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Charter Ready to Give DSL a Thrashing

Charter Communications Inc. still considers video an important part of its business, but the MSO plans to take advantage of its high-speed Internet platform to drive growth and steal away DSL subs from competitors such as AT&T Inc. (NYSE: T) and CenturyLink Inc. (NYSE: CTL), echoing a strategy underway at Time Warner Cable Inc. (NYSE: TWC), which now views broadband as its "anchor service." (See TWC: Broadband Becoming 'Anchor Service'.)

"There is an opportunity to increase our Internet penetration, particularly in homes passed where we don't have a video customer relationship," Charter President and CEO Mike Lovett said on Tuesday morning's third-quarter earnings call.

Charter's cable modem service penetration is about 10 percent in non-video homes, versus 60 percent in homes where it does have a video relationship. "We feel we have ample room for growth," Lovett said. Charter estimates it has roughly 7 million non-video homes passed in its footprint.

In addition to going after DSL customers directly with what Charter believes to be a "superior" broadband service, the MSO will also look to add high-speed data subs via its new partnership with satellite TV giant Dish Network LLC (Nasdaq: DISH). Lovett said Charter was marketing the Dish video/Charter broadband combo across the MSO's footprint by the end of the third quarter He said Charter's been "pleased with the initial results," but didn't say how many broadband subs have come way of the Dish partnership. Charter added 53,200 cable modem subs in the period, giving it a total of 3.4 million. Charter added 54,900 non-video subs in the third quarter. (See Charter Sheds More Video Subscribers.)

Much of Charter's broadband tilt will target AT&T and CenturyLink markets. AT&T is present in about 62 percent of Charter's footprint, with about half of it on the U-verse platform. About 10 percent is CenturyLink, and less than 4 percent is built out with Verizon Communications Inc. (NYSE: VZ) FiOS.

Styling as a broadband ISP
Charter intends to play up the over-the-top video streaming advantages of its Internet product. Among related moves, the company just launched a unified search tool on the Charter.net portal that helps customers find content from Netflix Inc. (Nasdaq: NFLX), Hulu LLC and Amazon.com Inc. (Nasdaq: AMZN) Instant Video. (See Charter.net Goes OTT.)

Charter will also sell a similar story to video subs via its integrated, broadband-capable TiVo Inc. (Nasdaq: TIVO) product, which is being tested in Texas and will be offered in all Charter markets by the first half of 2012. MSO EVP of Technology and Commercial Service President Don Detampel said the TiVo QAM/IP product offers the MSO a "bridge" to IP video, but did note that Charter is working on a "next-gen gateway product" that will reach the trial stage in 2012.

Lovett agreed with an analyst's notion that Charter is starting to style itself as a broadband ISP more so than as a traditional video service operator as programming costs increase and its video subscriber base and service margins continue to shrink.

"Certainly the video business has its challenges ... it is still a significant part of our business, so we are not abandoning it by any means," Lovett said. "There's a bit of a mantra within the company to think of ourselves as an ISP."

Other tidbits from today's call:

  • Charter's on target to average 75 HD channels by year's end, and expects to offer more than 100 HD channels in "key markets" in 2012.

  • Charter expects to have its deployment of Docsis 3.0 and switched digital video (SDV) largely complete by the end of 2011. At the end of the quarter, 85 percent of Charter's plant was D3-capable and 80 percent had SDV.

  • Charter has no plans to deploy outdoor WiFi canopies on the scale of a TW Cable or Cablevision Systems Corp. (NYSE: CVC), but is looking to deploy hot spots surgically in some markets.

  • Charter will remain opportunistic with M&A, looking mostly at "tack-ons" systems that serve between 5,000 and 50,000 subs. (See Charter Closes US Cable Deal.)


— Jeff Baumgartner, Site Editor, Light Reading Cable

Jeff Baumgartner 12/5/2012 | 4:50:02 PM
re: Charter Ready to Give DSL a Thrashing

After insisting for years that cable won't be a dumb pipe, some MSOs are starting to cozy up to the idea now, though they still claim they won't abandon the traditional pay-TV service. Interesting what skyrocketing programming costs can alter MSO thinking.  So is Ringgold Telephone's decision to yank its IPTV service in favor of a broadband+OTT video strategy+Dish strategy a shrewd but rare move or a sign of a future that will involve even the larger pay-TV operators? JB


 

msilbey 12/5/2012 | 4:49:55 PM
re: Charter Ready to Give DSL a Thrashing

I think this is a short-term strategy. Being a dumb pipe is great when there's room for growth, but if MSOs ever abandon their content deals, they'll be forever at the mercy of OTT companies. They need to keep QAM video so they can eventually make money off of IP video. They own the networks, and the costs associated with that. That means they want to bring in cash from as many services delivered over that network as possible. 

SabrinaChow 12/5/2012 | 4:49:54 PM
re: Charter Ready to Give DSL a Thrashing

I have to go with msilbey on this one.  It makes sense for MSO's to generate revenue from as many services as possible.  Look at what Verizon is doing with the home monitoring/security solutions and there are other projects in the works.


Perhaps the real issue here is that MSO's have stopped innovating.  If I can get OTT video that plays on my phone and tablet at a lower price, then why should I be compelled to keep cable video service???  That question has not been answered. 


Dump the capital intensive set top boxes which limit capabilities and go all IP.  Only then will they have a fighting chance to be innovative and give customers a reasons to bundle.

paolo.franzoi 12/5/2012 | 4:49:53 PM
re: Charter Ready to Give DSL a Thrashing

 


Cooper,


I think what you will eventually see is that OTT video costs more than cable or comes with ads.  All that happens is that cable gets out of the middle of the transaction.  Right now you pay the cable guy who pays the content provider and makes a small margin on the content.  The content guy also gets ad revenue and some of the slots are reserved for local ads.


I think its funny that the video service is not considered a "dumb pipe" offering, because it is.  All they are doing is hooking up streaming in a very fixed manner and having end boxes that select which content to display at any given time.  The network itself is as dumb as a stump.


seven


 

Cooper10 12/5/2012 | 4:49:53 PM
re: Charter Ready to Give DSL a Thrashing

What many people overlook is that the content providers are dependent on the revenue streams from the pay TV providers to fund the content production in the first place.  Cord cutting will be self-correcting process from a content licensing perspective - to the extent that cord-cutting for OTT becomes "mainstream", content providers will be forced to raise the fees they charge OTT providers to make up the loss from the pay TV providers.  Also, as pay TV operators enable IP distribution, they will have the option to decline traditional licensing of the content and instead opt to license content on the same terms as OTT providers - either way, there is no free lunch from a content perspective - somebody has to pay for production of high value content

msilbey 12/5/2012 | 4:49:52 PM
re: Charter Ready to Give DSL a Thrashing

Seven- Sure the network is dumb here, but the service isn't. With video, operators are negotiating content deals and bundles for delivery over the dumb pipe. With Internet service, it's just the pipe by itself. 


Cooper- You're absolutely right about there being no free lunch. Wherever audiences migrate, that's where the operators and studios will charge fees and make their money. 

paolo.franzoi 12/5/2012 | 4:49:51 PM
re: Charter Ready to Give DSL a Thrashing

 


msilbey,


Video over the dumb pipe internet is a smart service then right?  Or is it smart because its a walled garden service so the smarts are that?  Also remember that the margin on all those complicated deals are diddley and squat.  So, I am not so sure that it is that "smart" of a service.  When the telcos think of a "smart" service, they think of the old CLASS services (like Call Waiting).  Those cost them basically 0 to offer and were 100% profit.


seven


 

msilbey 12/5/2012 | 4:49:51 PM
re: Charter Ready to Give DSL a Thrashing

Seven- You're right, of course. But those video contracts and bundles also create a barrier against competitors, and give MSOs a lot of their power. (the content guys sure don't want to piss them off and risk losing guaranteed revenue - hence the walled garden, hence no direct-to-consumer service) However you want to define smart service, video is a key part of the cable equation. 

paolo.franzoi 12/5/2012 | 4:49:50 PM
re: Charter Ready to Give DSL a Thrashing

So, it created a barrier to satellite, FiOS and U-verse?


The MSOs are simply one of many channels for video.  Where I see cable having an advantage is twofold:


1 - A non-union workforce with lots of outsourcing for low end jobs and;


2 - A better network than twisted pair copper that is not as good as FTTH


The biggest challenge for cable is generational.  Cord cutting is not as big a problem as video gaming.  That is the industry that is bigger the younger you go.  Broadcast video will not go away, but I suspect 30 years from now there will be many fewer channels.  My take is cable companies have to realize that video broadcasting is a long term dying business and use it as a cash cow to create new growth businesses.  It will have a long tail, but there are lots of viable alternatives from major players getting the same discounts as the large MSOs.


seven


 

Duh! 12/5/2012 | 4:49:49 PM
re: Charter Ready to Give DSL a Thrashing

Cooper,


I would think exactly the opposite.  Really, this is a microcosm of the issues that the #Occupy folks are banging the drum on.   People are cord cutting because household incomes are stagnant in absolute dollars, and declining in constant dollars.  Household budgets for entertainment therefore shrink, so premium packages are the first to go, followed by basic cable.  Content providers seem to have no concept of this reality, and keep driving their pricing up, to be passed through by MVNOs, which precipitate more cord cutting.  The problem is exacerbated  by bundling, which forces consumers to decide between paying for channels they don't want, or not having the channels they do.  And the MVNOs are stuck in the middle, getting little in the way of margins for taking the heat. 


If I were an MVNO, I'd be thinking seriously about embracing OTT, and offering services like billing and conditional access to OTT content providers, and ultimately dumping the high cost content providers into an OTT model. 


If I were a content provider, I'd be thinking very hard about my business model and cost structure. 

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