Charter Communications (NASDAQ: CHTR) lost 150,000 residential video subs – more than double as many as Wall Street expected – missed Street forecasts for residential Internet adds, missed its revenue and earnings projections and is taking a hit as its share price declined this morning.
But, a some good news came out of its earnings call with analysts this morning.
Charter, like Comcast (NASDAQ: CMCSA) yesterday and AT&T (NYSE: T) earlier this week, is pivoting its business from a traditional pay TV model to one that embraces connectivity overall. And, on that front, Charter is kicking it.
Charter’s 1 gig-capable network now passes 51 million homes. Its mobile network growth is accelerating. And it has a very realistic view of the declining traditional pay-TV play.
Focus on video? Not anymore
“The pace of change in video ecosystem is accelerating,” Charter CEO Tom Rutledge said during the earnings call. And, like other operators, Charter plans to focus on more profitable subscribers.
But most importantly, he said, Charter won’t “look at video as a stand-alone business” any longer. There’s till value in the bundle for a lot of consumers, he said. But, “the problem is the content companies that supply it have their services available everywhere… it’s hard to compete with free.”
With that in mind, Charter intends to look at video as “an attribute of our overall service,” he said. “We want to make it easy to consume. It’s a part of the business, an attribute of the connectivity relationships we’ve established… we see it as something that enhances out service.”
“The price of the bundle is very expensive,” Charter CEO Tom Rutledge said during the call. As a result, a lot of customers have begun to “trade down” to Charter’s own Spectrum streaming service, a much-reduced option from a traditional bundle. In fact, he said, the streaming service is outselling its pay-TV options.
“There are a lot of customers who can’t afford (pay TV),” he said, so they opt for the streaming service instead “to save money.”
And, while Charter is trying to market smartly to those customers, “it’s not a perfect science,” he said. And that’s created “a tension between our two strategies – to sell the full package and to those who are income restrained. I don’t know where it goes or where our contractual relationships will take us,” Rutledge said.
1 gig network opens future products
Charter, like most of the cable industry, has focused hard on building its high-speed Internet capabilities. CapEx spent to upgrade every customer to 1-gig ability has averaged about $10 per passing, Rutledge said. A bargain in that it’s a long-range play. Charter now is in position to take advantage of products that don’t even exist yet, and to take advantage of services and products that aren’t feasible otherwise.
And, the upgrade has created excess capacity in the network that is helping to future-proof it.
“Our broadband business has the ability to grow at a really healthy rate for a really long time,” he said.
The mobile opportunity
Mobile brought in $158 million in revenue in Q2, and Rutledge said Charter was in full sales mode and expected to “continue to grow our mobile business at a more rapid rate. We do expect the mobile business to accelerate.”
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Rutledge said Charter had no plans – at the moment – to offer its wireless service outside its footprint.
“We are, fundamentally, a regional company and wireless is a national business,” he said. The primary mission of mobile, in his eyes, is to drive customer relationships.
Rutledge declined to talk about rumors Charter had tried to acquire some Sprint assets as part of the T-Mobile/Sprint merger discussions, but did say he would be willing to take advantage of spectrum sales that would improve the mobile business “in specific locations in a cost-efficient way.”
The wireless business, he said, like broadband and video, will help the connectivity business as a whole thrive, especially as the pay-TV business declines over time. And, like video and gigabit Internet, it has a “pull through” to the overall customer relationship.
The bottom line
Connectivity is a magic phrase among operators right now, with good reason. The video cash cow has been sliced and dice and, for operators at least, traditional pay TV has become a lower margin cut.
That’s why all of them are looking to streaming, and that re-focusing isn’t going to change as content costs continue to rise.
Charter this year is focusing on making it easier to be one of their customers. It’s improved its call center by bringing it back onshore. There’s a new focus on reducing selling friction, making self installation simpler and, in the end, trying to improve the value perception.
“Our core business is strong and we are positioned to be the network of choice today and in the future,” said Rutledge.
There’s no doubt, this isn’t the old Charter any more.