CHTR - Charter Communications

[Liberty]

How does it blow up? 

 

Some wireless tech advances that don't "need" fiber for the backhaul and thereby have a cost advantage, unless and until CHTR goes through BK (again) and cleans up balance sheet from legacy costs of all that fiber to the home?

 

Why did GOOG stop laying fiber?

 

I'd love more detail on how you'd imagine the physics of that would work.

[DooDiligence]

A super huge thanks to all of you for illuminating such a great investment opportunity (intelligently & provocatively.)

I feel pretty high confidence here with funds I'll be needing around 2022ish.

 

Can anyone tell me why the f WEB didn't buy here instead of airlines?

[marazul]

Berkshire owns 3% of Charter

[bergman104]

A super huge thanks to all of you for illuminating such a great investment opportunity (intelligently & provocatively.)

I feel pretty high confidence here with funds I'll be needing around 2022ish.

 

Can anyone tell me why the f WEB didn't buy here instead of airlines?

 

Completely agree. Reading this thread and some of the attached articles laid out the thesis perfectly. Special thanks to Liberty. Will initiate a position tomorrow.

 

Follow-up question though. Is there anywhere that describes a Verizon/AT&T thesis from the opposite angle? I feel like I get the Charter 5G/toll-road point of view but is there anything that can realistically disrupt their technology that is economically viable? Does anyone have insight into a doomsday scenario? 

[chrispy]

It seems like brk could increase their position here. Would love it if ffh did

[CorpRaider]

How does it blow up? 

 

Some wireless tech advances that don't "need" fiber for the backhaul and thereby have a cost advantage, unless and until CHTR goes through BK (again) and cleans up balance sheet from legacy costs of all that fiber to the home?

 

Why did GOOG stop laying fiber?

 

I'd love more detail on how you'd imagine the physics of that would work.

 

Sorry, I think you misread a question as a statement.

 

So you are implying that photons and a glass pipe are required, so the laws of physics dictate that alternate delivery is not one way it could blow up?  Seems like this article agrees with you, long term (I've also read the Deloitte report, like everyone else, projecting the explosion in demand for fiber):

 

https://www.zdnet.com/article/fiber-broadband-is-it-a-waste-with-5g-and-elon-musks-satellites-on-the-horizon/

 

I guess maybe continued surprise cord cutting numbers and a covenant or three gets tripped before the 5G rollout/demand explosion? 

[DooDiligence]

How does it blow up? 

 

Some wireless tech advances that don't "need" fiber for the backhaul and thereby have a cost advantage, unless and until CHTR goes through BK (again) and cleans up balance sheet from legacy costs of all that fiber to the home?

 

Why did GOOG stop laying fiber?

 

I'd love more detail on how you'd imagine the physics of that would work.

 

Sorry, I think you misread a question as a statement.

 

So you are implying that photons and a glass pipe are required, so the laws of physics dictate that alternate delivery is not one way it could blow up?  Seems like this article agrees with you, long term (I've also read the Deloitte report, like everyone else, projecting the explosion in demand for fiber):

 

https://www.zdnet.com/article/fiber-broadband-is-it-a-waste-with-5g-and-elon-musks-satellites-on-the-horizon/

 

I guess maybe continued surprise cord cutting numbers and a covenant or three gets tripped before the 5G rollout/demand explosion?

 

Good read, thanks.

[Liberty]

How does it blow up? 

 

Some wireless tech advances that don't "need" fiber for the backhaul and thereby have a cost advantage, unless and until CHTR goes through BK (again) and cleans up balance sheet from legacy costs of all that fiber to the home?

 

Why did GOOG stop laying fiber?

 

I'd love more detail on how you'd imagine the physics of that would work.

 

Sorry, I think you misread a question as a statement.

 

So you are implying that photons and a glass pipe are required, so the laws of physics dictate that alternate delivery is not one way it could blow up?  Seems like this article agrees with you, long term (I've also read the Deloitte report, like everyone else, projecting the explosion in demand for fiber):

 

https://www.zdnet.com/article/fiber-broadband-is-it-a-waste-with-5g-and-elon-musks-satellites-on-the-horizon/

 

I guess maybe continued surprise cord cutting numbers and a covenant or three gets tripped before the 5G rollout/demand explosion?

 

I was kind of just giving your question a push with another question.

 

The thing with wires, is that they're not shared. Airwaves/spectrum is a lot more shared, and the physics of radio waves means that the frequencies that have the higher throughput are also shorter range and don't penetrate materials as well as the longer ones, so you need more numerous, smaller cells, and you start to have more trouble providing reliable, high quality service...

 

So I'm trying to imagine a world where most houses in a decently dense neighborhood all start streaming 4K Netflix content (with all the kids in their bedrooms watching Youtube on their iPads simultaneously...) over wireless in the evening. It'd be difficult on the shared spectrum on a local level, it would be difficult to give good service to everyone (always weird deadspots and people deep in basements or with thick walls that get poor reception), and the backhaul needed to pipe all those bits back would be almost as costly to built as a new cableco from scratch, since each 5G cell would be quite small (lots of branches needed on the tree trunk, so to speak).

 

That's just how I visualize the situation, but maybe I'm missing something.

[Spekulatius]

There just aren’t enough radio bands available to support high speed data transfer of a high cell densities without interference. Also, for very high dataspeed, one needs high frequency/ short wave bands, which have very poor penetration, which means that we probably need to look at line of sight systems, which are Prone to interruptions.

 

Infrared Light frequencies used in goadfiners are 10^5 x higher than common radio frequencies, and that is why more information can be squeezed through quartz fiber.

[WayWardCloud]

It looks like T-Mobile and Sprint are finally merging (if the regulator approves).

They plan on investing jointly $40B into 5G within the next 4 years, which sounds like a lot (?).

How do you guys think about this news relative to Charter?

 

I don't like having Masa as a competitor at scale (I know he's not going to be in actual full control of the board, but still) because he has the potential of being very irrational on pricing for years to come. He's so good at raising other people's capital to invest in pharaonic money-losing projects in the name of his long term vision. Otherwise, I find the US telecom/cable market to be pretty complacent with one another, running their businesses like cash cows rather than competing too much. The amount of actual competitive pressure is the big difference with Europe IMO and I see the Germans and Japanese as potential disrupters. That would be great for consumers but not so great for stock holders... Look at the price for broadband access in Europe vs US for example. Mobile is the same: in France I get unlimited cell voice + texts for 2 euros / month and I can add unlimited 4G for another 18 (14 if bundled with DSL at home).

 

On the other hand, it might just push Verizon to go after Charter again so they can roll-up their own 5G faster (but it will be a harder bargain for Malone at today's price tag).

[Happy]

Rutledge says video subscriber losses wouldn't affect the valuation much because they are only marginally profitable. However, when Malone ran TCI, his central insight was that scale is key in a cable company, so he made countless acquisitions. The TWC Brighthouse acquisition probably also was in part driven by scale. So if scale was that crucial in the past, why shouldn't there be negative operating leverage at work when video scale decreases? If video subscribers are only marginally profitable now, can they turn unprofitable due to negative operating leverage? Or has the business changed that much and costs are much more variable so that scale no longer is as important?

[Liberty]

Rutledge says video subscriber losses wouldn't affect the valuation much because they are only marginally profitable. However, when Malone ran TCI, his central insight was that scale is key in a cable company, so he made countless acquisitions. The TWC Brighthouse acquisition probably also was in part driven by scale. So if scale was that crucial in the past, why shouldn't there be negative operating leverage at work when video scale decreases? If video subscribers are only marginally profitable now, can they turn unprofitable due to negative operating leverage? Or has the business changed that much and costs are much more variable so that scale no longer is as important?

 

You have to look at what changed since then. Back then, video was very profitable.

 

Scale is still important, and you don't want to necessarily rapidly lose video subs and have a much worse rate card and all that. But if you had very slowly melting video subs with rapidly growing broadband, you'd be in a good spot. People cut video because they switch over to OTT video and spend more time on their mobile devices, so they're not really cutting the cord, just spending on a different product (with better margins) on the same cord.

 

If you look at this:

 

 

Based on what management said, a lot of the video losses in this Q were for non-pay, and the timing was at the discretion of the company. It seems like it's possible that they had this spike in Q1 and the rest of the year will look a lot better (maybe grow? they seemed confident they could do it in the past, though the integration is probably disruptive on that front for now) because they just did it all at once rather than spread it over time.

[cameronfen]

Rutledge says video subscriber losses wouldn't affect the valuation much because they are only marginally profitable. However, when Malone ran TCI, his central insight was that scale is key in a cable company, so he made countless acquisitions. The TWC Brighthouse acquisition probably also was in part driven by scale. So if scale was that crucial in the past, why shouldn't there be negative operating leverage at work when video scale decreases? If video subscribers are only marginally profitable now, can they turn unprofitable due to negative operating leverage? Or has the business changed that much and costs are much more variable so that scale no longer is as important?

 

You have to look at what changed since then. Back then, video was very profitable.

 

Scale is still important, and you don't want to necessarily rapidly lose video subs and have a much worse rate card and all that. But if you had very slowly melting video subs with rapidly growing broadband, you'd be in a good spot. People cut video because they switch over to OTT video and spend more time on their mobile devices, so they're not really cutting the cord, just spending on a different product (with better margins) on the same cord.

 

If you look at this:

 

 

Based on what management said, a lot of the video losses in this Q were for non-pay, and the timing was at the discretion of the company. It seems like it's possible that they had this spike in Q1 and the rest of the year will look a lot better (maybe grow? they seemed confident they could do it in the past, though the integration is probably disruptive on that front for now) because they just did it all at once rather than spread it over time.

 

As a further point, Charter makes roughly 16 billion in revenue in video revenue and spends 10 billion in programming costs alone.  After capex, marketing, and other costs (split evenly by revenue), these numbers seem to support Rutledge's point that these are barely profitable profitable even at the margin, (i.e. ignoring fixed costs, which are the same if you transmit only internet or transmit a triple/quaduple play) at best.  The corollary is that internet has EBITDA margins above 65%. 

[BG2008]

Regarding video - My 2 cents is that if video shrinks too rapidly, then it could introduce shocks to the systems.  Second, Malone or someone at Charter had mentioned that video makes an argument that cable should not be regulated.  If Charter only owns the broadband, then it becomes dumb pipes and dumb pipes invites regulation. 

[Happy]

I agree that all seems fine if video is melting very slowly. It's a bit disappointing that broadband grew at a lower rate, but that might be just quarterly fluctuations.

 

If it's true that almost all video sub losses were discretionary decisions, the decline would be way overblown. But it doesn't seem totally irrational for Mr. Market to not just take management's word for a fact. A while ago they said that TWC offered broadband + video at a cheaper price than just broadband so they could show more video subs to Wall Street. They explained large video sub losses by cutting unprofitable contracts, where the customers with the incredible deals wouldn't renew to their new pricing. In one of the last quarters Winfrey suggested that they would turn the corner fairly shortly and that's why they were buying back stock up to $395. Now suddenly they lose way more video subs again than expected. Why didn't they cut these subs before when they were cleaning the house? Why didn't Winfrey say anything about this chunk left that they would probably need to cut at some point when he was talking about turning the corner soon? What they say might be a perfectly good explanation. But it is somewhat surprising given the earlier comments.

 

That said, if the decision was at the discretion of the company, it really might not be the sign of weakness Mr. Market thought because if the business were in bad shape, they probably would have tried to make the numbers look better instead of taking a large voluntary cut. 

 

[Foreign Tuffett]

I don't have a strong opinion on CHTR, but the bull case I keep seeing both here and on Twitter seems somewhat overly simplistic. A few thoughts, in no particular order:

 

* I pay $45 per month for Comcast internet. I have an acquaintance who pays well over $200 per month for Comcast internet + landline phone + an extensive cable TV package ("Triple Play"). Let's take a page out of Bezos' playbook and ignore gross margin %, to focus on gross profit $. I'm skeptical that my friend's nearly $3000 annual cable bill produces only a marginally higher gross profit # for Comcast than my own $540 annual bill.

 

* Most new cable sign ups that I've seen are done via a 12 or 24 month initial contract. Typically, unless you call and argue with a customer service rep, prices go up significantly for the same service once these initial contracts reach the end of their term. If the rate of cable video customer churn is increasing (which it appears to be), then lots of customers are probably downgrading to internet only once their initial contracts expire. This limits the ability of the cable companies to jack up the price and enhance the unit-level profitability of that customer.

 

* Similarly, increased video customer churn means that the cable companies have to (in effect) amortize the cost of the initial truck roll and digital set top box over a shorter time frame. This damages the unit level economics of the business.   

 

* I agree with the bulls that consumer demand for broadband internet is fairly price inelastic. However, the industry has to be cautious when increasing prices due to the threat of further government regulation. There's a long history of government conflict with the cable industry, which is perhaps best epitomized by Al Gore calling John Malone "Darth Vader."

 

* Finally, I think predicting what the 5G vs. fiber vs. cable picture is going to look like a decade from now is very, very difficult.

 

 

[Shooter MacGavin]

I agree that all seems fine if video is melting very slowly. It's a bit disappointing that broadband grew at a lower rate, but that might be just quarterly fluctuations.

 

If it's true that almost all video sub losses were discretionary decisions, the decline would be way overblown. But it doesn't seem totally irrational for Mr. Market to not just take management's word for a fact. A while ago they said that TWC offered broadband + video at a cheaper price than just broadband so they could show more video subs to Wall Street. They explained large video sub losses by cutting unprofitable contracts, where the customers with the incredible deals wouldn't renew to their new pricing. In one of the last quarters Winfrey suggested that they would turn the corner fairly shortly and that's why they were buying back stock up to $395. Now suddenly they lose way more video subs again than expected. Why didn't they cut these subs before when they were cleaning the house? Why didn't Winfrey say anything about this chunk left that they would probably need to cut at some point when he was talking about turning the corner soon? What they say might be a perfectly good explanation. But it is somewhat surprising given the earlier comments.

 

That said, if the decision was at the discretion of the company, it really might not be the sign of weakness Mr. Market thought because if the business were in bad shape, they probably would have tried to make the numbers look better instead of taking a large voluntary cut.

 

Are there people here who have an OTT product that have recently switched from cable, in particular from Spectrum or Comcast?  What about people who are hanging on to their satellite video products and using Comcast and Spectrum or cable for Internet?  Would you care to elaborate why you prefer that?

 

I've tried OTT products (Vue, DirectTV now, Hulu Live) and they aren't great honestly.  I have a 200 Mbps connection with Spectrum and I don't find it worth switching.  It barely saves any money either if I want news and the few channels that I and my wife watch and have a DVR like feature.  Im kinda stuck with Spectrum's expensive bundle for now.

 

[Guest longinvestor]

I don't have a strong opinion on CHTR, but the bull case I keep seeing both here and on Twitter seems somewhat overly simplistic. A few thoughts, in no particular order:

 

* I pay $45 per month for Comcast internet. I have an acquaintance who pays well over $200 per month for Comcast internet + landline phone + an extensive cable TV package ("Triple Play"). Let's take a page out of Bezos' playbook and ignore gross margin %, to focus on gross profit $. I'm skeptical that my friend's nearly $3000 annual cable bill produces only a marginally higher gross profit # for Comcast than my own $540 annual bill.

 

* Most new cable sign ups that I've seen are done via a 12 or 24 month initial contract. Typically, unless you call and argue with a customer service rep, prices go up significantly for the same service once these initial contracts reach the end of their term. If the rate of cable video customer churn is increasing (which it appears to be), then lots of customers are probably downgrading to internet only once their initial contracts expire. This limits the ability of the cable companies to jack up the price and enhance the unit-level profitability of that customer.

 

* Similarly, increased vide

 

* Finally, I think predicting what the 5G vs. fiber vs. cable picture is going to look like a decade from now is very, very difficult.

 

+1 very balanced, unbiased post.

 

The script followed by cables is very old. And predictable, like sunrise.

 

As to the 12- or 24- month contract, I promptly play the duopoly one against the other. We have AT&T and Comcast with pipes into our home. I have been doing this for well over 15 years. They are not going to raise my price. Guess what, I have numerous people in my circles who do just that. Some of them call and get another  12- or 24- month extension of the discounted price.

 

 

 

 

 

 

[Liberty]

I'm thinking that people are reading way too much into one quarter. On a short time scale, most of what you see is noise, not signal.

 

Charter hasn't been taking much price, if any, since the acquisition. In fact, they've been increasing internet speeds on their packages, so they're giving people more value for the same price. They'll increase them even more when they are all-digital (which frees a ton of bandwidth in their pipes). I have no doubt that someday they'll take more price, but for now I don't think that's the reason.

[dwy000]

It's baffling that Charter or Comcast with 20M+ customers wouldn't be able to make money on a product but OTT providers with less than 10% of that would be able to.  If it's the difference of being over cable vs. streaming (need a box, truck roll etc) then it's likely to eventually switch to a Cableco offered streaming product (as someone here pointed out). 

 

But again, unless people are going to just stop watching live or scripted TV, content needs to be paid for.  Having 20 different Netflix/HBO/Hulu type channels from each content provider seems much less efficient than a consolidator who can offer them all up.  And cablecos are easily best positioned to play that role.  Right now it's just a pricing issue given OTT consolidators appear to be doing it at a loss.

[jmp8822]

I agree that all seems fine if video is melting very slowly. It's a bit disappointing that broadband grew at a lower rate, but that might be just quarterly fluctuations.

 

If it's true that almost all video sub losses were discretionary decisions, the decline would be way overblown. But it doesn't seem totally irrational for Mr. Market to not just take management's word for a fact. A while ago they said that TWC offered broadband + video at a cheaper price than just broadband so they could show more video subs to Wall Street. They explained large video sub losses by cutting unprofitable contracts, where the customers with the incredible deals wouldn't renew to their new pricing. In one of the last quarters Winfrey suggested that they would turn the corner fairly shortly and that's why they were buying back stock up to $395. Now suddenly they lose way more video subs again than expected. Why didn't they cut these subs before when they were cleaning the house? Why didn't Winfrey say anything about this chunk left that they would probably need to cut at some point when he was talking about turning the corner soon? What they say might be a perfectly good explanation. But it is somewhat surprising given the earlier comments.

 

That said, if the decision was at the discretion of the company, it really might not be the sign of weakness Mr. Market thought because if the business were in bad shape, they probably would have tried to make the numbers look better instead of taking a large voluntary cut.

 

Are there people here who have an OTT product that have recently switched from cable, in particular from Spectrum or Comcast?  What about people who are hanging on to their satellite video products and using Comcast and Spectrum or cable for Internet?  Would you care to elaborate why you prefer that?

 

I've tried OTT products (Vue, DirectTV now, Hulu Live) and they aren't great honestly.  I have a 200 Mbps connection with Spectrum and I don't find it worth switching.  It barely saves any money either if I want news and the few channels that I and my wife watch and have a DVR like feature.  Im kinda stuck with Spectrum's expensive bundle for now.

 

I've had the opposite experience of what you're describing with YouTube TV.  Forgive me for sounding like an advertisement: I pay $38.xx including tax, (recently raised for new customers to $40+tax). I get my local Fox Sports channel for MLB baseball plus other local sports, I get all the ESPN networks, I get all my local ABC, NBC, FOX, CBS channels included, I get all the Turner Networks, basically everything I want for live sports, plus a bunch of other channels. YouTube TV has DVR that saves shows for 9 months. The picture is crystal clear HD.  I have Spectrum internet with 60 MBPS for $40/month and I pay no tax because I own my router and modem. I will re-up my internet in 10 months to 200 MBPS for $45/month with no tax owed.

 

All that said - I pay ~$80/month for fast internet and everything I want in TV, without the games of a cable company. I can watch shows seamlessly on the go on my phone/laptop or in my house with Roku/phone/CPU.  Bottom line, I am paying at least $20+ per month less for internet/TV, while receiving a better TV experience (for me, at least), with no old clunky DVR box and no TV bill that has ridiculous fees/rising charges.

[CorpRaider]

 

* Finally, I think predicting what the 5G vs. fiber vs. cable picture is going to look like a decade from now is very, very difficult.

 

Impossible for me.  Which is why I look at google Access saying...no more fiber, we are doing wireless and I say, hmmm.

 

TMobile ans Sprint are going to be the position of painting wireless and cable cos as competitors, so we will probably hear some decent arguments about how and why they can all provide the same services in the future.

[walkie518]

 

* Finally, I think predicting what the 5G vs. fiber vs. cable picture is going to look like a decade from now is very, very difficult.

 

Impossible for me.  Which is why I look at google Access saying...no more fiber, we are doing wireless and I say, hmmm.

 

TMobile ans Sprint are going to be the position of painting wireless and cable cos as competitors, so we will probably hear some decent arguments about how and why they can all provide the same services in the future.

 

There is no way the Sprint / TMobile deal would be happening unless Comcast and Charter were talking about competing with already existing 5G infrastructure.  The cost advantage might turn the MVNOs inside-out eventually? 

[vince]

Lets assume video losses continue worse than expected at 100,000 a quarter and internet additions continue adding 250-300 a qtr, which is probably a little slower than market is expecting, similar to latest qtr.  Under these circumstances we still are going to grow earnings nicely.  We have some operating synergies that still have to be realized and then some pricing power if need be and other levers for sure. My point is that the market is way too pessimistic on valuations based on what is currently happening.  What worries me more is potential irrational overbuild on the broadband side.  Yes their assets are advantaged but they arent bulletproof.  Having said that, imo, the multiple is way too low and is already pricing in lots of bad news.  Current earning power is in the 6.5-7.5 billion range.  Lastly, if things do start to look bleak then we have one of the best minds that will know how to get us out of there with the least amount of impairment. 

[vince]

Now if earnings had already stopped growing or were showing signs of really topping out then I would be nervous.