CHTR - Charter Communications

[Spekulatius]

In a way, one could regard 5G as a much more  advanced wifi technology. The tech is diffident, but from a user perspective,it will look somewhat the same, except much better coverage and speed. I would agree that the tech at some point will force convergence between them wireless and broadband, to create an optimal product from a user perspective. i think for the Next 5 years, I like the cable business the best. Wireless has more competition , which is getting fiercer and you can get wireless at a reseller very cheap buying prepaid or via a reseller (MVNO) but no such thing exists with broadband. Beyond the next 5 years, it’s harder to tell, but I think competition will build slowly and one will have time to adjust accordingly.

[cameronfen]

^ Despite my posts, I somewhat agree although my time frames for this is more like 3 years.  I think you can probably make good money waiting for the merger synergies in Charter (based on what people said upthread as I havent researched this part as I'm not long) and just compounding in general in cable.  However me personally I couldn't buy this knowing at some point I could be a bag holder given that there is a significant chance in my mind Charter and all cable companies become average businesses instead of really good ones. 

[vince]

5G broadband is certainly going to be different, but how is it going to be cheaper?

 

It's cheaper in the same way I assume dsl is cheaper, costs about the same to put in if you are digging underground cables, but dsl is for phone service and I can offer internet over the same pipes for no (or very little) additional cost so you can price it almost anywhere. Sure dsl is inferior so is 5g but if you can price it at any price or bundle it in a quad play, it doesnt have to be a category killer just a good enough product to make people think about switching.  Then cable loses its pricing power.  Maybe in 20 years when all the cable and telecoms have merged they will get it back, but who knows.  Not saying this is a definite outcome, but a possibility most people in the thread have discounted more than they should.

 

I'm not absolutely certain on this but from all the information I have seen 5G may be more expensive than even fiber to the house.  Much of the cost is in the equipment that is needed.  Where did you find information to conclude that 5G cost is similar to DSL?  I think you may be underestimating the speeds that people desire and will absolutely need at some point.  For whatever reason, people are signing up for higher speed tiers than what is needed.  Cabo advertises a slower speed at 35 dollars but when the customer calls they cant resist 100 mbps for an extra 15-20 bucks.  Cabo also claims that their arpu's continue to grow without price increases....customers are choosing higher tiers, at every level for extra money. 

 

When I talk about DSL I'm using it as an analogy, with the analogy being since telcos already have infrastructure delivering your phone system, if that covers costs they can basically charge low rates for internet service.  This metaphor doesnt hold now really but you still have the effects of this as dsl providers dont really sell much fixed line phone service anymore, but the legacy assets are still there and dont cost much to maintain so you call sell dsl for cheap even now. 

 

In the same way, even if 5g costs the same as fiber (I think it costs less), because you can use the same pipes for phone service and internet, your phone bill covers capex and you can charge whatever for 5g broadband.  Cable companies have to use there pipes for cable but have to rent telecom assets as an MVNO for phone service, putting them at a cost disadvantage.  That or they rent 5g assets for both phone and broadband basically making their capital useless. 

 

That being said, the vast majority of costs for cable is last mile connection.  5g broadband uses small cells so they dont have that cost.  Here is a panel from Forbes discussing this (it was posted upthread as well):  https://www.google.com/amp/s/www.forbes.com/sites/washingtonbytes/2017/09/22/the-dawn-of-5g-will-wireless-kill-the-broadband-star/amp/

About halfway, Bennett mentions that fiber to the home costs about $700-1000 per home while 5g costs $100-200.  This might be low idk as another article (https://www.investors.com/news/technology/verizon-5g-broadband-pricing-cable/) says CAC is $650 per house although this might have only broadband 5g buyers in the denominator and not all homes connected. Even so, 5g broadband is certainly competitive with cable and Verizon is offering its services  below what cable operators are charging in places it has rolled out 5g broadband (same investors.com article). 

 

Additionally, the upgrade cycle is more favorable for 5g.  6g will likely involve different spectrum or a better compression algorithm.  This is a software updated and involves basically changing code on the small cells, which to simplify,

is just a push of a button.  In order for cable to upgrade speeds you need to lay more fiber. 

 

 

Cam, I haven't read the articles yet but in my experience it is dangerous to rely on them, I have seen tons of inaccurate information printed on this subject.  I have come to believe that the mgmt's of the various telecoms and cable cos are a good source combined with some organizations that are close to the technology and then further verified by scientific papers.  More recently however, the telecoms have changed their posture and are contradicting their earlier statements that a full fiber network or 5G were going to be very tough economic propositions.  I think it's important to note that all 4 of them agreed with the views you would get if you combined all the info i just mentioned.  In addition, more than 1 telecom has tried to get Charter to the negotiations table.  Having said that I dont want to sound like my position is a 100% lock on the future of this business and I agree we will see at least some erosion of their physical network advantages at some point.  I think I was talking past you when you were talking about the various technologies and I was talking about Charter's stock performance.  And my point is, with the time that it will take for 5G and the fact that Charter is trading at a low equity to FCF (earning power), you are in effect paying a price that already discounts a tougher competitive environment.  But I do agree with your overriding statement that there is a chance that their moat starts to get chipped away.  One more comment about the cost of competitive infrastructure that hasnt been raised yet is the fiber backhaul that is needed for ANY truly competitive product at the present.  When people quote prices are they including the cost of backhaul and then spreading it across the cost per premise?  I just don't see the kind of immediate threat that I normally see when I find good businesses trading around 10 times fcf.  And in my mind the much bigger worry, even though there are no headlines right now is gov't intervention.  And with that as my main "kill the business" worry, all this tough talk about 5G may actually be a life saver if it fogs up the fact that right now there is a monopoly on the most important telecommunications infrastructure ever demanded.

[vince]

True or False?

 

Charter is becoming a 5G wireless provider & can offer better bundles than Verizon.

 

---

 

Rutledge said this was what he wanted to do back in 2010 as COO of Cablevision.

 

https://gigaom.com/2010/03/01/419-cablevision-sees-alternative-path-to-entering-the-wireless-market/

 

https://www.fiercewireless.com/wireless/charter-looks-beyond-mvno-model-as-it-prepares-to-launch-wireless-next-year

 

He has also stated multiple times that he wants to (and apparently now can) offload as much traffic as possible to their own system instead of using Verizons network & that initially using the MVNO agreement was for testing purposes.

 

---

 

https://newtmobile.com/content/uploads/2018/09/Competition-in-Wireless-Telecommunications-Michelle-Connolly.pdf

 

 

Abridged version:

 

 

---

 

https://www.bbcmag.com/rural-broadband/5g-is-not-the-answer-for-rural-broadband

 

---

 

The NY lawsuit mansplained?

With a few interesting data points.

 

https://stopthecap.com/2017/02/16/charter-ceo-admits-may-sharing-internet-connection-499-neighbors/

 

---

 

I'm pretty confident in CHTR & CMCSA's ability to take a lot of business from legacy MNO's.

 

If it doesn't happen then it means Rutledge has wayyy overstated what CHTR is actually doing in wireless.

 

I believe it makes much more sense to see how their mobile business is doing before they start investing heavily in mobile infrastructure.  They will continue working on the best way to do it as they utilize and learn from the mvno/wifi combination.  But as they (if they) approach say 5 million customers it makes more sense.  In the meantime, both sides continue to posture (with cable in the stronger position right now but that could change quickly) to get the most favorable terms in the inevitable tie-ups that are coming.  The economics are just way to compelling for it not to happen.

[vince]

True or False?

 

Charter is becoming a 5G wireless provider & can offer better bundles than Verizon.

 

---

 

Rutledge said this was what he wanted to do back in 2010 as COO of Cablevision.

 

https://gigaom.com/2010/03/01/419-cablevision-sees-alternative-path-to-entering-the-wireless-market/

 

https://www.fiercewireless.com/wireless/charter-looks-beyond-mvno-model-as-it-prepares-to-launch-wireless-next-year

 

He has also stated multiple times that he wants to (and apparently now can) offload as much traffic as possible to their own system instead of using Verizons network & that initially using the MVNO agreement was for testing purposes.

 

---

 

https://newtmobile.com/content/uploads/2018/09/Competition-in-Wireless-Telecommunications-Michelle-Connolly.pdf

 

 

Abridged version:

 

 

---

 

https://www.bbcmag.com/rural-broadband/5g-is-not-the-answer-for-rural-broadband

 

---

 

The NY lawsuit mansplained?

With a few interesting data points.

 

https://stopthecap.com/2017/02/16/charter-ceo-admits-may-sharing-internet-connection-499-neighbors/

 

---

 

I'm pretty confident in CHTR & CMCSA's ability to take a lot of business from legacy MNO's.

 

If it doesn't happen then it means Rutledge has wayyy overstated what CHTR is actually doing in wireless.

 

I believe it makes much more sense to see how their mobile business is doing before they start investing heavily in mobile infrastructure.  They will continue working on the best way to do it as they utilize and learn from the mvno/wifi combination.  But as they (if they) approach say 5 million customers it makes more sense.  In the meantime, both sides continue to posture (with cable in the stronger position right now but that could change quickly) to get the most favorable terms in the inevitable tie-ups that are coming.  The economics are just way to compelling for it not to happen.

 

This excerpt was in one of DD's links...ecifically, Charter’s executives petitioned the FCC to release 3.5 GHz spectrum, often referred to as the CBRS band, for both licensed and unlicensed use. The agency is scheduled to discuss rules for that band during the FCC’s open meeting next week. Charter is urging the agency to move quickly to release the spectrum, but also to put rules around the spectrum that would keep licenses geographically no bigger than a county.

 

“Large license sizes would limit access of the band to the country’s largest wireless carriers and would likely result in deployment only to the most densely populated areas,” Charter argued in its filing. “Smaller license sizes will enable new entrants, like Charter, to tailor their investment and deployment plans by leveraging existing infrastructure. In particular, Charter’s existing hybrid fiber-coaxial (HFC) network provides the backhaul, power and location to rapidly deploy small cells for the provision of wireless broadband service. By contrast, increasing the geographic licensing size of PALs to PEAs (which are too large to match up with Charter’s network) would preclude new entrants such as Charter from investing in the 3.5 GHz Band due to their large geographic size.”

 

“We are going to be leaders in wireless,” Craig Cowden, SVP of wireless technology at Charter, proclaimed here during a presentation on wireless technologies at the SCTE Cable-Tec Expo.

[vince]

True or False?

 

Charter is becoming a 5G wireless provider & can offer better bundles than Verizon.

 

---

 

Rutledge said this was what he wanted to do back in 2010 as COO of Cablevision.

 

https://gigaom.com/2010/03/01/419-cablevision-sees-alternative-path-to-entering-the-wireless-market/

 

https://www.fiercewireless.com/wireless/charter-looks-beyond-mvno-model-as-it-prepares-to-launch-wireless-next-year

 

He has also stated multiple times that he wants to (and apparently now can) offload as much traffic as possible to their own system instead of using Verizons network & that initially using the MVNO agreement was for testing purposes.

 

---

 

https://newtmobile.com/content/uploads/2018/09/Competition-in-Wireless-Telecommunications-Michelle-Connolly.pdf

 

 

Abridged version:

 

 

---

 

https://www.bbcmag.com/rural-broadband/5g-is-not-the-answer-for-rural-broadband

 

---

 

The NY lawsuit mansplained?

With a few interesting data points.

 

https://stopthecap.com/2017/02/16/charter-ceo-admits-may-sharing-internet-connection-499-neighbors/

 

---

 

I'm pretty confident in CHTR & CMCSA's ability to take a lot of business from legacy MNO's.

 

If it doesn't happen then it means Rutledge has wayyy overstated what CHTR is actually doing in wireless.

 

I believe it makes much more sense to see how their mobile business is doing before they start investing heavily in mobile infrastructure.  They will continue working on the best way to do it as they utilize and learn from the mvno/wifi combination.  But as they (if they) approach say 5 million customers it makes more sense.  In the meantime, both sides continue to posture (with cable in the stronger position right now but that could change quickly) to get the most favorable terms in the inevitable tie-ups that are coming.  The economics are just way to compelling for it not to happen.

 

This excerpt was in one of DD's links...ecifically, Charter’s executives petitioned the FCC to release 3.5 GHz spectrum, often referred to as the CBRS band, for both licensed and unlicensed use. The agency is scheduled to discuss rules for that band during the FCC’s open meeting next week. Charter is urging the agency to move quickly to release the spectrum, but also to put rules around the spectrum that would keep licenses geographically no bigger than a county.

 

“Large license sizes would limit access of the band to the country’s largest wireless carriers and would likely result in deployment only to the most densely populated areas,” Charter argued in its filing. “Smaller license sizes will enable new entrants, like Charter, to tailor their investment and deployment plans by leveraging existing infrastructure. In particular, Charter’s existing hybrid fiber-coaxial (HFC) network provides the backhaul, power and location to rapidly deploy small cells for the provision of wireless broadband service. By contrast, increasing the geographic licensing size of PALs to PEAs (which are too large to match up with Charter’s network) would preclude new entrants such as Charter from investing in the 3.5 GHz Band due to their large geographic size.”

 

“We are going to be leaders in wireless,” Craig Cowden, SVP of wireless technology at Charter, proclaimed here during a presentation on wireless technologies at the SCTE Cable-Tec Expo.

 

And this was the result....In a 3-1 vote, the FCC adopted changes to the rules governing the licensed portion of the 3.5 GHz Citizens Broadband Radio Service (CBRS) band, increasing the license areas from census tracts to counties and extending license terms to 10 years.

[cameronfen]

5G broadband is certainly going to be different, but how is it going to be cheaper?

 

It's cheaper in the same way I assume dsl is cheaper, costs about the same to put in if you are digging underground cables, but dsl is for phone service and I can offer internet over the same pipes for no (or very little) additional cost so you can price it almost anywhere. Sure dsl is inferior so is 5g but if you can price it at any price or bundle it in a quad play, it doesnt have to be a category killer just a good enough product to make people think about switching.  Then cable loses its pricing power.  Maybe in 20 years when all the cable and telecoms have merged they will get it back, but who knows.  Not saying this is a definite outcome, but a possibility most people in the thread have discounted more than they should.

 

I'm not absolutely certain on this but from all the information I have seen 5G may be more expensive than even fiber to the house.  Much of the cost is in the equipment that is needed.  Where did you find information to conclude that 5G cost is similar to DSL?  I think you may be underestimating the speeds that people desire and will absolutely need at some point.  For whatever reason, people are signing up for higher speed tiers than what is needed.  Cabo advertises a slower speed at 35 dollars but when the customer calls they cant resist 100 mbps for an extra 15-20 bucks.  Cabo also claims that their arpu's continue to grow without price increases....customers are choosing higher tiers, at every level for extra money. 

 

When I talk about DSL I'm using it as an analogy, with the analogy being since telcos already have infrastructure delivering your phone system, if that covers costs they can basically charge low rates for internet service.  This metaphor doesnt hold now really but you still have the effects of this as dsl providers dont really sell much fixed line phone service anymore, but the legacy assets are still there and dont cost much to maintain so you call sell dsl for cheap even now. 

 

In the same way, even if 5g costs the same as fiber (I think it costs less), because you can use the same pipes for phone service and internet, your phone bill covers capex and you can charge whatever for 5g broadband.  Cable companies have to use there pipes for cable but have to rent telecom assets as an MVNO for phone service, putting them at a cost disadvantage.  That or they rent 5g assets for both phone and broadband basically making their capital useless. 

 

That being said, the vast majority of costs for cable is last mile connection.  5g broadband uses small cells so they dont have that cost.  Here is a panel from Forbes discussing this (it was posted upthread as well):  https://www.google.com/amp/s/www.forbes.com/sites/washingtonbytes/2017/09/22/the-dawn-of-5g-will-wireless-kill-the-broadband-star/amp/

About halfway, Bennett mentions that fiber to the home costs about $700-1000 per home while 5g costs $100-200.  This might be low idk as another article (https://www.investors.com/news/technology/verizon-5g-broadband-pricing-cable/) says CAC is $650 per house although this might have only broadband 5g buyers in the denominator and not all homes connected. Even so, 5g broadband is certainly competitive with cable and Verizon is offering its services  below what cable operators are charging in places it has rolled out 5g broadband (same investors.com article). 

 

Additionally, the upgrade cycle is more favorable for 5g.  6g will likely involve different spectrum or a better compression algorithm.  This is a software updated and involves basically changing code on the small cells, which to simplify,

is just a push of a button.  In order for cable to upgrade speeds you need to lay more fiber. 

 

 

Cam, I haven't read the articles yet but in my experience it is dangerous to rely on them, I have seen tons of inaccurate information printed on this subject.  I have come to believe that the mgmt's of the various telecoms and cable cos are a good source combined with some organizations that are close to the technology and then further verified by scientific papers.  More recently however, the telecoms have changed their posture and are contradicting their earlier statements that a full fiber network or 5G were going to be very tough economic propositions.  I think it's important to note that all 4 of them agreed with the views you would get if you combined all the info i just mentioned.  In addition, more than 1 telecom has tried to get Charter to the negotiations table.  Having said that I dont want to sound like my position is a 100% lock on the future of this business and I agree we will see at least some erosion of their physical network advantages at some point.  I think I was talking past you when you were talking about the various technologies and I was talking about Charter's stock performance.  And my point is, with the time that it will take for 5G and the fact that Charter is trading at a low equity to FCF (earning power), you are in effect paying a price that already discounts a tougher competitive environment.  But I do agree with your overriding statement that there is a chance that their moat starts to get chipped away.  One more comment about the cost of competitive infrastructure that hasnt been raised yet is the fiber backhaul that is needed for ANY truly competitive product at the present.  When people quote prices are they including the cost of backhaul and then spreading it across the cost per premise?  I just don't see the kind of immediate threat that I normally see when I find good businesses trading around 10 times fcf.  And in my mind the much bigger worry, even though there are no headlines right now is gov't intervention.  And with that as my main "kill the business" worry, all this tough talk about 5G may actually be a life saver if it fogs up the fact that right now there is a monopoly on the most important telecommunications infrastructure ever demanded.

 

Makes lot of sense.  Based on your previous threads you have clearly done your DD, likely more thoroughly than me.  But let me push back.  You say articles print uniformed information and management knows better. This is likely true, but keep in mind management is incentivized to say certain things and I think it's likely that telecoms dont want to overpromise to avoid more antitrust.  Again even if you dont trust the experts in the articles you can trust Verizon's price they offer for 5g broadband.  It's about  10% lower than any large cable competitor in the areas it's being offered. 

 

Maybe it's a loss making teaser rate, even so, based on what management is doing, they obviously think that 5g broadband is a viable threat at least some of the time.  Keep in mind even if 5g is inferior to cable in both price and quality like in the case of dsl, it could significantly erode the moat of cable because the margins are so high. 

[vince]

5G broadband is certainly going to be different, but how is it going to be cheaper?

 

It's cheaper in the same way I assume dsl is cheaper, costs about the same to put in if you are digging underground cables, but dsl is for phone service and I can offer internet over the same pipes for no (or very little) additional cost so you can price it almost anywhere. Sure dsl is inferior so is 5g but if you can price it at any price or bundle it in a quad play, it doesnt have to be a category killer just a good enough product to make people think about switching.  Then cable loses its pricing power.  Maybe in 20 years when all the cable and telecoms have merged they will get it back, but who knows.  Not saying this is a definite outcome, but a possibility most people in the thread have discounted more than they should.

 

I'm not absolutely certain on this but from all the information I have seen 5G may be more expensive than even fiber to the house.  Much of the cost is in the equipment that is needed.  Where did you find information to conclude that 5G cost is similar to DSL?  I think you may be underestimating the speeds that people desire and will absolutely need at some point.  For whatever reason, people are signing up for higher speed tiers than what is needed.  Cabo advertises a slower speed at 35 dollars but when the customer calls they cant resist 100 mbps for an extra 15-20 bucks.  Cabo also claims that their arpu's continue to grow without price increases....customers are choosing higher tiers, at every level for extra money. 

 

When I talk about DSL I'm using it as an analogy, with the analogy being since telcos already have infrastructure delivering your phone system, if that covers costs they can basically charge low rates for internet service.  This metaphor doesnt hold now really but you still have the effects of this as dsl providers dont really sell much fixed line phone service anymore, but the legacy assets are still there and dont cost much to maintain so you call sell dsl for cheap even now. 

 

In the same way, even if 5g costs the same as fiber (I think it costs less), because you can use the same pipes for phone service and internet, your phone bill covers capex and you can charge whatever for 5g broadband.  Cable companies have to use there pipes for cable but have to rent telecom assets as an MVNO for phone service, putting them at a cost disadvantage.  That or they rent 5g assets for both phone and broadband basically making their capital useless. 

 

That being said, the vast majority of costs for cable is last mile connection.  5g broadband uses small cells so they dont have that cost.  Here is a panel from Forbes discussing this (it was posted upthread as well):  https://www.google.com/amp/s/www.forbes.com/sites/washingtonbytes/2017/09/22/the-dawn-of-5g-will-wireless-kill-the-broadband-star/amp/

About halfway, Bennett mentions that fiber to the home costs about $700-1000 per home while 5g costs $100-200.  This might be low idk as another article (https://www.investors.com/news/technology/verizon-5g-broadband-pricing-cable/) says CAC is $650 per house although this might have only broadband 5g buyers in the denominator and not all homes connected. Even so, 5g broadband is certainly competitive with cable and Verizon is offering its services  below what cable operators are charging in places it has rolled out 5g broadband (same investors.com article). 

 

Additionally, the upgrade cycle is more favorable for 5g.  6g will likely involve different spectrum or a better compression algorithm.  This is a software updated and involves basically changing code on the small cells, which to simplify,

is just a push of a button.  In order for cable to upgrade speeds you need to lay more fiber. 

 

 

Cam, I haven't read the articles yet but in my experience it is dangerous to rely on them, I have seen tons of inaccurate information printed on this subject.  I have come to believe that the mgmt's of the various telecoms and cable cos are a good source combined with some organizations that are close to the technology and then further verified by scientific papers.  More recently however, the telecoms have changed their posture and are contradicting their earlier statements that a full fiber network or 5G were going to be very tough economic propositions.  I think it's important to note that all 4 of them agreed with the views you would get if you combined all the info i just mentioned.  In addition, more than 1 telecom has tried to get Charter to the negotiations table.  Having said that I dont want to sound like my position is a 100% lock on the future of this business and I agree we will see at least some erosion of their physical network advantages at some point.  I think I was talking past you when you were talking about the various technologies and I was talking about Charter's stock performance.  And my point is, with the time that it will take for 5G and the fact that Charter is trading at a low equity to FCF (earning power), you are in effect paying a price that already discounts a tougher competitive environment.  But I do agree with your overriding statement that there is a chance that their moat starts to get chipped away.  One more comment about the cost of competitive infrastructure that hasnt been raised yet is the fiber backhaul that is needed for ANY truly competitive product at the present.  When people quote prices are they including the cost of backhaul and then spreading it across the cost per premise?  I just don't see the kind of immediate threat that I normally see when I find good businesses trading around 10 times fcf.  And in my mind the much bigger worry, even though there are no headlines right now is gov't intervention.  And with that as my main "kill the business" worry, all this tough talk about 5G may actually be a life saver if it fogs up the fact that right now there is a monopoly on the most important telecommunications infrastructure ever demanded.

 

Makes lot of sense.  Based on your previous threads you have clearly done your DD, likely more thoroughly than me.  But let me push back.  You say articles print uniformed information and management knows better. This is likely true, but keep in mind management is incentivized to say certain things and I think it's likely that telecoms dont want to overpromise to avoid more antitrust.  Again even if you dont trust the experts in the articles you can trust Verizon's price they offer for 5g broadband.  It's about  10% lower than any large cable competitor in the areas it's being offered. 

 

Maybe it's a loss making teaser rate, even so, based on what management is doing, they obviously think that 5g broadband is a viable threat at least some of the time.  Keep in mind even if 5g is inferior to cable in both price and quality like in the case of dsl, it could significantly erode the moat of cable because the margins are so high.

 

Charter's reaction to decision....Today’s action by the FCC, which adopts improved licensing rules for the 3.5 GHz band, is an important step forward for next generation connectivity including 5G," said Charter. "We thank chairman Pai and commissioner Mike O’Rielly for their leadership on this issue. The 3.5 GHz band is an important component of Charter’s mobile strategy and also has the potential to provide a cost-effective solution for delivering fixed wireless broadband, including in rural areas. Preserving significant opportunity for GAA unlicensed use as well as adopting a counties-based Priority Access Licenses (PAL) areas will promote increased competition and broadband deployment, bringing new innovations and the future of connectivity even closer for consumers in urban suburban and rural communities across the U.S.”

[cameronfen]

 

Charter's reaction to decision....Today’s action by the FCC, which adopts improved licensing rules for the 3.5 GHz band, is an important step forward for next generation connectivity including 5G," said Charter. "We thank chairman Pai and commissioner Mike O’Rielly for their leadership on this issue. The 3.5 GHz band is an important component of Charter’s mobile strategy and also has the potential to provide a cost-effective solution for delivering fixed wireless broadband, including in rural areas. Preserving significant opportunity for GAA unlicensed use as well as adopting a counties-based Priority Access Licenses (PAL) areas will promote increased competition and broadband deployment, bringing new innovations and the future of connectivity even closer for consumers in urban suburban and rural communities across the U.S.”

 

Bold mine.  This may be confirmation bias, but I read that as 5G broadband is very economical and competitive with cable in at least some areas.  Now I think it's likely that in a vacuum, cable has an easier job of building out 5g than telcos have in building out 5g, which is what makes acquisitions of cable companies attractive, ultimately any company that survives will end up having both a critical mass of mobile and broadband customers.  However, all the big telcos have national brands and people all across the united states can name any one of the big four.  This is because have nationwide economies of scale for telecom and ultimately this new converged business that will have both mobile and broadband.  Cable has different economics, all you need is local monopolies, which means that building out a mobile subscriber base organically in areas that have never heard of Spectrum will be very hard for Charter and because of the local monopoly nature cable companies don't spend much on advertising compared to telcos and thus have much less mindshare in the population.  Likewise, telecoms don't need a national scale to attract customers on the cable side of the equation, they just need a locally strong network which is what Verizon is doing with 5G.  While cable has an advantage on the production side of the equation, I think telcos have a much more formidable advantage on the customer side of the equation. 

 

Again to emphasize, even if 5G broadband doesn't live up to the hype, the very fact that it makes entering local cable markets easier for a large category of well-capitalized companies, suggests that it will be difficult for cable to maintain is high ROIs that came with being local monopolies. 

[cmlber]

With all the talk about 5G, I'm really surprised nobody talks about the risk of government incentivized overbuilding.

 

It's easy to look at the economics as a business with a 10%+ cost of capital and say it makes no sense to overbuild, but if you're a municipality that can borrow at 3.5% for 30 years (or the federal government at 3%), there's actually a very good case for building a city owned FTTH network.  If it costs you $3,000 to connect a home (high end of Tucows estimate assuming 50% penetration), and you need to earn 3% to cover your cost of debt, you would only need to charge something like $10/month to break-even.  Compare that to cable prices at ~$70/month for 200Mbps download speeds.  I think there's a risk that local governments slowly start to view fiber as a utility to be provided to their residents just like garbage collection, water, etc.  That kind of gradual change probably doesn't kill the CHTR thesis, but it hurts the terminal value.  What I do think could kill the thesis would be inclusion in a national infrastructure bill (if it ever happens) of incentives for this kind of overbuilding that speeds it up significantly and highlights the risk.  Or alternatively just someone like Elizabeth Warren getting elected and regulating prices.

[vince]

5G broadband is certainly going to be different, but how is it going to be cheaper?

 

It's cheaper in the same way I assume dsl is cheaper, costs about the same to put in if you are digging underground cables, but dsl is for phone service and I can offer internet over the same pipes for no (or very little) additional cost so you can price it almost anywhere. Sure dsl is inferior so is 5g but if you can price it at any price or bundle it in a quad play, it doesnt have to be a category killer just a good enough product to make people think about switching.  Then cable loses its pricing power.  Maybe in 20 years when all the cable and telecoms have merged they will get it back, but who knows.  Not saying this is a definite outcome, but a possibility most people in the thread have discounted more than they should.

 

I'm not absolutely certain on this but from all the information I have seen 5G may be more expensive than even fiber to the house.  Much of the cost is in the equipment that is needed.  Where did you find information to conclude that 5G cost is similar to DSL?  I think you may be underestimating the speeds that people desire and will absolutely need at some point.  For whatever reason, people are signing up for higher speed tiers than what is needed.  Cabo advertises a slower speed at 35 dollars but when the customer calls they cant resist 100 mbps for an extra 15-20 bucks.  Cabo also claims that their arpu's continue to grow without price increases....customers are choosing higher tiers, at every level for extra money. 

 

When I talk about DSL I'm using it as an analogy, with the analogy being since telcos already have infrastructure delivering your phone system, if that covers costs they can basically charge low rates for internet service.  This metaphor doesnt hold now really but you still have the effects of this as dsl providers dont really sell much fixed line phone service anymore, but the legacy assets are still there and dont cost much to maintain so you call sell dsl for cheap even now. 

 

In the same way, even if 5g costs the same as fiber (I think it costs less), because you can use the same pipes for phone service and internet, your phone bill covers capex and you can charge whatever for 5g broadband.  Cable companies have to use there pipes for cable but have to rent telecom assets as an MVNO for phone service, putting them at a cost disadvantage.  That or they rent 5g assets for both phone and broadband basically making their capital useless. 

 

That being said, the vast majority of costs for cable is last mile connection.  5g broadband uses small cells so they dont have that cost.  Here is a panel from Forbes discussing this (it was posted upthread as well):  https://www.google.com/amp/s/www.forbes.com/sites/washingtonbytes/2017/09/22/the-dawn-of-5g-will-wireless-kill-the-broadband-star/amp/

About halfway, Bennett mentions that fiber to the home costs about $700-1000 per home while 5g costs $100-200.  This might be low idk as another article (https://www.investors.com/news/technology/verizon-5g-broadband-pricing-cable/) says CAC is $650 per house although this might have only broadband 5g buyers in the denominator and not all homes connected. Even so, 5g broadband is certainly competitive with cable and Verizon is offering its services  below what cable operators are charging in places it has rolled out 5g broadband (same investors.com article). 

 

Additionally, the upgrade cycle is more favorable for 5g.  6g will likely involve different spectrum or a better compression algorithm.  This is a software updated and involves basically changing code on the small cells, which to simplify,

is just a push of a button.  In order for cable to upgrade speeds you need to lay more fiber. 

 

 

Cam, I haven't read the articles yet but in my experience it is dangerous to rely on them, I have seen tons of inaccurate information printed on this subject.  I have come to believe that the mgmt's of the various telecoms and cable cos are a good source combined with some organizations that are close to the technology and then further verified by scientific papers.  More recently however, the telecoms have changed their posture and are contradicting their earlier statements that a full fiber network or 5G were going to be very tough economic propositions.  I think it's important to note that all 4 of them agreed with the views you would get if you combined all the info i just mentioned.  In addition, more than 1 telecom has tried to get Charter to the negotiations table.  Having said that I dont want to sound like my position is a 100% lock on the future of this business and I agree we will see at least some erosion of their physical network advantages at some point.  I think I was talking past you when you were talking about the various technologies and I was talking about Charter's stock performance.  And my point is, with the time that it will take for 5G and the fact that Charter is trading at a low equity to FCF (earning power), you are in effect paying a price that already discounts a tougher competitive environment.  But I do agree with your overriding statement that there is a chance that their moat starts to get chipped away.  One more comment about the cost of competitive infrastructure that hasnt been raised yet is the fiber backhaul that is needed for ANY truly competitive product at the present.  When people quote prices are they including the cost of backhaul and then spreading it across the cost per premise?  I just don't see the kind of immediate threat that I normally see when I find good businesses trading around 10 times fcf.  And in my mind the much bigger worry, even though there are no headlines right now is gov't intervention.  And with that as my main "kill the business" worry, all this tough talk about 5G may actually be a life saver if it fogs up the fact that right now there is a monopoly on the most important telecommunications infrastructure ever demanded.

 

Makes lot of sense.  Based on your previous threads you have clearly done your DD, likely more thoroughly than me.  But let me push back.  You say articles print uniformed information and management knows better. This is likely true, but keep in mind management is incentivized to say certain things and I think it's likely that telecoms dont want to overpromise to avoid more antitrust.  Again even if you dont trust the experts in the articles you can trust Verizon's price they offer for 5g broadband.  It's about  10% lower than any large cable competitor in the areas it's being offered. 

 

Maybe it's a loss making teaser rate, even so, based on what management is doing, they obviously think that 5g broadband is a viable threat at least some of the time.  Keep in mind even if 5g is inferior to cable in both price and quality like in the case of dsl, it could significantly erode the moat of cable because the margins are so high.

 

Well I meant that a combination of what mgmt's, trade organizations and scientific studies and journals were saying were more or less consistent.  And even the mgmt's of the large telecoms original but pretty recent statements were consistent.  I would say thats much better to rely on than a person quoted in an article where we have no idea of their motivations.  Just to be clear, I dont think a contrary statement in an article is automatically inaccurate, just that the contrary statements always seem to come from a quote in an article or someone making an investment case that argues against cable.  And i have absolutely seen seemingly objective statements made that were clearly false.  I think I have been clear in stating that your main statement in an earlier post was correct and that I agree there is some chance and reason for concern that 5G will take meaningful market share and/or telecoms will provide more perceived value with a combination of wireless and fixed broadband.  However, in this latest post it sounds like you are saying one or more of those claims is likely.  I don't mind at all any pushback but I dont think a continuing debate on the cost advantage of cable is an intelligent use of time.  Are you claiming that Verizon can sustainably (meaning similar margins as cable) offer a lower price on the same product as cable is offering in Charter's footprint?  That's outrageous.  Are you claiming that they can still be slightly profitable but put pressure on Charter's margins?  Well I hope you are including all costs, including capital costs to build out the infrastructure.  Cable just found themselves in a very fortunate position that their infrastructure, built mostly in old dollars, is sufficient to provide the demanded services of today's inflated dollars.  And they are equally lucky that demand for foreseeable future demanded services can be met with little incremental (mostly software) capital costs.  There is no other infrastructure that we know of today that is in that enviable position.  What I am saying is if cable today had to build the same capacity, no matter the physical form, they could not offer comparable prices, especially if they were entering an incumbent blanketed environment where a roughly 40% captured market share is needed to break even or maybe earn a small respectable return (Satellite services in the 90's, had an incredibly superior video product, with a smaller asset to revenue requirement and the 2 players combined failed to get 40% national share).  And this leads to Charter's current strategy which is to target volume, or unit sales.  It's no accident that Tom Rutledge is known as the best operator in the business and he has proved this out at different properties.  He wants to keep prices low and capture as many households as he can, while he has the superior product, because he knows how hard it is to steal a household EVEN when you have a vastly superior product.  The bet is that his product is vastly superior currently and anything that competitors have in the pipeline are, at most, similar to what he has and what he will have over next 10 years.  Therefore, he will be able to take, slowly, market share now and not lose any later.  And it makes sense.  And he also knows that when incumbent prices are low it deters potential competitors from entering. (Anyone interested in Charter should do some excercises of price increases to see what effect they have on cash flow...this will really open your eyes).  So no, I do not agree with your premise that the competition are on equal footing and that they will capture market share with inferior products.  And they certainly will not be able to sustainably put pressure on Charter's margins.  They will have to offer a vastly superior product set and probably lower prices as well to capture any significant share and/or pressure margins.  A couple more points....the telecoms are not in ideal positions, in terms of their balance sheets to comfortably pull this off imo.  In Verizon's own words they are planning on roughly 30 percent national coverage (or something like that) and 10 years to do it.  It will be even a smaller percentage of Charter's footprint and a New Street analysis, highlighted by Maffei shows a 7% national reach at scale for Verizon wieless broadband.  Lastly, i wouldn't compare Europe cable and conclude similar market trends will happen here.  There are major structural and cultural differences although I must admit I was caught by surprise by the evolving landscape across Europe. 

 

[vince]

With all the talk about 5G, I'm really surprised nobody talks about the risk of government incentivized overbuilding.

 

It's easy to look at the economics as a business with a 10%+ cost of capital and say it makes no sense to overbuild, but if you're a municipality that can borrow at 3.5% for 30 years (or the federal government at 3%), there's actually a very good case for building a city owned FTTH network.  If it costs you $3,000 to connect a home (high end of Tucows estimate assuming 50% penetration), and you need to earn 3% to cover your cost of debt, you would only need to charge something like $10/month to break-even.  Compare that to cable prices at ~$70/month for 200Mbps download speeds.  I think there's a risk that local governments slowly start to view fiber as a utility to be provided to their residents just like garbage collection, water, etc.  That kind of gradual change probably doesn't kill the CHTR thesis, but it hurts the terminal value.  What I do think could kill the thesis would be inclusion in a national infrastructure bill (if it ever happens) of incentives for this kind of overbuilding that speeds it up significantly and highlights the risk.  Or alternatively just someone like Elizabeth Warren getting elected and regulating prices.

 

This is one of the things that scares me, no doubt.  However, this will take time and will not be easy

[vince]

 

Charter's reaction to decision....Today’s action by the FCC, which adopts improved licensing rules for the 3.5 GHz band, is an important step forward for next generation connectivity including 5G," said Charter. "We thank chairman Pai and commissioner Mike O’Rielly for their leadership on this issue. The 3.5 GHz band is an important component of Charter’s mobile strategy and also has the potential to provide a cost-effective solution for delivering fixed wireless broadband, including in rural areas. Preserving significant opportunity for GAA unlicensed use as well as adopting a counties-based Priority Access Licenses (PAL) areas will promote increased competition and broadband deployment, bringing new innovations and the future of connectivity even closer for consumers in urban suburban and rural communities across the U.S.”

 

Bold mine.  This may be confirmation bias, but I read that as 5G broadband is very economical and competitive with cable in at least some areas.  Now I think it's likely that in a vacuum, cable has an easier job of building out 5g than telcos have in building out 5g, which is what makes acquisitions of cable companies attractive, ultimately any company that survives will end up having both a critical mass of mobile and broadband customers.  However, all the big telcos have national brands and people all across the united states can name any one of the big four.  This is because have nationwide economies of scale for telecom and ultimately this new converged business that will have both mobile and broadband.  Cable has different economics, all you need is local monopolies, which means that building out a mobile subscriber base organically in areas that have never heard of Spectrum will be very hard for Charter and because of the local monopoly nature cable companies don't spend much on advertising compared to telcos and thus have much less mindshare in the population.  Likewise, telecoms don't need a national scale to attract customers on the cable side of the equation, they just need a locally strong network which is what Verizon is doing with 5G.  While cable has an advantage on the production side of the equation, I think telcos have a much more formidable advantage on the customer side of the equation. 

 

Again to emphasize, even if 5G broadband doesn't live up to the hype, the very fact that it makes entering local cable markets easier for a large category of well-capitalized companies, suggests that it will be difficult for cable to maintain is high ROIs that came with being local monopolies.

 

Although not entirely accurate, this is an excellent post of an advantage that national mobile providers have.  However, it's not going to be enough imo.  DTV had this same advantage AND a much superior product. 

[cmlber]

With all the talk about 5G, I'm really surprised nobody talks about the risk of government incentivized overbuilding.

 

It's easy to look at the economics as a business with a 10%+ cost of capital and say it makes no sense to overbuild, but if you're a municipality that can borrow at 3.5% for 30 years (or the federal government at 3%), there's actually a very good case for building a city owned FTTH network.  If it costs you $3,000 to connect a home (high end of Tucows estimate assuming 50% penetration), and you need to earn 3% to cover your cost of debt, you would only need to charge something like $10/month to break-even.  Compare that to cable prices at ~$70/month for 200Mbps download speeds.  I think there's a risk that local governments slowly start to view fiber as a utility to be provided to their residents just like garbage collection, water, etc.  That kind of gradual change probably doesn't kill the CHTR thesis, but it hurts the terminal value.  What I do think could kill the thesis would be inclusion in a national infrastructure bill (if it ever happens) of incentives for this kind of overbuilding that speeds it up significantly and highlights the risk.  Or alternatively just someone like Elizabeth Warren getting elected and regulating prices.

 

This is one of the things that scares me, no doubt.  However, this will take time and will not be easy

 

There are 125MM households in the U.S., at $1,500/passing that would be a total cost of $188B (or 4% of the 2018 federal budget) to build a nation wide FTTH network.  Couldn't you see part of an infrastructure bill being a federal subsidy for municipal overbuilding?  Federal government can give states grants for 50% of the cost of FTTH projects and it would barely make a dent in the federal budget but would create huge value.  If something like that were to pass, don't you think CHTR would sell off?  I don't think it's that far fetched, especially as part of a much larger infrastructure bill that has a good chance of happening, eventually...  It was rumored earlier in the presidency that Trump wanted to nationalize a 5G network, and you can be damn sure Elizabeth Warren and Bernie Sanders want to break up the cable monopolies. 

[DooDiligence]

Well I meant that a combination of what mgmt's, trade organizations and scientific studies and journals were saying were more or less consistent.  And even the mgmt's of the large telecoms original but pretty recent statements were consistent.  I would say thats much better to rely on than a person quoted in an article where we have no idea of their motivations.  Just to be clear, I dont think a contrary statement in an article is automatically inaccurate, just that the contrary statements always seem to come from a quote in an article or someone making an investment case that argues against cable.  And i have absolutely seen seemingly objective statements made that were clearly false.  I think I have been clear in stating that your main statement in an earlier post was correct and that I agree there is some chance and reason for concern that 5G will take meaningful market share and/or telecoms will provide more perceived value with a combination of wireless and fixed broadband.  However, in this latest post it sounds like you are saying one or more of those claims is likely.  I don't mind at all any pushback but I dont think a continuing debate on the cost advantage of cable is an intelligent use of time.  Are you claiming that Verizon can sustainably (meaning similar margins as cable) offer a lower price on the same product as cable is offering in Charter's footprint?  That's outrageous.  Are you claiming that they can still be slightly profitable but put pressure on Charter's margins?  Well I hope you are including all costs, including capital costs to build out the infrastructure.  Cable just found themselves in a very fortunate position that their infrastructure, built mostly in old dollars, is sufficient to provide the demanded services of today's inflated dollars.  And they are equally lucky that demand for foreseeable future demanded services can be met with little incremental (mostly software) capital costs.  There is no other infrastructure that we know of today that is in that enviable position.  What I am saying is if cable today had to build the same capacity, no matter the physical form, they could not offer comparable prices, especially if they were entering an incumbent blanketed environment where a roughly 40% captured market share is needed to break even or maybe earn a small respectable return (Satellite services in the 90's, had an incredibly superior video product, with a smaller asset to revenue requirement and the 2 players combined failed to get 40% national share).  And this leads to Charter's current strategy which is to target volume, or unit sales.  It's no accident that Tom Rutledge is known as the best operator in the business and he has proved this out at different properties.  He wants to keep prices low and capture as many households as he can, while he has the superior product, because he knows how hard it is to steal a household EVEN when you have a vastly superior product.  The bet is that his product is vastly superior currently and anything that competitors have in the pipeline are, at most, similar to what he has and what he will have over next 10 years.  Therefore, he will be able to take, slowly, market share now and not lose any later.  And it makes sense.  And he also knows that when incumbent prices are low it deters potential competitors from entering. (Anyone interested in Charter should do some excercises of price increases to see what effect they have on cash flow...this will really open your eyes).  So no, I do not agree with your premise that the competition are on equal footing and that they will capture market share with inferior products.  And they certainly will not be able to sustainably put pressure on Charter's margins.  They will have to offer a vastly superior product set and probably lower prices as well to capture any significant share and/or pressure margins.  A couple more points....the telecoms are not in ideal positions, in terms of their balance sheets to comfortably pull this off imo.  In Verizon's own words they are planning on roughly 30 percent national coverage (or something like that) and 10 years to do it.  It will be even a smaller percentage of Charter's footprint and a New Street analysis, highlighted by Maffei shows a 7% national reach at scale for Verizon wieless broadband.  Lastly, i wouldn't compare Europe cable and conclude similar market trends will happen here.  There are major structural and cultural differences although I must admit I was caught by surprise by the evolving landscape across Europe.

 

All of the above.

[DooDiligence]

With all the talk about 5G, I'm really surprised nobody talks about the risk of government incentivized overbuilding.

 

It's easy to look at the economics as a business with a 10%+ cost of capital and say it makes no sense to overbuild, but if you're a municipality that can borrow at 3.5% for 30 years (or the federal government at 3%), there's actually a very good case for building a city owned FTTH network.  If it costs you $3,000 to connect a home (high end of Tucows estimate assuming 50% penetration), and you need to earn 3% to cover your cost of debt, you would only need to charge something like $10/month to break-even.  Compare that to cable prices at ~$70/month for 200Mbps download speeds.  I think there's a risk that local governments slowly start to view fiber as a utility to be provided to their residents just like garbage collection, water, etc.  That kind of gradual change probably doesn't kill the CHTR thesis, but it hurts the terminal value.  What I do think could kill the thesis would be inclusion in a national infrastructure bill (if it ever happens) of incentives for this kind of overbuilding that speeds it up significantly and highlights the risk.  Or alternatively just someone like Elizabeth Warren getting elected and regulating prices.

 

This is one of the things that scares me, no doubt.  However, this will take time and will not be easy

 

This too.

[DooDiligence]

With all the talk about 5G, I'm really surprised nobody talks about the risk of government incentivized overbuilding.

 

It's easy to look at the economics as a business with a 10%+ cost of capital and say it makes no sense to overbuild, but if you're a municipality that can borrow at 3.5% for 30 years (or the federal government at 3%), there's actually a very good case for building a city owned FTTH network.  If it costs you $3,000 to connect a home (high end of Tucows estimate assuming 50% penetration), and you need to earn 3% to cover your cost of debt, you would only need to charge something like $10/month to break-even.  Compare that to cable prices at ~$70/month for 200Mbps download speeds.  I think there's a risk that local governments slowly start to view fiber as a utility to be provided to their residents just like garbage collection, water, etc.  That kind of gradual change probably doesn't kill the CHTR thesis, but it hurts the terminal value.  What I do think could kill the thesis would be inclusion in a national infrastructure bill (if it ever happens) of incentives for this kind of overbuilding that speeds it up significantly and highlights the risk.  Or alternatively just someone like Elizabeth Warren getting elected and regulating prices.

 

This is one of the things that scares me, no doubt.  However, this will take time and will not be easy

 

There are 125MM households in the U.S., at $1,500/passing that would be a total cost of $188B (or 4% of the 2018 federal budget) to build a nation wide FTTH network.  Couldn't you see part of an infrastructure bill being a federal subsidy for municipal overbuilding?  Federal government can give states grants for 50% of the cost of FTTH projects and it would barely make a dent in the federal budget but would create huge value.  If something like that were to pass, don't you think CHTR would sell off?  I don't think it's that far fetched, especially as part of a much larger infrastructure bill that has a good chance of happening, eventually...  It was rumored earlier in the presidency that Trump wanted to nationalize a 5G network, and you can be damn sure Elizabeth Warren and Bernie Sanders want to break up the cable monopolies.

 

Do you think we'd see more wall funding attached to any appropriations bill?  ;)

[vince]

With all the talk about 5G, I'm really surprised nobody talks about the risk of government incentivized overbuilding.

 

It's easy to look at the economics as a business with a 10%+ cost of capital and say it makes no sense to overbuild, but if you're a municipality that can borrow at 3.5% for 30 years (or the federal government at 3%), there's actually a very good case for building a city owned FTTH network.  If it costs you $3,000 to connect a home (high end of Tucows estimate assuming 50% penetration), and you need to earn 3% to cover your cost of debt, you would only need to charge something like $10/month to break-even.  Compare that to cable prices at ~$70/month for 200Mbps download speeds.  I think there's a risk that local governments slowly start to view fiber as a utility to be provided to their residents just like garbage collection, water, etc.  That kind of gradual change probably doesn't kill the CHTR thesis, but it hurts the terminal value.  What I do think could kill the thesis would be inclusion in a national infrastructure bill (if it ever happens) of incentives for this kind of overbuilding that speeds it up significantly and highlights the risk.  Or alternatively just someone like Elizabeth Warren getting elected and regulating prices.

 

This is one of the things that scares me, no doubt.  However, this will take time and will not be easy

 

There are 125MM households in the U.S., at $1,500/passing that would be a total cost of $188B (or 4% of the 2018 federal budget) to build a nation wide FTTH network.  Couldn't you see part of an infrastructure bill being a federal subsidy for municipal overbuilding?  Federal government can give states grants for 50% of the cost of FTTH projects and it would barely make a dent in the federal budget but would create huge value.  If something like that were to pass, don't you think CHTR would sell off?  I don't think it's that far fetched, especially as part of a much larger infrastructure bill that has a good chance of happening, eventually...  It was rumored earlier in the presidency that Trump wanted to nationalize a 5G network, and you can be damn sure Elizabeth Warren and Bernie Sanders want to break up the cable monopolies.

 

I actually do believe that this is a threat and is part of "gov't intervention" that I mentioned in an earlier post that scares me the most.  Even though it's not dominating headlines and is a low probability in the short to medium term imo, this and some other interventions could really hurt the stock, and the business.  Just the anticipation of investors based on various actions would introduce uncertainty and hurt the stock.  But this is a different threat altogether and is not inconsistent with my earlier remarks.  I have yet to find a business that didnt have some potential threat or risk of substantial impairment of value.  It needs to be handicapped and I say that realizing it's just the type of risk thats very hard to evaluate..... small chance of happening but very high chance of substantial impairment if it does.

[vince]

By the way gentleman, I hope I didn't come across as if my thoughts are the only ones that matter ...I appreciate all the feedback.  And I also want to thank you for providing the links, some very good reading!!

[Spekulatius]

With all the talk about 5G, I'm really surprised nobody talks about the risk of government incentivized overbuilding.

 

It's easy to look at the economics as a business with a 10%+ cost of capital and say it makes no sense to overbuild, but if you're a municipality that can borrow at 3.5% for 30 years (or the federal government at 3%), there's actually a very good case for building a city owned FTTH network.  If it costs you $3,000 to connect a home (high end of Tucows estimate assuming 50% penetration), and you need to earn 3% to cover your cost of debt, you would only need to charge something like $10/month to break-even.  Compare that to cable prices at ~$70/month for 200Mbps download speeds.  I think there's a risk that local governments slowly start to view fiber as a utility to be provided to their residents just like garbage collection, water, etc.  That kind of gradual change probably doesn't kill the CHTR thesis, but it hurts the terminal value.  What I do think could kill the thesis would be inclusion in a national infrastructure bill (if it ever happens) of incentives for this kind of overbuilding that speeds it up significantly and highlights the risk.  Or alternatively just someone like Elizabeth Warren getting elected and regulating prices.

 

This is one of the things that scares me, no doubt.  However, this will take time and will not be easy

 

There are 125MM households in the U.S., at $1,500/passing that would be a total cost of $188B (or 4% of the 2018 federal budget) to build a nation wide FTTH network.  Couldn't you see part of an infrastructure bill being a federal subsidy for municipal overbuilding?  Federal government can give states grants for 50% of the cost of FTTH projects and it would barely make a dent in the federal budget but would create huge value.  If something like that were to pass, don't you think CHTR would sell off?  I don't think it's that far fetched, especially as part of a much larger infrastructure bill that has a good chance of happening, eventually...  It was rumored earlier in the presidency that Trump wanted to nationalize a 5G network, and you can be damn sure Elizabeth Warren and Bernie Sanders want to break up the cable monopolies.

 

I actually do believe that this is a threat and is part of "gov't intervention" that I mentioned in an earlier post that scares me the most.  Even though it's not dominating headlines and is a low probability in the short to medium term imo, this and some other interventions could really hurt the stock, and the business.  Just the anticipation of investors based on various actions would introduce uncertainty and hurt the stock.  But this is a different threat altogether and is not inconsistent with my earlier remarks.  I have yet to find a business that didnt have some potential threat or risk of substantial impairment of value.  It needs to be handicapped and I say that realizing it's just the type of risk thats very hard to evaluate..... small chance of happening but very high chance of substantial impairment if it does.

 

A lot of things could happen, but most don’t. I am not aware of any country in Europe, America’s or Asia where the communication infrastructure was nationalized. I don’t think the US will be the first.

[scorpioncapital]

You don't need to nationalize, you just have to make the environment highly controlled. In today's world, there is more government control over infrastructure via soft pressure than outright ownership.

[Liberty]

It would seem like a weird time to overbuild the whole country or nationalize or whatever, just when speeds are going up quickly (1GB becoming available in a lot of places, with near to mid-term path to 10GB at little capex) while telecos are trying to directly compete with cable with 5G, and just as video distribution is heavily fragmenting with lots of new entrants (OTT like Netflix, Disney, Apple, Google, Amazon, Hulu on top of telcos getting deeper into the space).

 

You used to pay about what you pay now (inflation-adjusted) for a 28.8 bauds connection a couple decades ago... Not exactly stagnation.

 

Most of the pricing pressure are coming from video content, but thats' transforming and I don't expect the big bundle to hold on for that much longer... Broadband is still an incredible value for the money. Price of a coffee a day to have access to more content and services than you could imagine at ridiculously fast speeds and low latencies.

[vince]

It would seem like a weird time to overbuild the whole country or nationalize or whatever, just when speeds are going up quickly (1GB becoming available in a lot of places, with near to mid-term path to 10GB at little capex) while telecos are trying to directly compete with cable with 5G, and just as video distribution is heavily fragmenting with lots of new entrants (OTT like Netflix, Disney, Apple, Google, Amazon, Hulu on top of telcos getting deeper into the space).

 

You used to pay about what you pay now (inflation-adjusted) for a 28.8 bauds connection a couple decades ago... Not exactly stagnation.

 

Most of the pricing pressure are coming from video content, but thats' transforming and I don't expect the big bundle to hold on for that much longer... Broadband is still an incredible value for the money. Price of a coffee a day to have access to more content and services than you could imagine at ridiculously fast speeds and low latencies.

 

I couldn't agree more, especially the last 2 sentences.  Obviously, the fact that wages have stagnated and the middle class shrinking contribute to the perception that HSD is too expensive.  I also never understood how society complained about cable pricing.  The amount of television watched in a household, per person makes the hourly cost almost nothing.  The stupid arrogance of cable company mgmt's to treat customers with indifference and the fact that television was free for decades are no doubt part of it. 

[rogermunibond]

CableCos and content providers and sports rights owners were all complicit.  5-6% compounded growth in fees or rights or subscriptions can't continue unabated for 20 years.  Trees don't grow to the sky.

[vince]

CableCos and content providers and sports rights owners were all complicit.  5-6% compounded growth in fees or rights or subscriptions can't continue unabated for 20 years.  Trees don't grow to the sky.

 

I don't necessarily disagree with that statement in the sense that as some point of continual increase, the price will not represent the utility/value of the product.  But I stand by what I said originally that the product still represents good value at least when measured similarly against the value of other entertainment assets.  A movie for a family of 4 at the theater is approaching 60 bucks (no snacks) where I live.  Obviously a superior activity but not even close in terms of total value.