Entner: Verizon and Charter … déjà vu all over again

Verizon store

According to reports from CNBC and the Wall Street Journal (WSJ), Verizon is interested in acquiring Charter Communications. Sources tell CNBC and the WSJ that Lowell McAdam made an initial approach, but we do not know of Charter’s reaction to it. Charter just acquired last year Time Warner Cable and Brighthouse and is under CEO Tom Rutledge on an acquisition path.

Verizon’s strategy until now has been to divest landline assets. Fairpoint Communications and Frontier Communications has been the go-to acquirer of Verizon landlines. In 2007, Fairpoint acquired Verizon’s landline operations in Maine, New Hampshire and Vermont  In 2009, Frontier bought Verizon’s landline business in Arizona, Idaho, Illinois, Indiana, Michigan, Nevada, North Carolina, Ohio, Oregon, South Carolina, Washington, West Virginia and Wisconsin plus some exchanges in California. In 2015, Frontier also purchased Verizon’s FiOS operations in California, Texas and Florida.

An acquisition of Charter would reverse the Verizon strategy of the last 10 years that transformed Verizon into first a wireless company and then began to morph into a wireless internet company. By acquiring Charter or any other cable provider, Verizon would de facto admit that their strategy to enter digital advertising is somewhere between much harder than expected and failing. As of Q3 2016, Google and Facebook control 60% of the US digital advertising market. What is more concerning, from a Verizon perspective, is that Google and Facebook were essentially responsible for the entire quarter-over-quarter digital advertising market growth. That does not bode well for its AOL, especially after Verizon’s planned acquisition of Yahoo was so rudely interrupted by several cybersecurity catastrophes.

On the bright side, Verizon’s foray into advertising was only a comparatively small bet with $4.4 billion for AOL and if the sale goes through something in the neighborhood for Yahoo. Verizon spends roughly that amount for six months of wireless capex. Never the less, the public attention regarding the success and failure is as big as when AT&T bought DirecTV for $48 billion.

Today, Verizon has 4.6 million TV customers and 7 million internet subscribers, whereas Charter has 17 million TV customers and 21 million internet customers. This would make the combined entity the larger internet provider in the US and third largest pay-TV provider. In normal times, a Verizon / Charter acquisition would get regulatory approval with some conditions as from a consumer perspective it does not change the number of competitors in a market. There might be some conditions regarding the MVNO access for other cable providers, but other than that it would be relatively smooth sailing. How this will be different under a Trump administration is too early to tell, especially as the key positions in the Department of Justice have not been filled yet.

Roger Entner is the Founder and Analyst at Recon Analytics. He received an Honorary Doctor of Science from Heriot-Watt University. Recon Analytics specializes in fact-based research and the analysis of disparate data sources to provide unprecedented insights into the world of telecommunications. Follow Roger on Twitter @rogerentner.