with Thomas Might, chief executive officer, Cable One
Thomas Might calls it "The Road Show" — a PowerPoint-driven look at Cable One's four-year transformation from a company struggling with declining video service margins into a leaner, more efficient operation focused on more profitable connectivity services.
Last year, around 46 percent of the MSO's $807.3 million in revenue came from broadband services, up from just 30 percent in 2010.
And while operating cash flow margins for video services are at negative 25 percent, margins for high-speed Internet service are in the 50 percent range.
Might and his team aggressively made the rounds with this presentation all of last year. And based on Cable One's steadily ascending stock price, Wall Street appears to be listening. FierceCable recently caught up with Might and asked him for an even more in-depth talk about his Phoenix, Ariz.-based MSO's evolution.
FierceCable: Can you explain the aggressive pivot away from TV and phone?
Thomas Might: We have deliberately evolved from a video and triple-play focus to a residential HSD and Business Services focus. Residential phone service has a well-established 15-year history of cord cutting. Penetration peaked in 2000 at 98 percent. Today, less than half of all homes still have a traditional landline. Traditional pay-TV service penetration peaked in 2008 at 86 percent and the modest cord cutting or avoidance since then has started to accelerate. The patterns of technological disruption and substitution are fairly similar. Video has the additional handicap of an excessively high cost structure. As a result, we are now focusing on residential HSD and business services with their ample growth opportunities and manageable cost structures.
Fierce: Can you explain the dynamics that have dramatically reduced margins for video services in recent years? Do you not see a ceiling to how high program costs can go? Is there simply just too much competition from OTT platforms?
Might: The actions of content owners is easily explained by the concept of tragedy of the commons. Once one programmer started taking double-digit rate increases, even in the face of falling ratings, each of the other programming groups felt compelled to do the same. The reason the theory is named "tragedy" is because it is guaranteed to end badly for all in the long run. It appears that long run is finally arriving.
Linear video ratings are plummeting for several reasons. The lower end of the market can no longer afford the big bundle; the number of disruptive OTT technologies and vendors are now multiplying rapidly; and the millennial generation has very limited interest in traditional TV viewing. These patterns will inevitably bring an end to the ubiquitous fat bundle, but only slowly and painfully.
Fierce: Do you envision a day when Cable One is completely out of the linear video business? If so, how soon?
Might: Not in the near future. We made higher profits on video last year than we did four years ago, even though we have about half as many video customers. We realized some video starts were very profitable, but many actually cost money due to things like churn and bad debt. Once you solve that riddle and stop chasing the unprofitable starts just to report good video subscriber counts, you can actually make more money with far fewer customers. However, if the previously discussed video cost structure and programming rate increases continue, even the profitable video customers will eventually become unprofitable.
Fierce: Do you see Cable One evolving its business in the same way that, say, Cablevision, does? Is the future for the company forming partnerships with programmers and distributing their OTT platforms along with your broadband products?
Might: The ACA refers to that as the "cablization" of Internet service, and that is not our current plan. We do not want our HSD cost structure to start looking like our video cost structure. As with video today, where customers are agitated with paying a lot for bundled content they do not want, they will be very unhappy if the same thing happens to their monthly Internet bill.
Fierce: How bullish is Cable One on DOCSIS 3.1? Within the company's footprint, is it necessary to deploy this technology quickly in order to compete with fiber-based competition? Or is DOCSIS 3.0 for the foreseeable future?
Might: We hope DOCSIS 3.1 is a huge success so we can eventually use it when needed. However, we have chosen to launch our 1-gig service, GigaONE, which should be available almost company-wide by the end of this year, using DOCSIS 3.0. We think this will keep us as the premier choice for high-speed Internet service in our markets for several more years before we take the next technological step.
Fierce: How bullish is the company on Wi-Fi? Is public connectivity a game for just the biggest operators?
Might: A good Wi-Fi experience is very important in the home and increasingly so outside the home. Cable One is taking many steps to improve our in-home game this year. Outside the home, the mid-sized operators are starting to move slowly. We are not a leader in this space, but we are mindful of what others are doing.
Fierce: Has Cable One explored -- or thought about exploring -- the wireless business?
Might: We actually purchased AWS spectrum in almost every one of our markets during the auction in 2008, when the big MSOs bought their national footprint through Spectrum Co. We sold it last year, for about four times the price, after they all sold out in 2013. We are too small to lead in this space, but would love to explore any successful models from the larger MSOs.