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Why Amazon will Buy Comcast

Why Amazon will Buy Comcast

The con­cept of world dom­i­na­tion used to be rel­e­gat­ed to sci­ence fic­tion movies how­ev­er Ama­zon may yet become one of the first to make it a real­i­ty.

Their recent addi­tion of the Stream­ing Part­ners pro­gram could be the start of Ama­zon as the world’s first glob­al OTT (over the top) pro­gram­ming provider.

With 83.5% of Face­book users and 79% of Twit­ter users com­ing from out­side the US, com­pa­nies today must be glob­al­ly focused to tru­ly com­pete and grow.

 

Com­cast busi­ness is lim­it­ed to the US.  With cable sys­tems pass­ing about 44% of all US homes and 22 mil­lion sub­scribers it has a strong pres­ence but only in the US.

Ama­zon is a glob­al com­pa­ny; Accord­ing to Mark Mahaney, ana­lyst at RBC Cap­i­tal Mar­kets, 37% of its 80 mil­lion Prime sub­scribers are from out­side the US and is grow­ing quick­ly.

But Why Should Amazon buy Comcast?

Amazon’s for­ay into OTT is the pre­cur­sor to the sep­a­ra­tion of the pro­gram­ming plat­form from the wired cable.  I believe that some­time in the next 3 to 5 years most cable com­pa­nies will sell broad­band access only and the pro­gram offer­ings will be spun off into sep­a­rate com­pa­nies which will have lots of com­pe­ti­tion from OTT providers like Ama­zon.  Much like what hap­pened with the sep­a­ra­tion of local and long dis­tance tele­phone ser­vice.

The acqui­si­tion of Com­cast would thrust Ama­zon into becom­ing a lead­ing OTT ser­vice with a major share of the new on demand mar­ket­place as well as the exist­ing cable net uni­verse.

With Com­cast Ama­zon would obtain major US direct to home dis­tri­b­u­tion, a major movie stu­dio, 16 major cable nets, includ­ing Bra­vo, USA Net­work, E Enter­tain­ment, CNBC, MSNBC, Golf Chan­nel, Syfy and more as well as acquire the man­age­ment and capa­bil­i­ties of a pro­gram­ming pow­er­house with NBC.

The oth­er busi­ness­es of Com­cast such as the Uni­ver­sal Stu­dios theme parks could be a great place to pro­mote all of Amazon’s prod­ucts and busi­ness­es.  The Com­cast Spec­ta­cor and Ven­tures seg­ments could be kept or spun off.

Amazon is already becoming like a cable operator

With the recent announce­ment of the expan­sion of its Prime Video ser­vice with the addi­tion of the Stream­ing Part­ners pro­gram Ama­zon is quick­ly becom­ing like a new type of cable oper­a­tor as they will offer cable nets, on demand and a la carte pay tv.

This is one of the first non-relat­ed par­ty deals where major cable nets will be sold by an OTT provider. Ama­zon will be sell­ing its Prime cus­tomers Show­time, Starz, A+E Net­work, AMC, Ring TV Box­ing and oth­ers.  Show­time and Starz will each sell for only $8.99 per month (less than on most cable sys­tems).  The oth­er ser­vices will be priced accord­ing­ly.

The need for Vertical Integration

Until stream­ing media cable oper­a­tors total­ly con­trolled what you could watch in your home.  They had such a strong hold on the dis­tri­b­u­tion that, as far back as the 1980’s the pro­gram ser­vices began sell­ing the oper­a­tors equi­ty stakes to assure dis­tri­b­u­tion.  Most recent­ly the BBC sold 50% of their US TV net­work to AMC to sub­stan­tial­ly improve their abil­i­ty to obtain cable access and receive favor­able affil­i­ate fees.

You may recall the dis­pute Com­cast had with Net­flix a few years ago which was resolved by Net­flix pay­ing Com­cast a fee to assure that Net­flix cus­tomers would have access to qual­i­ty stream­ing pic­tures.  While a major premise of Net Neu­tral­i­ty is to elim­i­nate the chance that cable oper­a­tors could pick and choose what sub­scribers can access from the inter­net, it is uncer­tain as to whether it will become law.

In order to guar­an­tee dis­tri­b­u­tion of a prod­uct many com­pa­nies choose to con­trol the entire dis­tri­b­u­tion from fac­to­ry to con­sumer.   Retail­ers like Coach own stores to assure con­trol over their dis­tri­b­u­tion and sales.

The only way Ama­zon can guar­an­tee the abil­i­ty to dis­trib­ute its video pro­gram­ming direct to con­sumers, with­out the pos­si­bil­i­ty of cable oper­a­tor con­trol and com­pen­sa­tion, is to own the cable oper­a­tor.

Comcast also has more Hidden Value: Programming and Subscriber Data

In addi­tion to obtain­ing direct broad­band access to con­sumers, Ama­zon would obtain all the behav­ior infor­ma­tion of its users and all the agree­ments with the pro­gram providers. The cable con­sumer behav­ior data­base for 18% of US house­holds would be valu­able to increas­ing the sales for the retail­ing side of Ama­zon.

As the largest cable oper­a­tor Com­cast most like­ly has the best rates and terms for the cable pro­gram­ming net­works.  In addi­tion Com­cast most like­ly has most favored nation’s claus­es in their agree­ments.  MFN’s guar­an­tee that if a pro­gram­mer gives a bet­ter deal to anoth­er cable com­pa­ny then Com­cast has to get the same deal.

Own­ing the largest cable oper­a­tor would also pro­vide sub­stan­tial lever­age for Ama­zon to extract ben­e­fi­cial terms from the pro­gram net­works to expand Amazon’s OTT plat­form glob­al­ly as well as for their wired cus­tomer offer­ings.

Own­ing some of the top cable net­works and a major movie stu­dio would enable Ama­zon to become the dom­i­nant force in on demand sub­scrip­tion based pro­gram­ming as well as to become a for­mi­da­ble com­peti­tor to Net­flix, the cur­rent dom­i­nant play­er.

Comcast also has more Hidden Value: Potential Global OTT Customers

As a glob­al com­pa­ny Ama­zon has a world­wide cus­tomer base and rela­tion­ships in many coun­tries.  30 mil­lion of Amazon’s Prime cus­tomers are out­side the US.   Dig­i­tal sub­scrip­tions can be sold world­wide pro­vid­ed the sell­er owns the rights.  Own­ing a movie stu­dio and many major cable net­works could help with the rights issues and adding all of Comcast’s owned cable net­works into the OTT offer­ing could pro­vide a for­mi­da­ble pack­age to mar­ket world­wide.

The abil­i­ty to grow Comcast’s TV busi­ness glob­al­ly is sub­stan­tial for Ama­zon.  Bot­tom line is Ama­zon can afford to pay a lot more for Com­cast than most oth­ers.

Comcast also has more Hidden Value: Potential Retail Bundling

Com­cast has 23 mil­lion cus­tomers and pass­es 54 mil­lion homes (poten­tial cus­tomers).  54 mil­lion homes rep­re­sents 44% of all homes in the US.   While we do not know how many of those homes already buy from Ama­zon sure­ly there are lots that do not.

But even bet­ter is the “gold­en hand­cuffs” deals Ama­zon could offer exist­ing Prime sub­scribers to add Com­cast broad­band.  This could be a high­er lev­el of Prime.  In any case the abil­i­ty to bun­dle and pack­age broad­band access with the buy­ing of prod­ucts could cre­ate advan­tage for Ama­zon in com­pet­i­tive mar­ket.  Watch out Wal­mart.

No Antitrust Issues

Now is the time for Ama­zon to buy Com­cast as they are still effec­tive­ly a minor play­er in video.  An acqui­si­tion of Com­cast would most like­ly not be chal­lenged by the FTC or the Jus­tice Depart­ment.

Why Comcast Shareholders would Jump at an Amazon deal

A sim­ple stock merg­er could be a gold­mine for Com­cast share­hold­ers.  As for Ama­zon share­hold­ers they would ben­e­fit from becom­ing the mar­ket leader in the future of tele­vi­sion glob­al­ly.

Ama­zon stock has grown over 355% in the last almost 4 years. Com­pare that to Comcast’s 252% growth.  Trad­ing Com­cast for Ama­zon could put lots more val­ue in Com­cast shareholder’s pock­ets soon­er.

Bottom Line is it makes Strategic Sense

Ama­zon has tra­di­tion­al­ly been a builder and not a buy­er.  How­ev­er at some point they may real­ize that it’s more prof­itable to acquire suc­cess then to build it from the ground up. Fur­ther it would be almost impos­si­ble to build an enter­tain­ment asset base that Com­cast has from scratch.  Fur­ther the new OTT, on demand, mar­ket is chang­ing and grow­ing quick­ly and it would take far too long to even cre­ate a frac­tion of Comcast’s assets even if Ama­zon only focused on the video por­tion.

I’m not an invest­ment banker so I won’t get into the finan­cial deal strate­gies.  How­ev­er I will note that Ama­zon, in addi­tion to all the strate­gic ben­e­fits cit­ed in this arti­cle, could tru­ly ben­e­fit from adding Comcast’s $17 Bil­lion cash flow.  As for the deal struc­ture I’ll leave that to the experts.

The acqui­si­tion of Com­cast by Ama­zon would bring Ama­zon a whole host of ben­e­fits from a very strong enter­tain­ment pow­er­house, many cable nets there­by cre­at­ing a very robust OTT offer­ing, ver­ti­cal inte­gra­tion for the OTT ser­vice, $17 bil­lion in cash flow and much more.  Also at this stage there should not be antitrust issues. Wait too long and the deal could be stopped.

@jeffbezos what are you wait­ing for?

 

 

 

 

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  1. […] sub­scribers put them in a dis­tant third to Netflix”s over 100 mil­lion sub­scribers and  Amazon’s esti­mat­ed 85 mil­lion keep in mind that Hulu is owned by the 3 of the largest media com­pa­nies in the […]



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