Charter has done better than many other cable operators in slowing the pace of video-subscriber losses. But that hasn’t made the company any less cranky about the programming-cost inflation that keeps pushing viewers to the exits.
“It is a prisoner’s dilemma,” CFO Chris Winfrey told Jessica Reif Ehrlich, Bank of America Securities media and cable analyst and managing director, in a 45-minute virtual appearance at the latter company’s 2021 Media, Communications & Entertainment Conference Monday morning.
Winfrey called Charter’s video customer relationships “essentially flat” compared to the large losses at competitors before questioning how long that could endure.
In an industry battered by cord cutting, Charter, the second-largest cable operator in the U.S., reported in its Q2 earnings that residential video subscriptions had fallen to 15.42 million, down from 15.65 million in the year-ago quarter, but had only lost 50,000 residential video subs from Q1. Meanwhile, it saw residential internet subscriptions climb to 27.72 million from 26.31 million in Q2 2020.
In a research note sent out Monday morning, the research firm MoffettNathanson credited Charter for showing “much smaller losses” than the largest cable operator, Comcast, and reiterated its buy rating for the Stamford, Connecticut, firm.
Winfrey suggested Charter’s wide array of viewing options for its Spectrum-branded service — it offers apps that can take the place of its cable boxes for such platforms as Apple TV, Samsung connected TVs, Microsoft’s Xbox and and Roku — amounted to “the broadest set of video capabilities that exist in the marketplace” and a competitive advantage
Winfrey did not mention Charter’s recent squabble with Roku that left Spectrum subscribers unable to add its app to their Roku devices until the two firms reached a new carriage deal in mid-August.
But, he added, Charter cannot offer a comparable level of flexibility in its video content bundles.
“What’s the floor for video relationships?” Winfrey asked. “I think a lot of that depends on the affordability question, and that’s not in our hands.”
While Charter is apparently willing to eat some of those costs — as Winfrey put it, “We’re not as sensitive to the profitability anymore, because there’s not much left” — subscribers continue to see them and make their own value judgments.
“We’re seeing multiple channels and cross-building requirements that increase the price of the product in a way that the customers can’t handle,” he said. “You have to increase the flexibility for MVPDs like ourselves to package these products.”
Winfrey expressed more optimism to Ehrlich about the potential of advertising to that remaining video subscriber base by making increasing use of addressability in its digital ads.
“We’re selling them a package of services,” he summed up Charter’s pitch to advertisers before suggesting that the best of this more accurate targeting (“anonymized, of course,” he was careful to add) was yet to come.
Charter shareholders, however, need not fret too much about trends in its video business, which Ehrlich and Winfrey didn’t even discuss until 30 minutes in.
Their talk led off with Winfrey noting that Charter passes some 54 million addresses and sells broadband to some 30 million of them (that figure includes about 1.9 million small business relationships).
“There’s 24 million customers inside our footprint that we think should have our internet product,” he said. “The opportunity at Charter is to grow the 30 somewhere to 54.”
Much of that opportunity exists in rural markets, Winfrey suggested, calling buildout there “another form of M&A” with particularly reliable long-term returns.
Some of this rural expansion will come from government support via the Federal Communications Commission’s Rural Digital Opportunity Fund, a program that has seen extensive criticism for sloppy allocations of subsidies. Charter plans to put about $5 billion into RDOF projects, offset by $1.2 billion in FCC funding.
Charter has been building out fiber in much of these new markets. Winfrey added that it could cost-effectively compete with fiber rivals (like most of them but unlike many cable operators, it does not impose data caps) across its footprint through such incremental cable upgrades as using more efficient MPEG-4 compression for video to free up data capacity.
Plus, Charter is selling Spectrum-branded wireless service — based on resold Verizon capacity but also Charter’s own Wi-Fi network and, soon, the CBRS 5G spectrum Charter picked up in last year’s auctions — to an increasing number of those subscribers.
Today, Spectrum Mobile’s best pricing requires Spectrum internet service. But five or 10 years down the road, Whitney suggested, the two might become one: “is it really a separate product, or are we selling a connectivity service?”