Comcast-Time Warner is dead and cable era is over

In February 2014, when Comcast said it planned to buy Time Warner Cable, an era of continued cable dominance still seemed likely. Maybe not inevitable, and certainly not eternal, but you could easily sketch a scenario in which the cable industry continued to define the way in which Americans got their home entertainment and lots of other things.

The previous month, a federal appeals court had thrown out the Federal Communications Commission’s “open Internet” (aka net neutrality) rules, freeing Comcast and other cable companies to put the squeeze on competing streaming services that piggybacked on cable broadband connections into homes. Comcast’s new X2 set- top box integrated cable and streaming in way that kept cable in charge, and the company would be able to roll it out to millions of new customers after taking control of Time Warner. The cable industry had so many advantages over any upstarts that would usurp it – gobs of money, deep ties with the makers of TV shows and movies, thick cords snaking into most Americans’ homes – that the scales seemed heavily weighted in its favor.

Not so much anymore. Comcast formally gave up on the merger last week, in the face of likely opposition from the FCC and the Justice Department. In February, the FCC voted to approve even stronger open Internet rules, this time with a legal justification more likely to withstand court scrutiny (it reclassified broadband as a Title II telecommunications service – a utility, basically). And in the meantime, there are signs all over the place that cable’s dominance is ebbing.

In the annual Deloitte Digital Democracy Survey released this week, respondents were asked to name the three media and telecommunications services their household purchased that they valued most. For every age group, home Internet came in first. But after that there were some big generational differences. The second most valued service for everybody 26 and up was pay TV. For what Deloitte called the “trailing millennials” (ages 14 to 25), it was streaming video, followed by mobile data plans and gaming.

Just to be clear, the streaming video services we’re talking about here are also TV that you pay for. And while cable and satellite pay TV is built around live and scheduled programming, it too offers shows on demand. So streaming services and pay TV are, speaking broadly, offering the same danged service.

But they’re not exactly the same. Streaming is delivered differently, over the Internet instead of as part of a cable or satellite programming bundle. That’s what makes it easy to watch a show on multiple devices using different carriers – and that’s important to those trailing millennials, who according to Deloitte watch only 43 percent of their TV on actual TVs. Streaming services also have more inherent flexibility in how they present their offerings – contrast Netflix’s personalized homepage to a cable channel lineup.

So with younger viewers, streaming is clearly winning, and I don’t think this is some age-specific thing that will fade as they get older and can afford comfier sofas. The streaming approach to TV – time-agnostic, device-agnostic, carrier- agnostic – is the wave of the future. And while the cable providers can in theory deliver that kind of TV too, they tend to be two steps behind their tech-industry competitors and deliver clunkier, less-appealing services. They’re also responsible for the actual physical infrastructure that delivers all these services, and sometimes breaks down. And so while Netflix, Apple, Amazon and the like inspire customer loyalty and even love, the best the cable companies can usually hope for is moderate customer dissatisfaction.

During the past year, the shift to streaming has become apparent in sinking cable-TV ratings. The Deloitte survey shows a growing interest in dispensing with cable subscriptions altogether.

This is still a small minority. A crack in the dike, really. But a conviction that the cracks will grow is already motivating some pay-TV providers (Dish Network with its Sling TV streaming service and Verizon FIOS with its mini-bundles) to break ranks and the leading premium-TV channel, HBO, to hedge its bets with a standalone streaming service. And here’s the thing – instead of putting its finger in the dike like that nice little fictional Dutch boy, the U.S. government has been out there with a pickaxe trying to break the thing down.

With the open Internet decision and the opposition to the Comcast-Time Warner deal, the current administration has to a remarkable extent favored one vision of the Internet and TV future over another, and one set of companies (Netflix, Google, Apple, et. al.) over another (the cable and phone companies). There are good arguments for this approach; on balance I would agree that it’s more likely to foster innovation and competition than letting a few cable giants call most of the shots. But I’m not sure of this, and it seems pretty clear that if a Republican had been in the White House things would have turned out very differently.

A Republican could be in the White House starting in 2017, and if that happens the cable companies will probably start winning regulatory battles. But that’s two years from now, two more years for the streaming providers – and, perhaps more important, the streaming mindset – to hack away at cable’s dominance. My guess is that there’s no turning back.

I should emphasize that the cable companies don’t go away in this scenario. Remember how home Internet was the most-valued service for every generation in that Deloitte survey? Cable companies are the leading providers of it, and even with inroads from Verizon, AT&T and Google’s fiber-optic networks they’re likely to stay in the lead for a while. But that is now more a utility service – “dumb pipes,” as some put it – than a platform from which to steer the development of the Internet and the entertainment business.

It’s possible that the cable companies will actually make more money under this scenario than if they got their way. By choking off innovation in an industry, the argument goes, a “gatekeeping platform monopolist” may cut into its own long-run profit prospects. Investors seem to think that Comcast, with its cable systems, cable channels, a broadcast network and a big Hollywood studio, will do fine in a more freewheeling future – its share price actually rose after both the FCC’s open Internet decision and the announcement that the Time Warner purchase was off. But it is looking less and less likely that it and its fellow cable companies will control that future.

Justin Fox is a Bloomberg View columnist writing about business.