Forum: How Independent Ops View Merger Mania

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Hardly a week goes by these days without bets placed on thenext "blockbuster" merger. The speculation runs rampant at industry trade shows,on the faxes and on the street: "Who's next? Who's active? Who'sleft?"

The focus in these mergers is always on big, as the bigbecome bigger and the bigger become, well, AOL Time Warner Inc. Who could have imaginedsuch a thing even a year ago? We have now truly seen the biggest of the big -- at leastuntil next week's announcement.

In our connected society, where big events require instantanalysis to feed hungry media outlets, industry leaders, prophets and pundits and evenlocal and federal regulators are often rushed to make instant declarations. Speculationwithout careful evaluation of all the facts can be extremely harmful in viewing the impactof mega-mergers. Snap judgments often cause regulators to overstate some of the impactwhile missing other potential outcomes entirely.

The initial headlines proclaimed that the union of AmericaOnline Inc. and Time Warner Inc. would change the cable industry forever. This rush tojudgment misses one key point -- the "cable industry" is not one homogenousbusiness. Will AOL Time Warner change the landscape for larger urban areas and other largeMSOs? Probably. Will it change the ownership or operation of the thousands of smaller,independent cable businesses and their customers in small towns and rural places allacross America? No.

Analysis and policy declarations surrounding most of themega-mergers have given little notice to the unique circumstances of the smaller,independent cable business, whose economics, operations, technologies and financing havelittle resemblance to that of the larger cable business.

In fact, the main reason the American Cable Association(ACA) was founded -- and exists today -- is to set the record straight. In solelyrepresenting smaller, independent cable businesses, the ACA works to make policymakers andindustry insiders aware that such businesses exist and serve people in areas that areoften neglected by other providers.

It is also the ACA's purpose to ensure that thespecific and unique concerns of smaller, independent cable are heard and addressed,without the application of a broad brush to cover both the big and the small in "onesize fits all" legislation and regulation.

So let's turn to David's view of theever-merging, ever-growing Goliaths.

ON PROGRAMMING

Is the merging of the big always bad for smaller companiesin the cable business? Not always.

In and of itself, big does not necessarily equal bad. Butwhen the amalgamated companies use their combined market power to unfairly leveragesmaller, independent companies, then such mega-mergers definitely become bad publicpolicy.

For independent cable businesses, the most dramaticnegative affect of such mergers comes in three areas: programming rates that are spiralingupward; unilateral carriage terms and conditions; and the triennial dance in whichanalog-broadcast retransmission consent is held hostage to the carriage of a new, unknowncable programming service at the expense of other services more valuable to the customer.

Independent cable businesses that lack the market power ofan AT&T Corp. or a Time Warner Inc. worry legitimately when the programming they mustdeliver to their customers becomes owned by a smaller and smaller group of media giants.

When that consolidation also involves consolidation withthose who control other distribution pipelines, there's an even greater concern. Thishappens when large broadcasting and cable-programming distribution companies link up tocontrol the pipeline of programming to smaller operators and systems in small towns andrural areas.

The leveraged, one-sided control of rising programmingrates and the Draconian conditions of carriage imposed by mega-merged distributioncompanies lead only to higher prices, strained business relationships and decreasedprogramming selections offered to viewers.

Despite these difficulties, independent cable businesseshave been significantly aided through the dedicated efforts of the National CableTelevision Cooperative, which represents independent cable businesses in the collectivenegotiation of master programming agreements. Yet some programmers continue to refuse todeal with the NCTC -- directly and adversely affecting viewers.

The programming ills often generated by mega-mergers willnot be fully addressed until all of the merged companies step up to the plate with bindingcommitments to treat independent cable businesses fairly. In addition, such mergedcompanies must refrain from taking advantage of their combined market power to forcecarriage of emerging or otherwise unwanted programming services or to unreasonablyincrease programming rates.

ON OPEN/FORCED ACCESS

For independent cable businesses, policymakers mustunderstand that the merger of large Internet and cable companies, such as AOL and TimeWarner, will not by themselves affect the efforts of independent cable to providehigh-speed Internet services.

Independent cable businesses are aggressively closing the"digital divide" in rural America through joint ventures, partnerships and manyother creative solutions, which frankly have nothing to do with the AOL-Time Warnermerger.

However, if that merger were to cause Congress or theFederal Communications Commission to react impulsively in forcing open access on all cablebusinesses, the likely result would be to undermine the great strides independent cableoperators have already made on their own -- and will continue to make -- to close thedigital divide.

The landscape has not changed in small and rural towns as aresult of the AOL-Time Warner merger. The only near-term hope for high-speed Internetservice in those areas comes from independent cable businesses willing to take advancedservices to rural customers where no one else is willing to serve with that level ofcommitment.

ON CURRENT MERGERS

The AOL-Time Warner merger continues to occupy theheadlines because it is the most recent -- and by far the largest -- merger to date. Myinitial reaction was that AOL-Time Warner would not be good for independent cablebusinesses. To be candid, I -- like many others -- reacted this way because this merger isso big. But in retrospect, my knee-jerk reaction was not warranted, because big is notnecessarily bad unless the combined market power leads or is likely to lead to abuse.

In fact, since the 1996 Telecommunications Act and themerger of Time Warner and Turner Broadcasting System Inc., Time Warner and Turner have,for the most part, dealt fairly with independent cable businesses through the NCTC. I hopethese same actions will continue in the new AOL Time Warner entity.

Problems from the AOL-Time Warner merger could only come ifthe new entity forces independent operators to carry the AOL service as a result ofprogramming tying arrangements for other Time Warner programming.

At this point, there's no reason to assume this willhappen, and I hope it doesn't. Suffice to say, the American Cable Association will bereviewing this merger carefully and will clearly point out the legitimate concerns ofindependent cable businesses when that becomes necessary. It will also seek some positive,relationship-building commitments from AOL-Time Warner that will avoid the abuse of theircombined market power.

As for two other mergers -- one completed and one pending-- the results and expectations are not as good.

The Walt Disney Co.-Capital Cities/ABC Inc. merger has beencompleted for several years now. Our association opposed that merger on the basis that thenew entity would use its combined market power to the detriment of independent cablebusinesses and subscribers in smaller towns. On this one, I'm afraid we told you so.

On the plus side, Disney has finally inked deals with theNCTC on its Disney and ESPN services. But the specter of Disney's 1999 forcedcarriage of SoapNet in return for ABC retransmission consent will haunt its businessrelationships with independent cable businesses for many years to come. It didn'thelp matters any when news of significant programming increases were coupled withfront-page reports that Disney's entire profit comes from cable.

The other current pending merger is Viacom Inc.-CBS Corp.Unfortunately, this appears to be also headed for trouble. First, CBS has steadfastlyrefused to make The Nashville Network available to the NCTC and has hemmed and hawed onCountry Music Television. The Department of Justice is investigating certain ofViacom's business practices. And it is reasonable to expect that a new Viacom/CBSentity will be chomping at the bit for the next retransmission consent cycle.

An independent cable business is clearly a David amongGoliaths when it comes to the spate of media mega-mergers these days. However, like David,these smaller companies have survived despite the long odds against them.

They will continue to do so, because these importantproviders of service to small towns and rural areas know how the story of David andGoliath ends.

Matt Polka is president of the American Cable Association.The ACA currently represents 300 member companies, 3.2 million cable subscribers andseveral thousand cable systems in small towns and rural areas across the U.S.

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