. Being the dominant national
company gives them the advantage to negotiate with cable networks and content providers. The
bigger the company gets the more leverage it will be to exert on the networks that depend on it
for distribution. On an extreme case the company has the power to stop airing certain stations,
like what happened to CBS in August 2013 when Time Warner Cable pulled CBS stations off the
air in several cities for a month due to their disagreement over transmission fees.
Herfindahl-Hirschman Index (HHI) on Pay-TV
Herfindahl-Hirschman Index is a commonly accepted method to measure market
concentration. The index counts the market share of not just the top four or eight firms, but all
firms. The more unequal the market share, the greater is the index. The more numerous the firms,
the lower is in the index. Because of these properties, HHI is used as one factor in the
Department’s of Justice Merger Guidelines.
HHI are ranked on a scale of 0 to 10,000 with 0 representing Perfect Competition, and
10,000 representing Monopoly. If an industry scores above 2,500, it’s considered “highly
concentrated”. If it scores between 1,500 and 2,500, it’s considered “moderately concentrated.”
Any merger that increases an industry’s HHI by more than 200 points in a highly concentrated

market, or more than 100 points in a moderately concentrated market, will alert the Department
of Justice.
HHI = s1
2
+ s2
2
+ s3
2
+ … + sn
2
Monopoly HHI: 1002
= 10,000,
Duopoly with 50/50 market share HHI: 502
+ 502
= 5,000,
Triopolies with same market share HHI: 33.332
+ 33.332
+ 33.332
= 3,332.67, and so on.
Port-Merger HHI Industry
Concentration
Change between
Pre-merger HHI
and Post-merger
HHI
Antitrust Action
Less than 1,500 Not concentrated Any amount No Action
Between 1,500 and
2,500
Moderately
concentrated
100 or more Possible Antitrust
Challenge
Greater than 2,500 Highly concentrated 200 or more Antitrust Challenge
virtually certain
Roughly there are about 100 million U.S. homes with some form of paid TV service.
Comcast and TWC have about 22 million and 11 million subscribers. Using Multimedia Research
Group, Inc. (MRG)’s recent statistic about the top eight pay-TV providers, rough pre-merger
estimate of the industry’s HHI is 1,815, which means the industry is moderately concentrated.

Top 8 U.S. Pay-TV Operators’ Subscribers, 4Q12
Service Provider Total Subscribers
(4Q/2012)
% of Total
Subscribers (Sn)
Sn
2
Comcast 21,995,000 26.01% 676.52
DirecTV 20,080,000 23.75% 564.06
DISH Network 14,056,000 16.62% 276.22
Time Warner Cable 12,030,000 14.23% 202.49
Verizon 4,700,000 5.56% 30.91
AT&T 4,500,000 5.32% 28.30
Charter 3,989,000 4.72% 22.18
Cablevision 3,197,000 3.78% 14.29
Others 21,995,000 26.02%
Total 84,547,000 100% 1814.99
Source: Company financials, compiled by MRG
But if we merge Comcast and Time Warner Cable total subscribers and divest 3 million
(as planned by Comcast) and transfer them to other service providers, the pay-TV industry’s
nationwide HHI become 2,383, an increase of 568 points.
Top 8 U.S. Pay-TV Operators’ Subscribers, Post Comcast & TWC Merger
Service Provider Total Subscribers
(4Q/2012)
% of Total
Subscribers (Sn)
Sn
2
Comcast + Time
Warner Cable
31,025,000 36.70% 1346.89
DirecTV 21,080,000 24.93% 621.50
DISH Network 15,056,000 17.81% 317.20
Verizon 4,800,000 5.68% 32.26
AT&T 4,500,000 5.32% 28.30
Charter 3,989,000 4.72% 22.18
Cablevision 3,197,000 3.78% 14.29
Others 21,995,000 26.02%
Total 84,547,000 100% 2382.62
Based on this rough HHI Calculation, there is a big chance the merger won’t be allowed
to happen. However, Comcast may argue since Comcast and Time Warner Cable hardly compete

in the same region, HHI should be calculated differently using city-by-city statistics instead of
nationwide calculations.
Herfindahl-Hirschman Index (HHI) on Broadband Services
According to Leichtman Research Group the real value of this merger is their serious lead
in broadband subscribers over telephone companies with Comcast holding 24% of the market
share while Time Warner Cable holding 13% of the market share. The rough HHI calculation of
the national broadband market is 1,455, which means the industry is not concentrated. However,
once Comcast and Time Warner Cable merge the HHI jumped up 675 points to 2,130. In 19 out
of the 20 largest U.S. cities, business will only have one option for high-speed Internet.
Past Case Study: AT&T and T-Mobile
In March 2011, AT&T announced it would buy T-Mobile USA for $39 billion, creating
the nation’s largest wireless carrier if it got approved. This seems like a great idea for both
companies, but not for the customers. Less competition will result in higher prices, less phone
options, innovation stagnancy and lower customer service level.
The antitrust laws are intended to protect consumers and HHI was well applied in the
beginning of AT&T and T-Mobile merger case analysis. AT&T repeatedly argued that the case
should be considered market-by-market, and not nationwide, but the results are still not good for
AT&T.
In New York, the combination of AT&T and T-Mobile would acquire 43.7 percent of the
market, resulting in an HHI of 3,335, an increase of 951; In Chicago, it would acquire 48.1
percent of the market and an HHI of 3,189, an increase of 1,114; and in Seattle, it will acquire

53.2 percent of the market with an HHI of 4,044, an increase of 1,366. These numbers are way
above the 200 HHI increase limit.
In 96 of the top 100 markets, the HHI is over 2,500, which means the industry is highly
concentrated. In all of the 40 markets, the increase exceeds the guideline limit of 200. If
nationwide is calculated as a whole, the HHI is 3,100 and the increase would be just under 700.
The next step analysis was to explore on barriers of entry, T-Mobile’s replacement, higher
efficiencies and lower prices in high concentration industry. The Justice department concluded

each case with a resounding “no” and further analysis showed that the merger was AT&T’s way
to eliminate “maverick competitor” and solidify AT&T’s leading market position in major areas.
If this merger was not stopped, there is a possibility that Verizon will merge with Sprint,
creating a national duopoly, resulting in negative impacts on competitions and less choice for
consumers.
Comcast and Time Warner Cable Merger Possible Results
Comcast and Time Warner Cable emphasized that their networks do not overlap, which
means the deal is not a simple horizontal merger. Horizontal merger such as AT&T and T-Mobile
were more vulnerable to being blocked by antitrust officials. Telecoms and satellite rivals would
still face the same number of competitors in each market.
Their subscribers have consistently ranked the companies with the lowest customer
satisfaction in both pay-TV industry and Internet service providers industry. According to
Harvard Law Professor, Susan Crawford, the merger will probably will cause the price to increase
without any corresponding improvement in service.
Sarah Morris, Senior Policy Counsel for the Open Technology Institute at New America
Foundation mentioned that cable companies serve as gatekeepers for a number of
communications services. This merger represents unprecedented move to consolidate market even
further. There will be fewer competitive incentives to invest in network infrastructure, and will
likely lead to higher prices and less innovation.
The increased size and market power Comcast will get from the merger is one of the
regulators’ concerns. Industry battles with content providers in the past 2 years resulted in
multiple outages of popular programming due to clash over rising content costs.

However, the biggest concern is the combined company’s control over broadband access
to more than one-third of consumers in the country. Content providers, broadcast networks, and
other competitors that rely on the broadband services to reach viewers, such as Netflix and
Amazon, are worried about the merger.
According to HHI calculations the merger is unlikely to be approved, but Comcast has
received regulatory approval every single time. They have researched, lobbied from the early
stage, and laid the groundwork for counter arguments against regulators. There is sizable chance
for this merger to be approved.

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