Deeper Dive—The unlikely odds that Charter licenses Comcast’s X1

Comcast X1
Charter might not want to go all-in on X1 but it could be interested in licensing parts of the platform. (Comcast)

Charter made a surprising admission this week when CEO Tom Rutledge said that his company had held discussions with Comcast about potentially licensing its X1 video platform.

Rutledge said that his company likes its own user interface and likes having the ability to change the UI whenever and as quickly as it wants. However, he said if Charter could “check all the boxes in terms of having flexibility and low cost,” then his company could take on Comcast as its video platform vendor.

Charter considering X1 is not necessarily shocking in and of itself. After all, other cable providers have already gone down the same path. Cox has been licensing X1 for years and offering it under the “Contour” moniker. In Canada, both Rogers and Shaw use white-label versions of X1.

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The surprising aspect of Rutledge’s comments is that Charter has poured a lot of time and investment into its own WorldBox set-tops and Spectrum Guide user interface, which the company built with help from ActiveVideo, a company that Charter jointly acquired with Arris in 2015.

Charter said this week that Spectrum Guide is now fully rolled out to all new video connections with a set-top box in more than 90% of the company’s footprint and that it’s begun to offer in-app, on-box upgrade capabilities. That puts Charter far “down the road” with its Spectrum Guide, as Rutledge said. And, according to Light Reading, which cited unnamed sources, Charter does not intend to fully license X1 like Cox, Rogers and Shaw.

But, the report did say that Charter might look to pick up some of the X1’s features, like voice search, if Comcast was willing to offer and integrate them on a piece-by-piece basis.

Charter has been embroiled in a tricky integration process for the past three years after it finalized its acquisition of Time Warner Cable and Bright House Networks. In February, Charter CFO Chris Winfrey said that during the integration process, Charter’s product development has been “intentionally stunted.” But the company sounds like it’s easing off the brakes.

“If you look at our capital expenditure plans for this year, there’s as much if not more new product development that’s built into those plans,” said Winfrey. “We can start turning on the gas.”

Charter is projecting about $7 billion (excluding mobile capex) in capital spending guidance for 2019. Though broadband and business services are big growth and margin expansion stories deserving of investment from Charter, it’s reasonable to think that Charter will funnel a good-sized portion of its capital allocation into video. MoffettNathanson analyst Craig Moffett said that Charter’s 145,000 net video subscriber losses this quarter means the company’s video subscriber base is shrinking at a rate of 1.7% annually, much better than the 4% rate of decline for the overall U.S. pay TV industry.

“Cable is taking video share from satellite TV at an accelerating rate, softening its own rate of decline,” Moffett wrote in a research note.

So, Charter has still has a video business that’s worth investing in, and adding pieces of X1 to the equation could help improve the user experience for the company’s video subscribers. Comcast almost certainly had to go through some growing pains to get X1 to where it's at today. Charter tapping into some of that hard-won expertise could spare it and its customers more of the same.

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