Author Topic: CHTR - Charter Communications  (Read 262637 times)

Munger_Disciple

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Re: CHTR - Charter Communications
« Reply #1010 on: August 15, 2019, 08:40:37 PM »

Internet is becoming more and more important of a utility, especially with OTT reliant on internet pipes, so I don't think the decline of video hurts us LT. Maybe churn goes up (probably does) but I mean that's the idea behind MVNO's for Charter and Comcast right, so they're already trying to find a way around this.

How do they get away with no boxes? I wasn't aware of Rutledge having said that, but it would change my estimation of the value of Charter if they could reduce that capex item for sure.

Where's the source for Malone's comments, I'd be interested in hearing them. I'm unsure how it will develop so I wonder what he's seeing here.



You can already get Charter's video via AppleTV or Roku app. Long term I see traditional set-top box completely going way, replaced by an app with cloud DVR capability similar to youtube TV offering. This will reduce capex and ongoing customer support charges for video a lot.

I agree with others that video is becoming less and less important as a service offering to cable companies not just because there is no margin in it for them but even as a churn reducing mechanism. Core offering for cable is HSD with MVNO add-on being helpful in reducing the churn as it enables the customer to have all the data needs (fixed and mobile) serviced by one company.



Spekulatius

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Re: CHTR - Charter Communications
« Reply #1011 on: August 16, 2019, 03:41:16 AM »

Internet is becoming more and more important of a utility, especially with OTT reliant on internet pipes, so I don't think the decline of video hurts us LT. Maybe churn goes up (probably does) but I mean that's the idea behind MVNO's for Charter and Comcast right, so they're already trying to find a way around this.

How do they get away with no boxes? I wasn't aware of Rutledge having said that, but it would change my estimation of the value of Charter if they could reduce that capex item for sure.

Where's the source for Malone's comments, I'd be interested in hearing them. I'm unsure how it will develop so I wonder what he's seeing here.



You can already get Charter's video via AppleTV or Roku app. Long term I see traditional set-top box completely going way, replaced by an app with cloud DVR capability similar to youtube TV offering. This will reduce capex and ongoing customer support charges for video a lot.

I agree with others that video is becoming less and less important as a service offering to cable companies not just because there is no margin in it for them but even as a churn reducing mechanism. Core offering for cable is HSD with MVNO add-on being helpful in reducing the churn as it enables the customer to have all the data needs (fixed and mobile) serviced by one company.

The setup box was a significant part of the Capex and directly related to video. Broadband only needs a router and those are much cheaper, more reliable can often be self installed.  I believe it is correct that the cable company will probably resell streaming subscription (probably at a small discount due to wholesale negotiated prices to individual a membership ). Those are self install and the hardware is pretty cheap and simple and in any way not their responsibility.
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vince

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Re: CHTR - Charter Communications
« Reply #1012 on: August 16, 2019, 03:04:48 PM »

Internet is becoming more and more important of a utility, especially with OTT reliant on internet pipes, so I don't think the decline of video hurts us LT. Maybe churn goes up (probably does) but I mean that's the idea behind MVNO's for Charter and Comcast right, so they're already trying to find a way around this.

How do they get away with no boxes? I wasn't aware of Rutledge having said that, but it would change my estimation of the value of Charter if they could reduce that capex item for sure.

Where's the source for Malone's comments, I'd be interested in hearing them. I'm unsure how it will develop so I wonder what he's seeing here.



You can already get Charter's video via AppleTV or Roku app. Long term I see traditional set-top box completely going way, replaced by an app with cloud DVR capability similar to youtube TV offering. This will reduce capex and ongoing customer support charges for video a lot.

I agree with others that video is becoming less and less important as a service offering to cable companies not just because there is no margin in it for them but even as a churn reducing mechanism. Core offering for cable is HSD with MVNO add-on being helpful in reducing the churn as it enables the customer to have all the data needs (fixed and mobile) serviced by one company.

Your first sentence is right on the mark for why the video box is going away and is very similar to what Rutledge thinks and how he explained it.

vince

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Re: CHTR - Charter Communications
« Reply #1013 on: August 16, 2019, 03:07:10 PM »
Has anyone seen a good breakout of the actual incremental economics of video? 

Here's my back-of-the-envelope line-of-business analysis of Comcast's EBITDA margin - capex for FY 2018:
- first some assumptions.  I'm assigning the programming costs to Residential Video.  All of the remaining cash opex will be allocated equally as a percent of revenue.
- capex assumptions:   customer premise equipment (75% video, 25% HSD), infrastructure/line ext (25% video, 75% HSD), support/other (allocate across all LOB's as a % of revenue).

   

I have no idea if my assumptions are accurate - but I think this table shows the dilemna.  Most operating costs are largely fixed - so how one allocates them across the businesses is somewhat arbitrary.  But video programming costs are largely direct to video and its obvious that they are squeezing EBITDA margins.  But capex equipement is probably making the video cash flows very challenging.

So you have two approaches - the CMCSA and CHTR approach which is to hold onto the video business due to its incremental contribution to fixed costs.  Then there is the CABO approach which is to abandon the video business and to focus on the data and business services businesses. 

In their 10-K, CABO says this:
Quote
In 2018, our Adjusted EBITDA margins for residential data and business services were approximately six and seven times greater, respectively, than for residential video.

In the case of Comcast, based on my SWAG analysis, EBITDA margins for data and business services are eight and four times greater.  Comcast probably gets better pricing on its video.  I also may have used the wrong allocation process for opex and put too much opex for the ancillary businesses (other than residential).  But it gives one a sense of proportion.

I think this is probably true for most of the industry - the lion share of margins are in data and business services and video is a very challenging business.

FWIW,
wabuffo

This is VERY close to my original estimate of the breakdown (like scarily close).

I've since tried to estimate the portion in Other/SMB that is allocated to video/internet and phone, and if I adjust for that and allocate the revenue against the programming costs, the total video margins are about 20% on EBITDA and about 10% on video (gels with a friend of mine who knows a PE  firm that owns a cableco with EBITDA margins on video of mid teens). It implies total video EBITDA of ~$4bn (notably exluding the $3.8bn in "other" costs (corporate/taxes etc.) from this estimate, so it's higher than if I had allocated those costs as a % of revenue) vs. internet EBITDA of $12.3bn for 2018.

Regardless of how you look at it, I think there's no way that cable subs declining is really a major issue for Charter.

Great work guys.  I will add my 2 cents.  I don't think there is any question that video is marginally profitable at best... cable ceo's have not really denied this but rather think that more products per house equals lower churn which increases lifetime value.  Obviously the larger cable co's have better programming rates which skews the comparison.  Remember also that box costs are falling (due to cable's more recent ability to source from additional suppliers) and with internet capabilities they need less box capability (and less boxes or no boxes over time is what Rutledge has stated) which will lower capex significantly.  But I think the most important factor that is hard to measure is the customer relationship, on the video side specifically, and how the aggregation of over the top services will evolve.  OTT pricing is low and churn is high which makes for some interesting opportunities for cable to continue managing the video relationship, possibly bundling some skinnier packages with various OTT services and increasing video margins while simultaneously driving data usage.  Malone has stated that video is still critical and that is a result of him looking into the future and having a keen eye for how this will develop.  So yes, on the surface, and for the next number of years, it appears that losing video will not hurt us financially but i'm not so sure longer term

Internet is becoming more and more important of a utility, especially with OTT reliant on internet pipes, so I don't think the decline of video hurts us LT. Maybe churn goes up (probably does) but I mean that's the idea behind MVNO's for Charter and Comcast right, so they're already trying to find a way around this.

How do they get away with no boxes? I wasn't aware of Rutledge having said that, but it would change my estimation of the value of Charter if they could reduce that capex item for sure.

Where's the source for Malone's comments, I'd be interested in hearing them. I'm unsure how it will develop so I wonder what he's seeing here.

Peter, I don't recall where I saw it, may have even been quoted on this board.  Usually a smart idea to incorporate what Malone says into your thinking.  As far as the boxes go, Mungers post is exactly right.

Munger_Disciple

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Re: CHTR - Charter Communications
« Reply #1014 on: August 16, 2019, 04:40:10 PM »
Some additional thoughts on video (FWIW):

Most of the video in the future will be delivered via SVOD; the only exception being live sports and news. So one can think of video as an app riding on HSD rails. Rutledge mentioned they might end up selling OTT packages in the future. Regardless of which OTT provider a cable customer buys video apps from, cable will get paid thru' higher HSD usage. It is very clear from cable CEOs comments that the data usage of HSD only customers is significantly higher than double play (HSD + video) customers  and internet pricing is higher for data only customers. So cable companies get paid indirectly for delivering OTT video from other providers.