CABO - Cable One

[AccentricInv]

Also on the video costs, the set top box is one incremental capex cost.  Also you need to send a truck / installation guy (aka a "truck roll"), which generally costs ~$100-150 in one time costs.

 

Long term, video set-top box installation will be similar to a cable modem installation today. Customers typically buy their own modems and can authorize their device on-line on cable company's web site. Moving to this model will drastically reduce if not eliminate capex and truck roll costs related to video service.

 

Agreed.  Just look at all the streaming trials these guys are running (Charter Stream in the Midwest, TWC's stream product in NYC, Comcast Stream in Boston & Chicago,  etc).  I think they realize it's moving that way, and would rather see STB's replaced with Roku's as many of these trials use.  Besides Comcast who are invested a lot into their X1 platform, I think the other cable cos are counting down the days till consumers pay for their own STBs.

 

Fyi- we were told by IR that the Comcast Stream product generates very similar FCF on an absolute level, despite the lower $15-20 price.  Just goes to show how much cost is in traditional video product.

[rishig]

I changed my mind of CableOne long.

 

My long thesis was based on:

(a) CableOne accomplishing higher ARPUs as more residential customers adopt 100 Mbps or higher plans. They finished rollout of 100 Mbps in Q4 '15 and are rolling out Gbps plans in 2016.

(b) Higher business services penetration.

 

However, I saw a few red flags that make me uncomfortable with my long thesis:

 

* Their higher speed plans are very expensive. Gbps plan is $175 / month. Contrast this to a FTTH plan I have in the Bay Area my home at $75 / month. Also, their higher speed plans also have a data cap! I have not seen ISP plans with data caps. Their Gbps plan has a 500 GB data cap. See: http://www.cableone.net/Pages/internetaup.aspx?p=NetworkManagementLimitation

* The whole point of higher speed is lost with such a low data cap - the customer will run into the cap faster! Higher ARPU thesis was based on higher adoption, but I don't think a system wide higher adoption is as strong a likelihood given that they enforce such low data caps. Also, I haven't understood why they enforce such low data caps.

* To check if this issue is real, I went looking for local online forums in Boise, ID and Fargo, ND. I found lots of unhappy customers complaining about the exact same thing - low data caps. As an example, see: http://www.dslreports.com/forum/r30547167-GigaONE-has-a-500gb-data-cap

* In turn, CableOne has been freezing the resi customers when they go over their data caps and/or automatically to higher tier plans that are even more expensive or to a no cap business plan. The business plan is ridiculously expensive. CableOne has been touting growth in business services, but it looks like some of these customers are just resi customers that have been forced into a business plan.

* Customers are sticking around with CableOne due to lack of choice in the non urban areas, but I am not comfortable with a monopoly exercising their position to the degree that CableOne is. The stock may do very well, but I decided to pass.

[glorysk87]

Rishig - I have no horse in this race as I don't have a position. But one thing I'd say is that customer satisfaction isn't necessarily a prerequisite for positive financial performance for cable companies. As far as I know (you tell me if I'm wrong), CABO has a virtual monopoly position in it's markets. So tough pricing and data caps shouldn't necessarily cause them to lose customers, as people can't really live without their cable internet.

[rishig]

Rishig - I have no horse in this race as I don't have a position. But one thing I'd say is that customer satisfaction isn't necessarily a prerequisite for positive financial performance for cable companies. As far as I know (you tell me if I'm wrong), CABO has a virtual monopoly position in it's markets. So tough pricing and data caps shouldn't necessarily cause them to lose customers, as people can't really live without their cable internet.

 

Agree in general with your statement.

 

However, the primary price increase thesis is based on customer adoption to higher tiered plans. Why would anyone voluntary upgrade to Gbps plan with such a low data cap?  Reading the online forums, CableOne has been very forceful on enforcing these data caps.

 

The price increases are going to come from either customers voluntarily upgrading to a premium product because it is truly better or by forcing customers to upgrade to a premium product when they violate their data caps. If you read through the forums, customers think the Gbps plan is very expensive and silly. So, you can't ignore the customer unhappiness because the voluntary upgrades may not happen system wide to cause ARPUs to go up. Also, I don't want to count on CableOne using its "monopolistic" position to force customers to upgrade when they violate data caps. Even if they do, how much will such a strategy cause ARPUs to rise?

 

Lastly, I looked at the FCC Form 477 data that gives broadband coverage data. It is *not* true that CableOne has a monopoly position. CenturyLink is in almost all the counties that CableOne operates. The prices CenturyLink offers are quite competitive (and in fact lower). I will put the data in a format that is readable and share it if you are interested.

 

 

[cmlber]

Rishig - I have no horse in this race as I don't have a position. But one thing I'd say is that customer satisfaction isn't necessarily a prerequisite for positive financial performance for cable companies. As far as I know (you tell me if I'm wrong), CABO has a virtual monopoly position in it's markets. So tough pricing and data caps shouldn't necessarily cause them to lose customers, as people can't really live without their cable internet.

 

Agree in general with your statement.

 

However, the primary price increase thesis is based on customer adoption to higher tiered plans. Why would anyone voluntary upgrade to Gbps plan with such a low data cap?  Reading the online forums, CableOne has been very forceful on enforcing these data caps.

 

The price increases are going to come from either customers voluntarily upgrading to a premium product because it is truly better or by forcing customers to upgrade to a premium product when they violate their data caps. If you read through the forums, customers think the Gbps plan is very expensive and silly. So, you can't ignore the customer unhappiness because the voluntary upgrades may not happen system wide to cause ARPUs to go up. Also, I don't want to count on CableOne using its "monopolistic" position to force customers to upgrade when they violate data caps. Even if they do, how much will such a strategy cause ARPUs to rise?

 

Lastly, I looked at the FCC Form 477 data that gives broadband coverage data. It is *not* true that CableOne has a monopoly position. CenturyLink is in almost all the counties that CableOne operates. The prices CenturyLink offers are quite competitive (and in fact lower). I will put the data in a format that is readable and share it if you are interested.

 

I think you're reading too much into a few messages on a message board.  There's pretty serious sampling bias there.  Nobody goes on a message board to post about how they have no issues with their cable provider.  Only people with complaints take the time out of their day to do that.

 

HSD ARPU is $61.5.  The bottom tier package is $55.  There can't possibly be that many people that are on the top tiers paying $175/month and/or pissed about hitting their data caps.  If 5% of customers were on the top plan and 95% on the bottom plan, the ARPU would be $61.5.  Since we know there are some people in the middle, the % of customers on the top plan are significantly less than 5%. 

 

And comparing that price to the Bay Area price is meaningless.  Anybody paying for 1gbps speeds either is price insensitive or needs it for some reason.  If they need it for some reason, and the only alternative is to move from Boise to the Bay Area to save $100/month on HSD, I think the additional rent in the Bay Area will offset the internet savings  ;)

 

Kind of reminds me of IBKR, the product is the only viable option for a sub-segment of the market (in this case people who want higher than 20mbps speeds) and as a result customer service can suck and they can still grow like a weed.

[rishig]

Rishig - I have no horse in this race as I don't have a position. But one thing I'd say is that customer satisfaction isn't necessarily a prerequisite for positive financial performance for cable companies. As far as I know (you tell me if I'm wrong), CABO has a virtual monopoly position in it's markets. So tough pricing and data caps shouldn't necessarily cause them to lose customers, as people can't really live without their cable internet.

 

Agree in general with your statement.

 

However, the primary price increase thesis is based on customer adoption to higher tiered plans. Why would anyone voluntary upgrade to Gbps plan with such a low data cap?  Reading the online forums, CableOne has been very forceful on enforcing these data caps.

 

The price increases are going to come from either customers voluntarily upgrading to a premium product because it is truly better or by forcing customers to upgrade to a premium product when they violate their data caps. If you read through the forums, customers think the Gbps plan is very expensive and silly. So, you can't ignore the customer unhappiness because the voluntary upgrades may not happen system wide to cause ARPUs to go up. Also, I don't want to count on CableOne using its "monopolistic" position to force customers to upgrade when they violate data caps. Even if they do, how much will such a strategy cause ARPUs to rise?

 

Lastly, I looked at the FCC Form 477 data that gives broadband coverage data. It is *not* true that CableOne has a monopoly position. CenturyLink is in almost all the counties that CableOne operates. The prices CenturyLink offers are quite competitive (and in fact lower). I will put the data in a format that is readable and share it if you are interested.

 

I think you're reading too much into a few messages on a message board.  There's pretty serious sampling bias there.  Nobody goes on a message board to post about how they have no issues with their cable provider.  Only people with complaints take the time out of their day to do that.

 

HSD ARPU is $61.5.  The bottom tier package is $55.  There can't possibly be that many people that are on the top tiers paying $175/month and/or pissed about hitting their data caps.  If 5% of customers were on the top plan and 95% on the bottom plan, the ARPU would be $61.5.  Since we know there are some people in the middle, the % of customers on the top plan are significantly less than 5%. 

 

And comparing that price to the Bay Area price is meaningless.  Anybody paying for 1gbps speeds either is price insensitive or needs it for some reason.  If they need it for some reason, and the only alternative is to move from Boise to the Bay Area to save $100/month on HSD, I think the additional rent in the Bay Area will offset the internet savings  ;)

 

Kind of reminds me of IBKR, the product is the only viable option for a sub-segment of the market (in this case people who want higher than 20mbps speeds) and as a result customer service can suck and they can still grow like a weed.

 

All fair points.

 

I am assuming you are saying the bottom tiered customers will upgrade to the higher tiers, despite the strict data caps. What % of customers do you think will upgrade and how will it impact ARPUs.

[AccentricInv]

Also keep in mind that running 1Gbps speeds in SF is VERY different than rural Idaho or in the desert in Arizona.  Since SF has a denser population, its significantly cheaper to upgrade the infrastructure on a per household basis, so it's not fair to compare prices in these two regions.  As an extreme, look at GNCMA.  Internet prices in Alaska are like $150 for <100Mbps speeds, due to the cost to run wire to households in the middle of nowhere.

 

Data caps aren't new (although not very well publicized).  Many regional players do it, and Comcast is "trialing" it in Florida and many other Southeast cities.  If I remember right, CABO bumps up the customer to the higher tier automatically, only if they've breached the data cap in 3x in the trailing twelve months.

[rishig]

Also keep in mind that running 1Gbps speeds in SF is VERY different than rural Idaho or in the desert in Arizona.  Since SF has a denser population, its significantly cheaper to upgrade the infrastructure on a per household basis, so it's not fair to compare prices in these two regions.  As an extreme, look at GNCMA.  Internet prices in Alaska are like $150 for <100Mbps speeds, due to the cost to run wire to households in the middle of nowhere.

 

Data caps aren't new (although not very well publicized).  Many regional players do it, and Comcast is "trialing" it in Florida and many other Southeast cities.  If I remember right, CABO bumps up the customer to the higher tier automatically, only if they've breached the data cap in 3x in the trailing twelve months.

 

I looked across the board on data caps and I found CableOne's data caps to be quite restrictive and their policy very forceful. Automatically upgrading when they breach the data cap 3x or freezing the customer out of its account.

 

Having said all of this, the stock could work out fine. Their strategy of getting higher ARPUs by forcing a product that seems sub-par at crazy prices. I am not a fan of win-lose businesses (which one could argue are how all cable businesses operate).

 

If I were a customer living in this area, I don't know why I need a 100 Mbps plan or Gbps plan with a restrictive data cap. Seems like I would just stay with the 50 Mbps plan, but again I understand not everyone is a techie. There are probably enough customers that can be persuaded /coerced on the value of the upgrade.

[cmlber]

All fair points.

 

I am assuming you are saying the bottom tiered customers will upgrade to the higher tiers, despite the strict data caps. What % of customers do you think will upgrade and how will it impact ARPUs.

 

I don't think that's the most important variable.  Imagine a scenario where HSD/Business Services penetration grows from 31% to 45%, prices rise by 3%/year (only 1% in real terms, which would still leave them way underpriced relative to comps today), and the mix of packages only goes from 95% low speed ($55), 5% high speed ($175) to 90%/10%.  HSD/Business Services revenue would triple if it takes 20 years.  That's an additional $900 million in revenue.  Incremental margins on that are probably 90% or higher.  So let's call it $800 million of extra EBIT.  Tax it and it's $500 million after tax free cash flow.  That would be almost 5x FCF growth over 20 years.  8%+ 20 year EBITDA CAGR.  That assumes video business is flat, if it goes to 0 you'll still grow mid single digits for 20 years. 

 

I think those are all conservative estimates.  They could raise prices 4%/year for a while and still be underpriced relative to Suddenlink.  45% penetration in 20 years is where Charter already is today. 

[rishig]

All fair points.

 

I am assuming you are saying the bottom tiered customers will upgrade to the higher tiers, despite the strict data caps. What % of customers do you think will upgrade and how will it impact ARPUs.

 

I don't think that's the most important variable.  Imagine a scenario where HSD/Business Services penetration grows from 31% to 45%, prices rise by 3%/year (only 1% in real terms, which would still leave them way underpriced relative to comps today), and the mix of packages only goes from 95% low speed ($55), 5% high speed ($175) to 90%/10%.  HSD/Business Services revenue would triple if it takes 20 years.  That's an additional $900 million in revenue.  Incremental margins on that are probably 90% or higher.  So let's call it $800 million of extra EBIT.  Tax it and it's $500 million after tax free cash flow.  That would be almost 5x FCF growth over 20 years.  8%+ 20 year EBITDA CAGR.  That assumes video business is flat, if it goes to 0 you'll still grow mid single digits for 20 years. 

 

I think those are all conservative estimates.  They could raise prices 4%/year for a while and still be underpriced relative to Suddenlink.  45% penetration in 20 years is where Charter already is today.

 

(1) This is not a new business, they have been an ISP for some time now. Why would penetration grow now? Is it because they have the higher speed plans now? That would spur newer demand? This is despite the overly restrictive data caps and the expensive high speed data plans?

(2) You say they are underpriced relative to comps. When I look at their prices on zip code basis, I don't see them being underpriced. Can you show me the data for this? If you look at GCI in Alaska, they are offering similar plans at higher data caps at lower prices. And this is for a less denser population.

(3) At the current subscriber count for video, they are free cash zero. You are assuming that all costs associated with the video business is variable - i.e. they will not turn into cash flow negative, as video subscribers are lost. Why is that the case?

(4) For one to project 20 years from now, you are assuming DSL speeds never catch and they will always be the only game in town. Why couldn't existing competition (DSL) catch up eventually in speed and undercut them on prices?

 

Everything you say may actually happen. In the end, I am just uncomfortable with a thesis where a monopoly is exercising its pricing power as much as it can and it has to continue to do so for a long time creating a win-lose relationship with its customers.

[Spekulatius]

Rishig - I have no horse in this race as I don't have a position. But one thing I'd say is that customer satisfaction isn't necessarily a prerequisite for positive financial performance for cable companies. As far as I know (you tell me if I'm wrong), CABO has a virtual monopoly position in it's markets. So tough pricing and data caps shouldn't necessarily cause them to lose customers, as people can't really live without their cable internet.

 

Agree in general with your statement.

.

 

However, the primary price increase thesis is based on customer adoption to higher tiered plans. Why would anyone voluntary upgrade to Gbps plan with such a low data cap?  Reading the online forums, CableOne has been very forceful on enforcing these data caps.

 

The price increases are going to come from either customers voluntarily upgrading to a premium product because it is truly better or by forcing customers to upgrade to a premium product when they violate their data caps. If you read through the forums, customers think the Gbps plan is very expensive and silly. So, you can't ignore the customer unhappiness because the voluntary upgrades may not happen system wide to cause ARPUs to go up. Also, I don't want to count on CableOne using its "monopolistic" position to force customers to upgrade when they violate data caps. Even if they do, how much will such a strategy cause ARPUs to rise?

 

Lastly, I looked at the FCC Form 477 data that gives broadband coverage data. It is *not* true that CableOne has a monopoly position. CenturyLink is in almost all the counties that CableOne operates. The prices CenturyLink offers are quite competitive (and in fact lower). I will put the data in a format that is readable and share it if you are interested.

 

Very few areas are true monopolies in terms of broadband internet. in most areas, there is at least one somewhat viable competitor (mostly a on one company that offers a modified DSL service like Uverse (ATT) or similar. If you squeeze your customers too much, they will go elsewhere

 

[cmlber]

(1) This is not a new business, they have been an ISP for some time now. Why would penetration grow now? Is it because they have the higher speed plans now? That would spur newer demand? This is despite the overly restrictive data caps and the expensive high speed data plans?

 

I think the difference between offering 20Mbps and 1,000Mbps is huge in a world with ever increasing data consumption.  If the caps are holding back penetration growth I think management is smart enough to remove them, it would take all of ten minutes to implement.  Clearly they've made a decision for now that the pros (higher ARPU growth) outweigh the cons (slower sub growth). 

 

(2) You say they are underpriced relative to comps. When I look at their prices on zip code basis, I don't see them being underpriced. Can you show me the data for this?

 

$/Mbps for CABO and some other comps:

 

Cable One:  $2.05

 

Comcast:  $2.40

Cox:  $2.36

WOW:  $2.44

Mediacom:  $2.48

Suddenlink:  $2.88

 

(3) At the current subscriber count for video, they are free cash zero. You are assuming that all costs associated with the video business is variable - i.e. they will not turn into cash flow negative, as video subscribers are lost. Why is that the case?

 

If they are free cash flow negative they won't continue to operate the video business...  They'll do what they've been doing, keep raising prices until the business disappears naturally while staying free cash flow positive.

 

(4) For one to project 20 years from now, you are assuming DSL speeds never catch and they will always be the only game in town. Why couldn't existing competition (DSL) catch up eventually in speed and undercut them on prices?

 

The only way for competition to "catch up" today would be to spend huge amounts of capex.  In order to justify that they would need to raise prices higher than CABO's. 

 

If competition catches up over time due to some new technology, they still will be a duopoly, so would have no reason to cut prices.  Think Fedex/UPS or Moodys/S&P. 

 

And if competition catches up and you assume 20 years out 90% of the population will have HSD, 45% penetration would leave room to split the market 50/50 with another competitor.

 

[rishig]

(1) This is not a new business, they have been an ISP for some time now. Why would penetration grow now? Is it because they have the higher speed plans now? That would spur newer demand? This is despite the overly restrictive data caps and the expensive high speed data plans?

 

I think the difference between offering 20Mbps and 1,000Mbps is huge in a world with ever increasing data consumption.  If the caps are holding back penetration growth I think management is smart enough to remove them, it would take all of ten minutes to implement.  Clearly they've made a decision for now that the pros (higher ARPU growth) outweigh the cons (slower sub growth). 

 

(2) You say they are underpriced relative to comps. When I look at their prices on zip code basis, I don't see them being underpriced. Can you show me the data for this?

 

$/Mbps for CABO and some other comps:

 

Cable One:  $2.05

 

Comcast:  $2.40

Cox:  $2.36

WOW:  $2.44

Mediacom:  $2.48

Suddenlink:  $2.88

 

(3) At the current subscriber count for video, they are free cash zero. You are assuming that all costs associated with the video business is variable - i.e. they will not turn into cash flow negative, as video subscribers are lost. Why is that the case?

 

If they are free cash flow negative they won't continue to operate the video business...  They'll do what they've been doing, keep raising prices until the business disappears naturally while staying free cash flow positive.

 

(4) For one to project 20 years from now, you are assuming DSL speeds never catch and they will always be the only game in town. Why couldn't existing competition (DSL) catch up eventually in speed and undercut them on prices?

 

The only way for competition to "catch up" today would be to spend huge amounts of capex.  In order to justify that they would need to raise prices higher than CABO's. 

 

If competition catches up over time due to some new technology, they still will be a duopoly, so would have no reason to cut prices.  Think Fedex/UPS or Moodys/S&P. 

 

And if competition catches up and you assume 20 years out 90% of the population will have HSD, 45% penetration would leave room to split the market 50/50 with another competitor.

 

Here's an alternate explanation for all of these:

 

(1) They have data caps because that forces users to upgrade to the higher tier. Maybe, for the demographics of the markets they serve, 50 Mbps is good enough, when you take into account the prices they charge for the higher speed plans.

(2) Why are you using Cox, Comcast as comps? They serve markets that are significantly different with different penetration rates and different demand curves. CableOne's internet is not cheap - tell me how $80 / month for a 150 Mbps plan is "underpriced"?

(3) You are assuming that they can lose all the video business when it turns free cash flow negative without losing a single customer to competitors that offer triple play. Why is that the case?

(4) What you say may be true today - what gives us the confidence that DSL or alternate technology will require the same large capex as it does today 10-20 years down the road?

 

 

[cmlber]

Here's an alternate explanation for all of these:

 

(1) They have data caps because that forces users to upgrade to the higher tier. Maybe, for the demographics of the markets they serve, 50 Mbps is good enough, when you take into account the prices they charge for the higher speed plans.

(2) Why are you using Cox, Comcast as comps? They serve markets that are significantly different with different penetration rates and different demand curves. CableOne's internet is not cheap - tell me how $80 / month for a 150 Mbps plan is "underpriced"?

(3) You are assuming that they can lose all the video business when it turns free cash flow negative without losing a single customer to competitors that offer triple play. Why is that the case?

(4) What you say may be true today - what gives us the confidence that DSL or alternate technology will require the same large capex as it does today 10-20 years down the road?

 

(1)  I agree with you 100%.  The data caps are clearly just a way to disguise price increases.  Not sure why that's a bad thing if it works.  The vast majority of customers are still on the lowest speed plan so obviously most customers aren't running into the data caps (i.e. they aren't as restrictive as you think).  I trust managements judgement to find the right balance between price and penetration and view data caps as just another form of price.

 

(2)  I agree, I think Suddenlink/Mediacom/WOW are the better comps and they are even higher.  Also, if we're thinking 20 years out, the demographics will improve. 

 

(3)  Who said I'm assuming that?  I'm not.  But I think well before that happens they'll be bought out by a larger competitor that can provide video at a profit.

 

(4)  Same answer, even if it happens, it'll be a duopoly selling a non-discretionary product.  I expect pricing will be rational just like it is in many other stable duopolies selling a non-discretionary product (Fedex/UPS, Moody's/S&P, Schwab/Fidelity are a few examples).  Maybe this won't be the case and that's a risk factor.  But basically any "good" business that isn't a monopoly (most of them) has this risk.

[rtvinvest]

Here's an alternate explanation for all of these:

 

(1) They have data caps because that forces users to upgrade to the higher tier. Maybe, for the demographics of the markets they serve, 50 Mbps is good enough, when you take into account the prices they charge for the higher speed plans.

(2) Why are you using Cox, Comcast as comps? They serve markets that are significantly different with different penetration rates and different demand curves. CableOne's internet is not cheap - tell me how $80 / month for a 150 Mbps plan is "underpriced"?

(3) You are assuming that they can lose all the video business when it turns free cash flow negative without losing a single customer to competitors that offer triple play. Why is that the case?

(4) What you say may be true today - what gives us the confidence that DSL or alternate technology will require the same large capex as it does today 10-20 years down the road?

 

I think these are some very relevant worries. CenturyLink is planning to upgrade large parts of its footprint to 40Mbps and a decent part to 100Mbps in the next 3-4 years. Through vectoring copper can reach up to 100Mbps, and in the Netherlands has reached up to 200Mbps, with trials up to 400mbps occurring right now.

 

I do believe there are distance restrictions on these speeds, so they might be less suited for rural America than for densely populated Western Europe, but the threat remains. The question then becomes: if HSD is good enough from both providers in the duopoly, what do customers base their decision on? If it's video: CenturyLink offers bundles with DirecTV, their own Prism, and is developing an own OTT offering. Cable ONE currently has a very mediocre video offering, and is focusing on OTT (Netflix on channel 1 on tivo). If they would offer a bundle with Netflix/DirecTV/Dish Sling I believe their offering's value would increase significantly.

[AccentricInv]

That's a great chart rtvinvest, thanks for sharing.  I agree that vector is a risk, and ATT U-Verse is using it in some of their footprints.  However even at their avg 2,500 feet from cabinet to home, the areas where they use copper still can't achieve higher than 40Mbps.  I believe the cabinets in Western Europe is much much closer to the curb.  I'm not sure the risk of twisted copper in rural america, where the housing density is 1-10 homes per square mile, would be as high since the speeds would deteriorate significantly over the long distance.

 

Also regarding capex, we've run some analysis using the FCC Connect America study, and determined it costs ~$10 per foot to run fiber ($0.50 for raw material, $9.50 for labor & equipment; this can go as high as $18/ft in hard rock, or low as $5/ft for soft land & suburb areas).  In rural America, this comes out to ~$7K per home passed.  Let's assume you want 10% annual return on this investment, if you're trying to decide whether to replace the existing copper.  Using rough math, this would come out to needing $700 per home in EBIT, or $1000 per year in revs.  On a monthly basis, this means charging the customer $83 a month for HSD service, or very similar to what CABO is charging.  If the telcos eventually want to match cable's speed capacity, which we believe is bound to happen as data consumption increases (think Netflix, OTT, etc), then they'll need to raise their prices as well.  The only reason telcos are able to offer cheaper prices at lower speed tiers now is they're benefiting from the sunk cost of their existing copper network.

[hooplaer23]

There is also the technology G.fast, which several of the European telcos have talked about.  In theory it can allow speeds of 1 Gbps over copper, but more likely greater than 100 Mbps.  However, given the rural footprint, it may not pose as much of a threat to Cable One because the signal degrades at distances greater than 800 feet.

 

http://www.fiercetelecom.com/telecom/at-t-ramps-mdu-fiber-builds-sees-growing-potential-g-fast

 

Here is a helpful overview of G.fast

 

http://www.huawei.com/ilink/en/solutions/broader-smarter/morematerial-b/HW_278065

[Munger_Disciple]

AccentricInv,

 

Google has strung up the fiber on poles because they think it is cheaper. Your cost estimates seem to assume underground installations.

 

Google fiber videos:

[AccentricInv]

AccentricInv,

 

Google has strung up the fiber on poles because they think it is cheaper. Your cost estimates seem to assume underground installations.

 

Google fiber videos:

 

Yeah, you're right about that.  My assumptions were considering a suburb division, where the electric poles aren't available.  Obviously if you can use electric poles, it would be much much cheaper.

[rtvinvest]

That's a great chart rtvinvest, thanks for sharing.  I agree that vector is a risk, and ATT U-Verse is using it in some of their footprints.  However even at their avg 2,500 feet from cabinet to home, the areas where they use copper still can't achieve higher than 40Mbps.  I believe the cabinets in Western Europe is much much closer to the curb.  I'm not sure the risk of twisted copper in rural america, where the housing density is 1-10 homes per square mile, would be as high since the speeds would deteriorate significantly over the long distance.

 

Also regarding capex, we've run some analysis using the FCC Connect America study, and determined it costs ~$10 per foot to run fiber ($0.50 for raw material, $9.50 for labor & equipment; this can go as high as $18/ft in hard rock, or low as $5/ft for soft land & suburb areas).  In rural America, this comes out to ~$7K per home passed.  Let's assume you want 10% annual return on this investment, if you're trying to decide whether to replace the existing copper.  Using rough math, this would come out to needing $700 per home in EBIT, or $1000 per year in revs.  On a monthly basis, this means charging the customer $83 a month for HSD service, or very similar to what CABO is charging.  If the telcos eventually want to match cable's speed capacity, which we believe is bound to happen as data consumption increases (think Netflix, OTT, etc), then they'll need to raise their prices as well.  The only reason telcos are able to offer cheaper prices at lower speed tiers now is they're benefiting from the sunk cost of their existing copper network.

 

Thanks for the estimates. I think you might be mistaken in the rev/customer as this implies a 100% penetration rate. At a more realistic 40% penetration this would entail pricing of 250$/customer to generate 10% on the deployment of fiber. However, I'm not sure whether your estimate includes success based installation costs?

 

As Munger_Disciple mentions, aerial deployment is much cheaper than underground installation. CenturyLink has recently been deploying fiber through the air, at a much lower cost/home passed. This has been in more rural areas though.

 

Has anyone here studied the potential threat of (fixed) wireless providers?

[austin37]

Cable ONE to Acquire NewWave Communications

 

US$735m deal

11.5x adjusted 4Q annualised EBITDA

6.6x after synergies and tax benefits

 

Deal funded from US$650m loan and cash on hand.

 

Press release: http://ir.cableone.net/file/Index?KeyFile=37562361

 

Presentation (pdf): http://ir.cableone.net/Cache/1001219028.PDF?O=PDF&T=&Y=&D=&FID=1001219028&iid=4137149

 

 

 

 

[debtvulture]

How do you guys factor in future competition from streaming services into your valuation for cable companies?  It looks like more LIVE TV will be offered as a streaming service on other platforms besides through cable companies.  Sling has made some progress and I read today that HULU is beta testing a live TV service that it expects to launch this year.  More video subs will continue to be lost to these services.  I guess if "cable" makes enough on providing internet services than it is fine but I got to think they will be losing a lot of triple play customers over the next 5-10 years and that has to be high margin (what is margin on providing VoIP telecom service - gotta be very high). 

[Sunrider]

CABO has emphasised data services for some time ....

 

How do you guys factor in future competition from streaming services into your valuation for cable companies?  It looks like more LIVE TV will be offered as a streaming service on other platforms besides through cable companies.  Sling has made some progress and I read today that HULU is beta testing a live TV service that it expects to launch this year.  More video subs will continue to be lost to these services.  I guess if "cable" makes enough on providing internet services than it is fine but I got to think they will be losing a lot of triple play customers over the next 5-10 years and that has to be high margin (what is margin on providing VoIP telecom service - gotta be very high).

[jmp8822]

How do you guys factor in future competition from streaming services into your valuation for cable companies?  It looks like more LIVE TV will be offered as a streaming service on other platforms besides through cable companies.  Sling has made some progress and I read today that HULU is beta testing a live TV service that it expects to launch this year.  More video subs will continue to be lost to these services.  I guess if "cable" makes enough on providing internet services than it is fine but I got to think they will be losing a lot of triple play customers over the next 5-10 years and that has to be high margin (what is margin on providing VoIP telecom service - gotta be very high).

 

This in anecdotal - so apologies in advance.  I just canceled my cable subscription and switched internet providers to get the new customer rate.  I have been able to find streaming options that work well as an alternative to traditional cable TV, for example Sling and PS Vue. So, now I only need internet service from the cable company and it costs $30/month for 60 Mbps (currently TWC/Charter).

 

Also on the horizon, in my view, is enough bandwidth from wireless carriers, (T-mobile, Verizon, etc.) to compete directly with cable companies for my internet service business. Will this take five or 10 years?  I would be nervous owning a cable company for this reason, with technology becoming a potential major disruption to future cash flow.  Cable has traditionally been strong because it is utility-like with high switching costs.  Switching costs are becoming much lower with TV service, with internet service perhaps close behind. As an example, my T-Mobile phone service gives me 45 Mbps speed, while you can stream 4k TV at about 25 Mbps (of course bandwidth being a current cost bottleneck).

[maybe4less]

 

Also on the horizon, in my view, is enough bandwidth from wireless carriers, (T-mobile, Verizon, etc.) to compete directly with cable companies for my internet service business.

 

Thanks for the anecdote.

 

What do you point to as evidence for the increases in bandwidth to come from wireless carriers?