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Comcast CEO Brian Roberts made the rumors official today: Comcast is dropping its bid to buy Time Warner Cable. Certain regulators and politicians will claim victory. But that’s because they don’t understand the industry they are supposed to manage. In fact, despite the obvious egg on the face, Comcast executives either already know or will soon realize that losing this deal this soon is one of the better things to happen in a long time. Because Comcast needs to direct its attention elsewhere immediately — or miss the biggest shift in pay TV history since the advent of cable itself.
Don’t get me wrong; when Comcast announced its intention to buy Time Warner Cable, the company was sincere. And had regulators taken a light hand in the process, the deal could have closed and it would have added to the already massive broadband revenues the company already lands quarterly. But once it became clear that regulators were going to treat this deal like we were still living in 1985, Comcast executives were smart to realize that wasting a year trying to accommodate regulators’ concerns is a colossal waste of time when there are other, more pressing issues to confront.
What issues? Remember that when the deal was announced, HBO still wasn’t going direct, Sling TV didn’t exist, and Verizon hadn’t announced a national, over-the-top pay TV offering. Times have changed and in many regards, that’s the competitive field that Comcast needs to set its sights on, not the mucky and overregulated business of putting cables in the ground and obsolete set-top boxes in people’s homes.
Think of it financially: Do you spend tens of billions to add a few tens of millions of households to your customer base — profitable customers, to be sure, but also costly to maintain — and then still have to figure out how to reach the rest of the country with some kind of digital offering, more in the vein of Sling TV? Or do you spend less than a billion to offer a lower-cost, lower-margin pay TV product that can scale up to serve all U.S. households and even go global? The economics of the ’90s suggest you do the former. The economics of digital disruption practically insist you do the latter.
Yes, Comcast could have consummated this deal and used those extra revenues to help finance exactly that kind of over-the-top solution. But it would lose at least a year in doing so, a year during which everyone from Apple to Verizon, Netflix to Amazon, Sony to Sling TV, will have shifted the entire pay TV landscape, making Comcast a profitable provider of bits to those services.
And that’s not a good place to be. Because even though broadband profits are awesome today, they are in exactly the place where Sprint and MCI were in the long-distance telephony market of the 1990s: Happily profitable and ripe to be disrupted. Because even though regulators and politicians may fret about the power a large Comcast would have had, the fact is, competition will come. The smell of billions of profit accumulated by Comcast, TWC and Verizon will pull in companies like Google, Amazon, and even Facebook to provide alternative broadband connectivity, including wireless broadband, which gets more and more feasible every day.
Pay TV will be disconnected from the bundle, and then will itself be gradually unbundled. And for a few years, broadband providers will happily enjoy broadband profits. Then wireline broadband will be disrupted, and 10 years from now, Comcast the broadband provider will either have become Comcast the content owner, over-the-top pay TV provider, and hybrid broadband provider, or it will be out of business. That’s a transition not unlike the one AT&T had to go through in its various incarnations from the glory days of long distance to its current dependence on a technology that was laughable in 1990: Mobile phones.
That’s why Comcast should be grateful regulators got uppity. It gives the company a good clear reason to abandon ship now and start swimming for more verdant, welcoming shores.
James McQuivey is a vice president and principal analyst at Forrester Research, where he is the foremost analyst tracking and defining the power and impact of digital disruption on traditional businesses. His consumer models identify the ways consumers have embraced digital experiences and platforms, and his strategy models help companies prepare to serve those consumers. Though McQuivey applies this knowledge to a wide variety of industries, he spends the majority of his consulting time with consumer media and consumer electronics companies that are at the forefront of dealing with digital disruption. He is the author of “Digital Disruption: Unleashing the Next Wave of Innovation.” Reach him @jmcquivey.
This article originally appeared on Recode.net.
