CHTR - Charter Communications

[Value92]

Crazy thought: what about a cable consortium buying or financing Dish 5G network today or in the future? There are clear benefits from bundling and I don't believe Malone or Roberts will sell out to the big telcos as they are unlikely to get a cash offer. After Malone's AT&T experience I don't believe he wants his money ever again tied up in a big telco. The management teams of the big telcos are also not great.

 

The MVNOs in general are a nice move as they are putting even more pressure on the telcos as they are now losing broadband and mobile customers. As they are quadplay customers I would assume those are high value customers with great CLVs (in the Netherlands total churn at KPN dropped below 10% and is around 3% for household bundles, same goes for Telenet in Belgium on the household bundle front).

 

Link: https://www.lightreading.com/services/mobile-services/cable-mvnos-are-beginning-to-hurt-us-cellular/d/d-id/753292?_mc=RSS_LR_EDT

 

[Spekulatius]

Crazy thought: what about a cable consortium buying or financing Dish 5G network today or in the future? There are clear benefits from bundling and I don't believe Malone or Roberts will sell out to the big telcos as they are unlikely to get a cash offer. After Malone's AT&T experience I don't believe he wants his money ever again tied up in a big telco. The management teams of the big telcos are also not great.

 

The MVNOs in general are a nice move as they are putting even more pressure on the telcos as they are now losing broadband and mobile customers. As they are quadplay customers I would assume those are high value customers with great CLVs (in the Netherlands total churn at KPN dropped below 10% and is around 3% for household bundles, same goes for Telenet in Belgium on the household bundle front).

 

Link: https://www.lightreading.com/services/mobile-services/cable-mvnos-are-beginning-to-hurt-us-cellular/d/d-id/753292?_mc=RSS_LR_EDT

 

I thinking’s a possibility. I don’t think it’s likely that DISH will go alone, they will most likely Partner. Another possibility is that a tech Giant like GOOG or AMZN Partners with DISH but I am not sure how they deal with the infrastructure side.

[vince]

CHTR numbers weren’t that impressive compared to CMCSA cable business, despite CHTR being in a catch-up position. CHTR has shown lower revenue and EBITDA growth compared to CMCSA cable business. Granted VHTR buys back stock, while CMCSA delivers after the recent acquisition, but that’s a capital allocation decision.

 

This statement is misleading if you dig in and make the appropriate adjustments.  A good way to compare them accurately is to look at rates of growth in customer relationships, per product....Chtr hasn't even begun to price aggressively.  I will never forget Munger saying that when you have an advantaged business with top notch mgmt WITH untapped pricing power, it's a damn cinch.  I'm not knocking Comcast, it's a well run business, but in my mind there is close to ZERO chance that they will have higher growth rates than Charter.  They don't compete against one another, all products can be identical if need be, Charter's footprint is clearly less competitive and their prices are significantly lower.  Go to where the puck is going to be!!!

 

Could you please expand on the less competitive footprint of Charter versus Comcast. It is/was my believe that Charter is not raising prices as they have competitors like WideOpenWest in their footprint that offer similar services for lower prices. Penetration varies by market but I find it interesting that there are some markets with more than 30% penetration for challenger companies like WideOpenWest. If you compare ARPUs of cable companies it is clearly the case that less competitive footprints have much higher HSD ARPUs - see Cable One (72$) vs. WideOpenWest (around 52$). That being said a well managed cable company that takes up speeds early and takes care of its customers will be in a good competitive position. There are other cable incumbents that are still in the process of upgarding to 1 gig (Mediacom, Atlantic Broadband,...) and are therefore much weaker competitors.

 

One way to assess how competitive their footprint is compared to Comcast is to see how much fiber infrastructure the telcos have within their respective markets.  Verizon Fios has many more homes passed in Comcasts footprint.  In Charters markets you find much more satellite competition and lots of AT&T copper.  I think, in general, investors may be underestimating the value of the speed advantage cable has over copper and that's because speed isn't a critical factor.... yet.  I can tell you from my own experience that 50 mbps is probably sufficient for the majority of customers and upgraded copper can get there.  Still, many users value much higher speeds (even before they really need them), as evidenced by user patterns.  I believe that as more data intensive applications are developed, cable's speed advantage will prove to be very valuable indeed and mgmt's are aggressively widening the gap with low cost upgrades to 1 Gig (if cable really wanted they could offer much higher speeds within the same priced tiers).  Lastly, a large portion of Charters footprint cannot purchase high speed broadband (defined as 25 mbps) from anyone else.  And it doesn't look like their main copper competitor is willing to upgrade the majority of their plant to 25-75 mbps speeds, let alone a fiber overbuild.  The combination of future increases in demanded speed, superior cable plant, and Charters pricing power (look at their ARPU compared to Comcast) makes for a compelling investment opportunity IMO.

[Value92]

CHTR numbers weren’t that impressive compared to CMCSA cable business, despite CHTR being in a catch-up position. CHTR has shown lower revenue and EBITDA growth compared to CMCSA cable business. Granted VHTR buys back stock, while CMCSA delivers after the recent acquisition, but that’s a capital allocation decision.

 

This statement is misleading if you dig in and make the appropriate adjustments.  A good way to compare them accurately is to look at rates of growth in customer relationships, per product....Chtr hasn't even begun to price aggressively.  I will never forget Munger saying that when you have an advantaged business with top notch mgmt WITH untapped pricing power, it's a damn cinch.  I'm not knocking Comcast, it's a well run business, but in my mind there is close to ZERO chance that they will have higher growth rates than Charter.  They don't compete against one another, all products can be identical if need be, Charter's footprint is clearly less competitive and their prices are significantly lower.  Go to where the puck is going to be!!!

 

Could you please expand on the less competitive footprint of Charter versus Comcast. It is/was my believe that Charter is not raising prices as they have competitors like WideOpenWest in their footprint that offer similar services for lower prices. Penetration varies by market but I find it interesting that there are some markets with more than 30% penetration for challenger companies like WideOpenWest. If you compare ARPUs of cable companies it is clearly the case that less competitive footprints have much higher HSD ARPUs - see Cable One (72$) vs. WideOpenWest (around 52$). That being said a well managed cable company that takes up speeds early and takes care of its customers will be in a good competitive position. There are other cable incumbents that are still in the process of upgarding to 1 gig (Mediacom, Atlantic Broadband,...) and are therefore much weaker competitors.

 

One way to assess how competitive their footprint is compared to Comcast is to see how much fiber infrastructure the telcos have within their respective markets.  Verizon Fios has many more homes passed in Comcasts footprint.  In Charters markets you find much more satellite competition and lots of AT&T copper.  I think, in general, investors may be underestimating the value of the speed advantage cable has over copper and that's because speed isn't a critical factor.... yet.  I can tell you from my own experience that 50 mbps is probably sufficient for the majority of customers and upgraded copper can get there.  Still, many users value much higher speeds (even before they really need them), as evidenced by user patterns.  I believe that as more data intensive applications are developed, cable's speed advantage will prove to be very valuable indeed and mgmt's are aggressively widening the gap with low cost upgrades to 1 Gig (if cable really wanted they could offer much higher speeds within the same priced tiers).  Lastly, a large portion of Charters footprint cannot purchase high speed broadband (defined as 25 mbps) from anyone else.  And it doesn't look like their main copper competitor is willing to upgrade the majority of their plant to 25-75 mbps speeds, let alone a fiber overbuild.  The combination of future increases in demanded speed, superior cable plant, and Charters pricing power (look at their ARPU compared to Comcast) makes for a compelling investment opportunity IMO.

 

Great points! Faster speed packages are rising dramatically as percentage of overall internet packages sold. TAke a look at the last earnings calls of WOW or CABO. Why do you think Charter is so careful in raising prices today? IMO cable companies just have to invest far enough ahead of the data speeds demand curve to fend of possible competitors and take share from telcos. It‘s a good bet.

[vince]

CHTR numbers weren’t that impressive compared to CMCSA cable business, despite CHTR being in a catch-up position. CHTR has shown lower revenue and EBITDA growth compared to CMCSA cable business. Granted VHTR buys back stock, while CMCSA delivers after the recent acquisition, but that’s a capital allocation decision.

 

This statement is misleading if you dig in and make the appropriate adjustments.  A good way to compare them accurately is to look at rates of growth in customer relationships, per product....Chtr hasn't even begun to price aggressively.  I will never forget Munger saying that when you have an advantaged business with top notch mgmt WITH untapped pricing power, it's a damn cinch.  I'm not knocking Comcast, it's a well run business, but in my mind there is close to ZERO chance that they will have higher growth rates than Charter.  They don't compete against one another, all products can be identical if need be, Charter's footprint is clearly less competitive and their prices are significantly lower.  Go to where the puck is going to be!!!

 

Could you please expand on the less competitive footprint of Charter versus Comcast. It is/was my believe that Charter is not raising prices as they have competitors like WideOpenWest in their footprint that offer similar services for lower prices. Penetration varies by market but I find it interesting that there are some markets with more than 30% penetration for challenger companies like WideOpenWest. If you compare ARPUs of cable companies it is clearly the case that less competitive footprints have much higher HSD ARPUs - see Cable One (72$) vs. WideOpenWest (around 52$). That being said a well managed cable company that takes up speeds early and takes care of its customers will be in a good competitive position. There are other cable incumbents that are still in the process of upgarding to 1 gig (Mediacom, Atlantic Broadband,...) and are therefore much weaker competitors.

 

One way to assess how competitive their footprint is compared to Comcast is to see how much fiber infrastructure the telcos have within their respective markets.  Verizon Fios has many more homes passed in Comcasts footprint.  In Charters markets you find much more satellite competition and lots of AT&T copper.  I think, in general, investors may be underestimating the value of the speed advantage cable has over copper and that's because speed isn't a critical factor.... yet.  I can tell you from my own experience that 50 mbps is probably sufficient for the majority of customers and upgraded copper can get there.  Still, many users value much higher speeds (even before they really need them), as evidenced by user patterns.  I believe that as more data intensive applications are developed, cable's speed advantage will prove to be very valuable indeed and mgmt's are aggressively widening the gap with low cost upgrades to 1 Gig (if cable really wanted they could offer much higher speeds within the same priced tiers).  Lastly, a large portion of Charters footprint cannot purchase high speed broadband (defined as 25 mbps) from anyone else.  And it doesn't look like their main copper competitor is willing to upgrade the majority of their plant to 25-75 mbps speeds, let alone a fiber overbuild.  The combination of future increases in demanded speed, superior cable plant, and Charters pricing power (look at their ARPU compared to Comcast) makes for a compelling investment opportunity IMO.

 

Great points! Faster speed packages are rising dramatically as percentage of overall internet packages sold. TAke a look at the last earnings calls of WOW or CABO. Why do you think Charter is so careful in raising prices today? IMO cable companies just have to invest far enough ahead of the data speeds demand curve to fend of possible competitors and take share from telcos. It‘s a good bet.

 

Rutledge says that he prefers to capture as much share possible first, and stresses that end user inertia is alive and well.  Another reason is that low prices are harder to compete with and potential intruders, seeing even lower returns will have less incentive.  Important to note also that Rutledge's strategy was to improve product, improve service (insourcing labor), and ultimately consumer perception of value (of which price is a significant factor) after many years of negative sentiment because at some point he fears more regulatory action. Obviously, this would also help when they no doubt try to make more acquisitions.  I think that they are quietly giddy in regards to their competitive position with HSD and their pricing power and want to carefully manage it by not screwing it up.  But make no mistake, rising prices are coming.  Rutledge has agreed that is a lever that can and will be used when appropriate.  My assumption is that he will eventually start pricing for improved profit while at the same time staying well below his largest peer.

[cmlber]

If you take residential video + advertising revenue (excluding other revenue, which is to my understanding largely video based) , subtract programming costs, and then split the remaining costs by video + advertising as a % of revenue, you get EBITDA margins for Video + advertising of about 5%. If you figure that a lot of customer equipment is set top boxes (over 50%) then video is basically FCF neutral/negative today.

 

This may not be the case with you peter, but it amazes me how many CHTR longs I've heard go from thinking CABO math was crazy (i.e., video contribution margin isn't really profit because there are tons of variable costs that are generally thought of as fixed) to thinking CABO is absolutely right that video generates no profit when it was convenient for the thesis.

 

This implies residential internet EBITDA margins are somewhere in the 60's, which I think sort of gels with CABO EBITDA at 45% but at much much smaller scale than Charter. Maybe commercial internet margins are lower, so consolidated EBITDA is in the 50's, but regardless the point is that video is basically a breakeven business, and almost all the EBITDA and cash flow is generated by internet today.

 

Does "scale" really add 15 pts of margin on a pure internet business?  Where is the scale benefit?  In video they have buying power to get lower programming rates, but what cost specifically is lower as a % of internet revenue due to scale?

 

Inernet is an incredibly high fixed cost business (cable in the ground, customer relations/call centres, corporate G&A etc., and fewer truck rolls than video, and no content costs), whereas video is lots of variable cost (content/sub, set top box per sub, higher truck rolls). The exact number probably isn't 15%, it's probably lower and its impossible to tease out exactly, but I'm very sure that Charter's internet margins are higher than CABO.

 

If you run the math my way, video + advertising has shown declining EBITDA margins for years. That gels with the consistent rises programming costs per sub, coupled with fixed cost deleveraging (there's still the whole customer support/marketing etc. apparatus to support). You can argue that their backoffice/support/marketing costs could be loaded onto internet, but I thik that's unfair and it's better to use a % of sales approach.

 

Frankly I don't see a way you can argue that Video is anything other than marginally profitable between video + advertising + a good share of "other" revenue. If that's the case, you can back into the fact that internet EBITDA margins are very likely well above 50%.

 

I do allocate more capex to internet, though, so while EBITDA margins are higher, FCF conversion from EBITDA is worse, but still probably in the mid to high 20's range (I think).

 

This is all my view, of course, and happy to see where people disagree. Specifically, I'm calculating internet EBITDA as internet revenue - internet % of sales x regulatory, marketing, and other costs. Of costs to service customers, of the portion not allocated to voice (again allocated on % of revenue), I allocate 40% to internet, 60% to video as there are fewer truck rolls for internet.

 

Video EBITDA I'm calculating the same way, but with 100% of programming costs going to video.

 

Peter, yes, HSD is a high fixed cost business, but the fixed cost are relatively proportional to the geographic coverage.  Which of these costs "(cable in the ground, customer relations/call centres, corporate G&A etc., and fewer truck rolls than video, and no content costs)" is likely to be materially lower as a % of revenue with size?  Only corporate G&A really.  All the other stuff shouldn't change that much based on size. 

 

I think there's an important distinction between new video subs who probably don't have that much profitability due to the up-front capex of boxes, truck rolls, etc. and marketing costs, but existing video subs must be profitable.

 

Maybe I'm an anomaly, but I don't think I've ever called Comcast to service anything.  They don't need to market to me, and my set top box isn't going to change for 5 years.  What incremental expenses do they have to serve me, assuming I'm already a HSD customer, other than programming costs?  H1 2019 there's ~$9.8B in video revenue between video, ad, & other and $5.7B in video cost.  That's $4.1B of gross margin in the half.  Sure there is some variable customer service & capex to replace broken boxes, but I don't think it's that much.  Has anyone seen a good breakout of the actual incremental economics of video? 

 

[wabuffo]

Has anyone seen a good breakout of the actual incremental economics of video? 

 

Here's my back-of-the-envelope line-of-business analysis of Comcast's EBITDA margin - capex for FY 2018:

- first some assumptions.  I'm assigning the programming costs to Residential Video.  All of the remaining cash opex will be allocated equally as a percent of revenue.

- capex assumptions:  customer premise equipment (75% video, 25% HSD), infrastructure/line ext (25% video, 75% HSD), support/other (allocate across all LOB's as a % of revenue).

 

    http://i68.tinypic.com/2dv7gpv.jpg

 

I have no idea if my assumptions are accurate - but I think this table shows the dilemna.  Most operating costs are largely fixed - so how one allocates them across the businesses is somewhat arbitrary.  But video programming costs are largely direct to video and its obvious that they are squeezing EBITDA margins.  But capex equipement is probably making the video cash flows very challenging.

 

So you have two approaches - the CMCSA and CHTR approach which is to hold onto the video business due to its incremental contribution to fixed costs.  Then there is the CABO approach which is to abandon the video business and to focus on the data and business services businesses. 

 

In their 10-K, CABO says this:

In 2018, our Adjusted EBITDA margins for residential data and business services were approximately six and seven times greater, respectively, than for residential video.

 

In the case of Comcast, based on my SWAG analysis, EBITDA margins for data and business services are eight and four times greater.  Comcast probably gets better pricing on its video.  I also may have used the wrong allocation process for opex and put too much opex for the ancillary businesses (other than residential).  But it gives one a sense of proportion.

 

I think this is probably true for most of the industry - the lion share of margins are in data and business services and video is a very challenging business.

 

FWIW,

wabuffo

[peterHK]

Has anyone seen a good breakout of the actual incremental economics of video? 

 

Here's my back-of-the-envelope line-of-business analysis of Comcast's EBITDA margin - capex for FY 2018:

- first some assumptions.  I'm assigning the programming costs to Residential Video.  All of the remaining cash opex will be allocated equally as a percent of revenue.

- capex assumptions:  customer premise equipment (75% video, 25% HSD), infrastructure/line ext (25% video, 75% HSD), support/other (allocate across all LOB's as a % of revenue).

 

    http://i68.tinypic.com/2dv7gpv.jpg

 

I have no idea if my assumptions are accurate - but I think this table shows the dilemna.  Most operating costs are largely fixed - so how one allocates them across the businesses is somewhat arbitrary.  But video programming costs are largely direct to video and its obvious that they are squeezing EBITDA margins.  But capex equipement is probably making the video cash flows very challenging.

 

So you have two approaches - the CMCSA and CHTR approach which is to hold onto the video business due to its incremental contribution to fixed costs.  Then there is the CABO approach which is to abandon the video business and to focus on the data and business services businesses. 

 

In their 10-K, CABO says this:

In 2018, our Adjusted EBITDA margins for residential data and business services were approximately six and seven times greater, respectively, than for residential video.

 

In the case of Comcast, based on my SWAG analysis, EBITDA margins for data and business services are eight and four times greater.  Comcast probably gets better pricing on its video.  I also may have used the wrong allocation process for opex and put too much opex for the ancillary businesses (other than residential).  But it gives one a sense of proportion.

 

I think this is probably true for most of the industry - the lion share of margins are in data and business services and video is a very challenging business.

 

FWIW,

wabuffo

 

This is VERY close to my original estimate of the breakdown (like scarily close).

 

I've since tried to estimate the portion in Other/SMB that is allocated to video/internet and phone, and if I adjust for that and allocate the revenue against the programming costs, the total video margins are about 20% on EBITDA and about 10% on video (gels with a friend of mine who knows a PE  firm that owns a cableco with EBITDA margins on video of mid teens). It implies total video EBITDA of ~$4bn (notably exluding the $3.8bn in "other" costs (corporate/taxes etc.) from this estimate, so it's higher than if I had allocated those costs as a % of revenue) vs. internet EBITDA of $12.3bn for 2018.

 

Regardless of how you look at it, I think there's no way that cable subs declining is really a major issue for Charter.

[vince]

Has anyone seen a good breakout of the actual incremental economics of video? 

 

Here's my back-of-the-envelope line-of-business analysis of Comcast's EBITDA margin - capex for FY 2018:

- first some assumptions.  I'm assigning the programming costs to Residential Video.  All of the remaining cash opex will be allocated equally as a percent of revenue.

- capex assumptions:  customer premise equipment (75% video, 25% HSD), infrastructure/line ext (25% video, 75% HSD), support/other (allocate across all LOB's as a % of revenue).

 

    http://i68.tinypic.com/2dv7gpv.jpg

 

I have no idea if my assumptions are accurate - but I think this table shows the dilemna.  Most operating costs are largely fixed - so how one allocates them across the businesses is somewhat arbitrary.  But video programming costs are largely direct to video and its obvious that they are squeezing EBITDA margins.  But capex equipement is probably making the video cash flows very challenging.

 

So you have two approaches - the CMCSA and CHTR approach which is to hold onto the video business due to its incremental contribution to fixed costs.  Then there is the CABO approach which is to abandon the video business and to focus on the data and business services businesses. 

 

In their 10-K, CABO says this:

In 2018, our Adjusted EBITDA margins for residential data and business services were approximately six and seven times greater, respectively, than for residential video.

 

In the case of Comcast, based on my SWAG analysis, EBITDA margins for data and business services are eight and four times greater.  Comcast probably gets better pricing on its video.  I also may have used the wrong allocation process for opex and put too much opex for the ancillary businesses (other than residential).  But it gives one a sense of proportion.

 

I think this is probably true for most of the industry - the lion share of margins are in data and business services and video is a very challenging business.

 

FWIW,

wabuffo

 

This is VERY close to my original estimate of the breakdown (like scarily close).

 

I've since tried to estimate the portion in Other/SMB that is allocated to video/internet and phone, and if I adjust for that and allocate the revenue against the programming costs, the total video margins are about 20% on EBITDA and about 10% on video (gels with a friend of mine who knows a PE  firm that owns a cableco with EBITDA margins on video of mid teens). It implies total video EBITDA of ~$4bn (notably exluding the $3.8bn in "other" costs (corporate/taxes etc.) from this estimate, so it's higher than if I had allocated those costs as a % of revenue) vs. internet EBITDA of $12.3bn for 2018.

 

Regardless of how you look at it, I think there's no way that cable subs declining is really a major issue for Charter.

 

Great work guys.  I will add my 2 cents.  I don't think there is any question that video is marginally profitable at best... cable ceo's have not really denied this but rather think that more products per house equals lower churn which increases lifetime value.  Obviously the larger cable co's have better programming rates which skews the comparison.  Remember also that box costs are falling (due to cable's more recent ability to source from additional suppliers) and with internet capabilities they need less box capability (and less boxes or no boxes over time is what Rutledge has stated) which will lower capex significantly.  But I think the most important factor that is hard to measure is the customer relationship, on the video side specifically, and how the aggregation of over the top services will evolve.  OTT pricing is low and churn is high which makes for some interesting opportunities for cable to continue managing the video relationship, possibly bundling some skinnier packages with various OTT services and increasing video margins while simultaneously driving data usage.  Malone has stated that video is still critical and that is a result of him looking into the future and having a keen eye for how this will develop.  So yes, on the surface, and for the next number of years, it appears that losing video will not hurt us financially but i'm not so sure longer term

[peterHK]

Has anyone seen a good breakout of the actual incremental economics of video? 

 

Here's my back-of-the-envelope line-of-business analysis of Comcast's EBITDA margin - capex for FY 2018:

- first some assumptions.  I'm assigning the programming costs to Residential Video.  All of the remaining cash opex will be allocated equally as a percent of revenue.

- capex assumptions:  customer premise equipment (75% video, 25% HSD), infrastructure/line ext (25% video, 75% HSD), support/other (allocate across all LOB's as a % of revenue).

 

    http://i68.tinypic.com/2dv7gpv.jpg

 

I have no idea if my assumptions are accurate - but I think this table shows the dilemna.  Most operating costs are largely fixed - so how one allocates them across the businesses is somewhat arbitrary.  But video programming costs are largely direct to video and its obvious that they are squeezing EBITDA margins.  But capex equipement is probably making the video cash flows very challenging.

 

So you have two approaches - the CMCSA and CHTR approach which is to hold onto the video business due to its incremental contribution to fixed costs.  Then there is the CABO approach which is to abandon the video business and to focus on the data and business services businesses. 

 

In their 10-K, CABO says this:

In 2018, our Adjusted EBITDA margins for residential data and business services were approximately six and seven times greater, respectively, than for residential video.

 

In the case of Comcast, based on my SWAG analysis, EBITDA margins for data and business services are eight and four times greater.  Comcast probably gets better pricing on its video.  I also may have used the wrong allocation process for opex and put too much opex for the ancillary businesses (other than residential).  But it gives one a sense of proportion.

 

I think this is probably true for most of the industry - the lion share of margins are in data and business services and video is a very challenging business.

 

FWIW,

wabuffo

 

This is VERY close to my original estimate of the breakdown (like scarily close).

 

I've since tried to estimate the portion in Other/SMB that is allocated to video/internet and phone, and if I adjust for that and allocate the revenue against the programming costs, the total video margins are about 20% on EBITDA and about 10% on video (gels with a friend of mine who knows a PE  firm that owns a cableco with EBITDA margins on video of mid teens). It implies total video EBITDA of ~$4bn (notably exluding the $3.8bn in "other" costs (corporate/taxes etc.) from this estimate, so it's higher than if I had allocated those costs as a % of revenue) vs. internet EBITDA of $12.3bn for 2018.

 

Regardless of how you look at it, I think there's no way that cable subs declining is really a major issue for Charter.

 

Great work guys.  I will add my 2 cents.  I don't think there is any question that video is marginally profitable at best... cable ceo's have not really denied this but rather think that more products per house equals lower churn which increases lifetime value.  Obviously the larger cable co's have better programming rates which skews the comparison.  Remember also that box costs are falling (due to cable's more recent ability to source from additional suppliers) and with internet capabilities they need less box capability (and less boxes or no boxes over time is what Rutledge has stated) which will lower capex significantly.  But I think the most important factor that is hard to measure is the customer relationship, on the video side specifically, and how the aggregation of over the top services will evolve.  OTT pricing is low and churn is high which makes for some interesting opportunities for cable to continue managing the video relationship, possibly bundling some skinnier packages with various OTT services and increasing video margins while simultaneously driving data usage.  Malone has stated that video is still critical and that is a result of him looking into the future and having a keen eye for how this will develop.  So yes, on the surface, and for the next number of years, it appears that losing video will not hurt us financially but i'm not so sure longer term

 

Internet is becoming more and more important of a utility, especially with OTT reliant on internet pipes, so I don't think the decline of video hurts us LT. Maybe churn goes up (probably does) but I mean that's the idea behind MVNO's for Charter and Comcast right, so they're already trying to find a way around this.

 

How do they get away with no boxes? I wasn't aware of Rutledge having said that, but it would change my estimation of the value of Charter if they could reduce that capex item for sure.

 

Where's the source for Malone's comments, I'd be interested in hearing them. I'm unsure how it will develop so I wonder what he's seeing here.

[Munger_Disciple]

 

Internet is becoming more and more important of a utility, especially with OTT reliant on internet pipes, so I don't think the decline of video hurts us LT. Maybe churn goes up (probably does) but I mean that's the idea behind MVNO's for Charter and Comcast right, so they're already trying to find a way around this.

 

How do they get away with no boxes? I wasn't aware of Rutledge having said that, but it would change my estimation of the value of Charter if they could reduce that capex item for sure.

 

Where's the source for Malone's comments, I'd be interested in hearing them. I'm unsure how it will develop so I wonder what he's seeing here.

 

 

 

You can already get Charter's video via AppleTV or Roku app. Long term I see traditional set-top box completely going way, replaced by an app with cloud DVR capability similar to youtube TV offering. This will reduce capex and ongoing customer support charges for video a lot.

 

I agree with others that video is becoming less and less important as a service offering to cable companies not just because there is no margin in it for them but even as a churn reducing mechanism. Core offering for cable is HSD with MVNO add-on being helpful in reducing the churn as it enables the customer to have all the data needs (fixed and mobile) serviced by one company.

 

 

[Spekulatius]

 

Internet is becoming more and more important of a utility, especially with OTT reliant on internet pipes, so I don't think the decline of video hurts us LT. Maybe churn goes up (probably does) but I mean that's the idea behind MVNO's for Charter and Comcast right, so they're already trying to find a way around this.

 

How do they get away with no boxes? I wasn't aware of Rutledge having said that, but it would change my estimation of the value of Charter if they could reduce that capex item for sure.

 

Where's the source for Malone's comments, I'd be interested in hearing them. I'm unsure how it will develop so I wonder what he's seeing here.

 

 

 

You can already get Charter's video via AppleTV or Roku app. Long term I see traditional set-top box completely going way, replaced by an app with cloud DVR capability similar to youtube TV offering. This will reduce capex and ongoing customer support charges for video a lot.

 

I agree with others that video is becoming less and less important as a service offering to cable companies not just because there is no margin in it for them but even as a churn reducing mechanism. Core offering for cable is HSD with MVNO add-on being helpful in reducing the churn as it enables the customer to have all the data needs (fixed and mobile) serviced by one company.

 

The setup box was a significant part of the Capex and directly related to video. Broadband only needs a router and those are much cheaper, more reliable can often be self installed.  I believe it is correct that the cable company will probably resell streaming subscription (probably at a small discount due to wholesale negotiated prices to individual a membership ). Those are self install and the hardware is pretty cheap and simple and in any way not their responsibility.

[vince]

 

Internet is becoming more and more important of a utility, especially with OTT reliant on internet pipes, so I don't think the decline of video hurts us LT. Maybe churn goes up (probably does) but I mean that's the idea behind MVNO's for Charter and Comcast right, so they're already trying to find a way around this.

 

How do they get away with no boxes? I wasn't aware of Rutledge having said that, but it would change my estimation of the value of Charter if they could reduce that capex item for sure.

 

Where's the source for Malone's comments, I'd be interested in hearing them. I'm unsure how it will develop so I wonder what he's seeing here.

 

 

 

You can already get Charter's video via AppleTV or Roku app. Long term I see traditional set-top box completely going way, replaced by an app with cloud DVR capability similar to youtube TV offering. This will reduce capex and ongoing customer support charges for video a lot.

 

I agree with others that video is becoming less and less important as a service offering to cable companies not just because there is no margin in it for them but even as a churn reducing mechanism. Core offering for cable is HSD with MVNO add-on being helpful in reducing the churn as it enables the customer to have all the data needs (fixed and mobile) serviced by one company.

 

Your first sentence is right on the mark for why the video box is going away and is very similar to what Rutledge thinks and how he explained it.

[vince]

Has anyone seen a good breakout of the actual incremental economics of video? 

 

Here's my back-of-the-envelope line-of-business analysis of Comcast's EBITDA margin - capex for FY 2018:

- first some assumptions.  I'm assigning the programming costs to Residential Video.  All of the remaining cash opex will be allocated equally as a percent of revenue.

- capex assumptions:  customer premise equipment (75% video, 25% HSD), infrastructure/line ext (25% video, 75% HSD), support/other (allocate across all LOB's as a % of revenue).

 

    http://i68.tinypic.com/2dv7gpv.jpg

 

I have no idea if my assumptions are accurate - but I think this table shows the dilemna.  Most operating costs are largely fixed - so how one allocates them across the businesses is somewhat arbitrary.  But video programming costs are largely direct to video and its obvious that they are squeezing EBITDA margins.  But capex equipement is probably making the video cash flows very challenging.

 

So you have two approaches - the CMCSA and CHTR approach which is to hold onto the video business due to its incremental contribution to fixed costs.  Then there is the CABO approach which is to abandon the video business and to focus on the data and business services businesses. 

 

In their 10-K, CABO says this:

In 2018, our Adjusted EBITDA margins for residential data and business services were approximately six and seven times greater, respectively, than for residential video.

 

In the case of Comcast, based on my SWAG analysis, EBITDA margins for data and business services are eight and four times greater.  Comcast probably gets better pricing on its video.  I also may have used the wrong allocation process for opex and put too much opex for the ancillary businesses (other than residential).  But it gives one a sense of proportion.

 

I think this is probably true for most of the industry - the lion share of margins are in data and business services and video is a very challenging business.

 

FWIW,

wabuffo

 

This is VERY close to my original estimate of the breakdown (like scarily close).

 

I've since tried to estimate the portion in Other/SMB that is allocated to video/internet and phone, and if I adjust for that and allocate the revenue against the programming costs, the total video margins are about 20% on EBITDA and about 10% on video (gels with a friend of mine who knows a PE  firm that owns a cableco with EBITDA margins on video of mid teens). It implies total video EBITDA of ~$4bn (notably exluding the $3.8bn in "other" costs (corporate/taxes etc.) from this estimate, so it's higher than if I had allocated those costs as a % of revenue) vs. internet EBITDA of $12.3bn for 2018.

 

Regardless of how you look at it, I think there's no way that cable subs declining is really a major issue for Charter.

 

Great work guys.  I will add my 2 cents.  I don't think there is any question that video is marginally profitable at best... cable ceo's have not really denied this but rather think that more products per house equals lower churn which increases lifetime value.  Obviously the larger cable co's have better programming rates which skews the comparison.  Remember also that box costs are falling (due to cable's more recent ability to source from additional suppliers) and with internet capabilities they need less box capability (and less boxes or no boxes over time is what Rutledge has stated) which will lower capex significantly.  But I think the most important factor that is hard to measure is the customer relationship, on the video side specifically, and how the aggregation of over the top services will evolve.  OTT pricing is low and churn is high which makes for some interesting opportunities for cable to continue managing the video relationship, possibly bundling some skinnier packages with various OTT services and increasing video margins while simultaneously driving data usage.  Malone has stated that video is still critical and that is a result of him looking into the future and having a keen eye for how this will develop.  So yes, on the surface, and for the next number of years, it appears that losing video will not hurt us financially but i'm not so sure longer term

 

Internet is becoming more and more important of a utility, especially with OTT reliant on internet pipes, so I don't think the decline of video hurts us LT. Maybe churn goes up (probably does) but I mean that's the idea behind MVNO's for Charter and Comcast right, so they're already trying to find a way around this.

 

How do they get away with no boxes? I wasn't aware of Rutledge having said that, but it would change my estimation of the value of Charter if they could reduce that capex item for sure.

 

Where's the source for Malone's comments, I'd be interested in hearing them. I'm unsure how it will develop so I wonder what he's seeing here.

 

Peter, I don't recall where I saw it, may have even been quoted on this board.  Usually a smart idea to incorporate what Malone says into your thinking.  As far as the boxes go, Mungers post is exactly right.

[Munger_Disciple]

Some additional thoughts on video (FWIW):

 

Most of the video in the future will be delivered via SVOD; the only exception being live sports and news. So one can think of video as an app riding on HSD rails. Rutledge mentioned they might end up selling OTT packages in the future. Regardless of which OTT provider a cable customer buys video apps from, cable will get paid thru' higher HSD usage. It is very clear from cable CEOs comments that the data usage of HSD only customers is significantly higher than double play (HSD + video) customers  and internet pricing is higher for data only customers. So cable companies get paid indirectly for delivering OTT video from other providers.

[rogermunibond]

WSJ digging into the Mbps needs of normal users

 

https://www.wsj.com/graphics/faster-internet-not-worth-it/

[peterHK]

WSJ digging into the Mbps needs of normal users

 

https://www.wsj.com/graphics/faster-internet-not-worth-it/

 

This article seemed odd to me.

 

1) They didn't have a google home/smart security/nest/smart fridge or anything else going.

2) They didn't have a family of 5 all streaming and going on their phones at the same time (although I realize streaming 7 things at a time is supposed to replicate that)

3) They buried the key part: in the future, applications get more data intensive (gaming/VR/AR etc.)

 

I also found it odd that they said paying for above 100Mbps wasn't worth it, but they used 150mbps and had spikes to 100mbps so it seems like 100+ is probably useful to have.

 

They also leave out any discussion of data caps: https://stopthecap.com/2019/08/20/wall-street-journal-says-faster-internet-not-worth-it-but-they-ignore-bottlenecks-and-data-caps/

 

[rogermunibond]

https://www.wsj.com/articles/you-got-a-free-internet-speed-upgrade-then-your-bill-went-up-11566400429

 

Upgrade and raise the price.  WSJ must be pissing Rutledge off.

[Munger_Disciple]

Of all the risks cable companies face, delivering internet that is "too fast" is not one of them in my opinion. Paying $65 per month (in Southern California) for 150-200Mbps HSD only service with no data caps for unlimited streaming is a great deal for most people, especially when the cost is compared to other utilities like water and electricity.

[Liberty]

Broadband is one the great bargains out there, when it comes to value for what you pay. Smartphones are always one of the biggest bargains out there.

 

It's often a Fields of Dreams situation: Build it and they will come.

 

As faster and faster broadband diffuses through the population, new companies and products are popping up to take advantage of that capacity. Without the capacity in place, a lot of these things wouldn't be able to get traction. That's how the chicken & egg problem is usually solved with technology... Excess capacity first.

 

If you had told someone 10 years ago that some regular internet user (ie. not running servers or whatever) would use 400 gigs per month, they wouldn't have believed you.

 

"Charter cable Internet customers who don't subscribe to Charter's TV service are using an average of more than 400GB of data a month, the company said yesterday" [source]

[abitofvalue]

Of all the risks cable companies face, delivering internet that is "too fast" is not one of them in my opinion. Paying $65 per month (in Southern California) for 150-200Mbps HSD only service with no data caps for unlimited streaming is a great deal for most people, especially when the cost is compared to other utilities like water and electricity.

 

I dont think the controversy / problem is "delivering internet that is too fast"... it is that cable companies give their existing customers 'free' upgrades to a faster tier even when customers dont ask for it. Then in a year or so companies announce a price increase.  The companies say hey we just increased prices on everyone.  The problem as i understand it - when they increase prices, they charge the customer the price at the higher speed tier and now the 'free' upgrade is no longer free and the customer has a higher bill.

 

A more ethical way of doing it would be to do it on an opt-in basis - hey customer we are offering this promotion of a free upgrade to a higher speed for 12 mnths. do you want to accept.  then the customer has a choice to accept and read the fine print to understand the 'free' is temporary.  Instead, they seem to be doing it on an opt-out basis (thats how Comcast did it for us anyway).

[Munger_Disciple]

I don't want to get into marketing tactics of cable companies; however I think cable HSD is a great deal. I have been a cable HSD customer for more than 20 years. In 1999, I used to pay $45 per month for 10 Mbps service (highest data rate available in my area back then). Now I pay $65 per month for 150Mbps service (I can get 1Gbps service if I pay more). I never had data caps. BTW I have a friend who paid $50 per month for 25Mbps VDSL service from AT&T until recently close to my service area and he finally switched to cable HSD. During the last 20 years the cable provider continually made improvements to the infrastructure. So anyway you slice it, cable HSD is a very good deal for customers.

[Liberty]

I don't want to get into marketing tactics of cable companies; however I think cable HSD is a great deal. I have been a cable HSD customer for more than 20 years. In 1999, I used to pay $45 per month for 10 Mbps service (highest data rate available in my area back then). Now I pay $65 per month for 150Mbps service (I can get 1Gbps service if I pay more). I never had data caps. BTW I have a friend who paid $50 per month for 25Mbps VDSL service from AT&T until recently close to my service area and he finally switched to cable HSD. During the last 20 years the cable provider continually made improvements to the infrastructure. So anyway you slice it, cable HSD is a very good deal for customers.

 

In Canada, for most of the past 20 years we've had really low data caps and prices have been generally higher and/or speeds lower. In general we're getting screwed because of lower competition than in the US (with banks, telecoms, food, etc).

 

In some places like South Korea where population density is very high, speeds are insanely high and prices relatively low (afaik)

[Value92]

I don't want to get into marketing tactics of cable companies; however I think cable HSD is a great deal. I have been a cable HSD customer for more than 20 years. In 1999, I used to pay $45 per month for 10 Mbps service (highest data rate available in my area back then). Now I pay $65 per month for 150Mbps service (I can get 1Gbps service if I pay more). I never had data caps. BTW I have a friend who paid $50 per month for 25Mbps VDSL service from AT&T until recently close to my service area and he finally switched to cable HSD. During the last 20 years the cable provider continually made improvements to the infrastructure. So anyway you slice it, cable HSD is a very good deal for customers.

 

In Canada, for most of the past 20 years we've had really low data caps and prices have been generally higher and/or speeds lower. In general we're getting screwed because of lower competition than in the US (with banks, telecoms, food, etc).

 

In some places like South Korea where population density is very high, speeds are insanely high and prices relatively low (afaik)

 

Interesting! A Canadian CEO told me this was the case for wireless services (this might be changing with the CRTC hearings on MVNOs in January 2020). He also told me the telcos overbuilt cable via FTTH and FTTN. I assumed broadband prices would be lower than in the US. Is it like in the US that prices with less competition (rural areas) have higher prices?

 

Do you have an opinion on the Canadian cable companies? Cogeco moved into the US a few years ago and bought rural US cable companies. It is trading at a discount to CABO and even other US cable companies. The only possible reasons in my mind are a) mistrust towards the Audet family or b) the Canadian footprint is worth far less than US cable footprint.

[peterHK]

I don't want to get into marketing tactics of cable companies; however I think cable HSD is a great deal. I have been a cable HSD customer for more than 20 years. In 1999, I used to pay $45 per month for 10 Mbps service (highest data rate available in my area back then). Now I pay $65 per month for 150Mbps service (I can get 1Gbps service if I pay more). I never had data caps. BTW I have a friend who paid $50 per month for 25Mbps VDSL service from AT&T until recently close to my service area and he finally switched to cable HSD. During the last 20 years the cable provider continually made improvements to the infrastructure. So anyway you slice it, cable HSD is a very good deal for customers.

 

In Canada, for most of the past 20 years we've had really low data caps and prices have been generally higher and/or speeds lower. In general we're getting screwed because of lower competition than in the US (with banks, telecoms, food, etc).

 

In some places like South Korea where population density is very high, speeds are insanely high and prices relatively low (afaik)

 

Interesting! A Canadian CEO told me this was the case for wireless services (this might be changing with the CRTC hearings on MVNOs in January 2020). He also told me the telcos overbuilt cable via FTTH and FTTN. I assumed broadband prices would be lower than in the US. Is it like in the US that prices with less competition (rural areas) have higher prices?

 

Do you have an opinion on the Canadian cable companies? Cogeco moved into the US a few years ago and bought rural US cable companies. It is trading at a discount to CABO and even other US cable companies. The only possible reasons in my mind are a) mistrust towards the Audet family or b) the Canadian footprint is worth far less than US cable footprint.

 

Our Telco's are generally well run, and they're converged unlike US (offer mobile/TV/Internet services all by the same provider). That being said, our mobile prices are some of the highest in the world. Our internet prices are high. Because of the oligopolistic nature, frankly Canadians get a raw deal, and as a consumer I'd love to see lower prices. Some operators are beginning to offer lower priced options (Shaw/Wind, Rogers/Fido), but the service isn't great and the coverage isn't great on those.