The deals keep coming.

Photographer: Mandel Ngan/AFP/Getty Images

Four Charts Explain Cable's Merger Mania

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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With federal regulators having made clear that the No. 1 cable company (Comcast) wasn't going to be allowed to buy the No. 2 (Time Warner Cable), things are getting really interesting for everybody but No. 1. "This is a very attractive market for us that'll be consolidating for many years to come," Altice Chief Executive Officer Dexter Goei told analysts Wednesday while discussing the Luxembourg-based company's acquisition of 70 percent of U.S. cable provider Suddenlink. Goei didn't expand on the possibility that Altice might bid for Time Warner, but that's in the air now too.

Meanwhile, Charter Communications, the No. 4 cable operator in the U.S., is also reportedly thinking of bidding for Time Warner Cable, and said this week that it’s going ahead with the acquisition of Bright House Networks, now No. 6. 

What makes the U.S. cable-TV market attractive? It's definitely not subscriber growth. Here's the subscriber picture at four of the five biggest cable operators (Cox is missing because recent data wasn't readily available):

This decline is mostly because of defecting video subscribers, and it would be much worse but for the growth in broadband Internet connections. Comcast has just passed the milestone of having more broadband Internet subscribers than cable-TV subscribers (there's lots of overlap); other cable providers will soon follow. Some of the lost video subscribers are cutting the cord, which usually means keeping the cable but getting all video over a broadband connection rather than through a set-top box. But millions of other customers have jumped ship for the fiber-optic TV and Internet connections that Verizon and AT&T offer in some markets. Verizon now has 6 million video subscribers and AT&T has 5.7 million, which is more than any cable provider other than Comcast and Time Warner.

So cable-TV subscribers are declining in number. But they bring in a lot of money, and the amount has been rising rapidly.

Broadband connections cost less, and the average revenue per user hasn't been growing as much.

Until somebody (Verizon? AT&T? Google?) decides to roll out fiber-optic on a truly national scale, the cable companies still have a cash-spewing business. But it's under pressure. Keep pushing video revenue per user higher, and your video-subscriber decline may accelerate. One handy way to deal with that pressure is to negotiate better deals with the networks and programmers for all that content that you then sell to your subscribers. And guess what: you can negotiate much better deals if you're big. Comcast and Time Warner are the only cable providers with serious scale, and they pay markedly less for programming than the smaller guys:

Below the level of Comcast and Time Warner, the U.S. cable business remains pretty fragmented. As of 2013 there were 556 cable systems in the U.S. with 20,000 subscribers or more, according to the Federal Communications Commission. That number has been declining for years; it may be about to start declining even faster. Comcast has been told it isn't allowed to make its footprint all that much bigger. For everybody else, it's merger time.

Update: A couple of readers have pointed out to me what I should have pointed out to you. First, Comcast pays a lower price for programming not just because they’re big but because they own a bunch of cable networks. Second, as Realist50 notes in the comments, the gap between video revenue per user and programming costs per user is biggest for Cablevision, the fifth-largest cable provider.  

(Corrects final paragraph to delete reference to Time Warner, which doesn't own cable networks. )

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net