By Malathi Nayak
NEW YORK (Reuters) - Charter Communications Inc executives are exploring whether to launch an online video service as part of its combination with larger rival Time Warner Cable Inc, in what would be an unprecedented move in the cable industry.
The $56 billion takeover announced on Tuesday would make Charter the No. 2 U.S. Internet and cable company after Comcast Corp. Charter's top shareholder John Malone, a cable industry pioneer, is on record as being a fan of streaming TV over the Internet.
And Tom Rutledge, who would run the combined Charter-Time Warner Cable, has now opened the door to establishing the cable industry's first competitor to services like Netflix Inc and Hulu.
"We’re certainly exploring that thought," Charter CEO Tom Rutledge said in an interview on Tuesday. "But whether you can put an over-the-top product together today with the existing services that are in cable and make that work is unclear to us. It’s certainly something of interest."
The development of Charter's video technology in recent years, which includes a shift to cloud-based systems, also make it a likely move, analysts say.
New Street Research analyst Spencer Kurn said that Charter executives want to avoid the opposition faced by Comcast, which dropped its own Time Warner Cable bid after regulators expressed concern that the combined entity would stifle competition by gaining the largest market share in broadband and video streaming.
"Charter is going to be very proactive in helping that market emerge," he said. “Even since the Comcast deal broke, they’ve been more vocal about over-the-top,"
Companies from Sony Corp to Dish Network Corp have launched online video, or "over-the-top" services. Apple Inc, which already sells an Internet TV device, has been talking to CBS Corp and others about an enhanced product that would more directly compete with cable operators.
Cable companies such as Comcast have not yet launched their own Internet television services, in part over concern that it could threaten their existing pay-TV businesses that are seeing margins shrink. But Malone, chairman of Charter's largest investor Liberty Media Corp, suggested less than two years ago that cable companies should team up to take on Netflix.
"It’s very clear (Rutledge has) seen the writing on the wall and that Liberty and John Malone are giving him lots of advice about chasing where customers are, which is increasingly online," nScreenMedia analyst Colin Nixon said.
Rutledge talked in a recent Charter earnings call about his interest in offering online video content directly to its cable customers and creating smaller, cheaper channel packages as opposed to fully loaded cable and satellite TV bundles.
Charter already has the technology and infrastructure to support an online video service, according to Igor Ulis, chief executive of digital consulting firm Omnigon.
The company has the technology to store video and meter video consumption to bill customers, said Ulis, who helps companies build online video products and does not work with Charter.
An online video service from Charter could be somewhat similar to satellite operator Dish's Sling TV, which offers a fixed set of basic channels at $20 a month, Nixon said.
Like Dish, Charter could go after its existing customer base as well as younger viewers who prefer consuming content online, analysts say.
"The challenge about going to existing subscribers is you run the risk of cannibalizing," Forrester Research analyst James McQuivey said. "They will try to find a way to make it an incremental experience."
Charter would probably take some time to "digest this deal" before exploring online video, Wi-Fi services or other acquisitions, New Street's Kurn said.
(Reporting by Malathi Nayak; additional reporting by Liana Baker in New York; Editing by Christian Plumb)