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Can Charter Repeat the Video Feat?

11:25 AM -- Charter Communications Inc. pulled off a rare cable feat by adding 20,000 video customers in the first quarter, marking the first time in five years the MSO expanded that category.

While that was a surprising accomplishment, not every video metric was as rosy. Premium and video-on-demand (VoD) revenues declined US$12 million in the quarter, for example. Perhaps part of that dip could be blamed on video streaming services like Netflix Inc. (Nasdaq: NFLX), but Charter did acknowledge that it was a poor quarter for events and that it hopes to fix the premium problem with more aggressive packaging this quarter. On the positive side, "free" VoD usage was up, so that's welcome news if Charter can get going with dynamic ad insertion.

Charter will be an interesting company to watch this year now that the bankruptcy reorganization is well behind it.

In some ways, Charter's past troubles have put it in an advantageous spot. As new President and CEO Tom Rutledge put it on Tuesday's earnings call, the MSO "is underpenetrated in the marketplace, both in residential and commercial."

While normally that's not something to be proud of, it's actually good news for Charter's near-term prospects, and is exactly the opposite situation that Rutledge's former employer, Cablevision Systems Corp. (NYSE: CVC), finds itself in now. Cablevision, under Rutledge, became highly penetrated, but that has made it harder for that MSO to grow. Cablevision, like Charter, added video subscribers and was strong in its residential voice and broadband categories in the first quarter, but it did that with super-aggressive pricing on its triple-play bundle that it can't (and won't) sustain. (See Cablevision's Lower Prices Pay Off.)

How Charter will continue to take advantage of its situation is less clear. But there are some hints. On the video side, it's freeing up space to offer 100 HD channels, and expects to have that in all markets by mid-year. And it's getting ready to deploy TiVo Inc. (Nasdaq: TIVO) more aggressively, a tactic that has done wonders for Virgin Media Inc. (Nasdaq: VMED). It's also working on some apps that will turn tablets into fancy remote controls and make it easier for customers to find VoD titles and other content without having to switch out set-top boxes that don't speak a lick of IP.

Even with all that, it will probably take a minor miracle for the MSO to repeat the feat in the second quarter, historically pay-TV's weakest as college students go home and snow birds flock to their summer nests. But if any U.S. MSO is positioned to have a shot, it's Charter.

— Jeff Baumgartner, Site Editor, Light Reading Cable



DCITDave 12/5/2012 | 5:33:39 PM
re: Can Charter Repeat the Video Feat?

You grow the segment no one (on Wall Street) cares about and you've managed to spin us into thinking that somehow getting your asses kicked in your incumbent markets is a positive development. Think of all the growth potential you could have if you keep giving up ground to U-verse and DirecTV.


 

Jeff Baumgartner 12/5/2012 | 5:33:38 PM
re: Can Charter Repeat the Video Feat?

Charter's stock did jump about 5% yesterday, so I think Wall Street does give video performance some significant weight... whether that's deserved or not.  JB

DCITDave 12/5/2012 | 5:33:37 PM
re: Can Charter Repeat the Video Feat?

I'm probably wrong about guessing what Wall Street cares about. If I knew what Wall Street wanted now I wouldn't be writing it on message boards.


I think Charter deserves praise for how it is being managed. Debt is going down, markeitng expenses are shrinking and customer service is improving. But really the game begins and ends with high-speed data customers. If I were an investor, I'd be less excited about video and phone customers and really watching the HSI growth and home networking innovations.

cmmurrey 12/5/2012 | 5:33:36 PM
re: Can Charter Repeat the Video Feat?

Jeff,


Listening to the call and re-reading the transcript posted on SeekingAlpha, I don't see anything that leads me to believe Charter is going to aggressively roll-out TiVo to other markets. It actually seems just the opposite. 


 


Thomas M. Rutledge


 

In the video, we've improved the quality of the product we offer today, and we will accelerate that. For example, Charter's goal is to have 100 HD channels by the end of this year. Today, we're on a path to reach that by midyear. Above and beyond HD channels, we will also employ a number of tactics to achieve higher digital sell-in in HD/DVR takeup. We have the necessary products and network capabilities today to create a compelling digital offer for existing customers and successfully compete for new video relationships by having a better video product than our competitors can replicate.

David Carl Joyce - Miller Tabak + Co., LLC, Research Division

I was wondering if you could comment a little more broadly on the strength that we're seeing in the video product. Does it seem like there's more consumers coming back into the pay TV environment, granted you do break out residential and commercial video subs? But the residential was a nice surprise. If there's more color you could provide on that'd be great.


 


Thomas M. Rutledge


I'm not sure I can tell you what the exact macro trend is, but it's certainly -- there's a couple of favorable wins at our back which are -- certainly, the economy isn't getting worse. I'm not sure it's getting better from a housing perspective, but it's not getting worse. And the amount of telco overbuild, as a percentage of passive activity, has declined year-over-year, and it looks like that's a longer-term trend as well. So that's having a somewhat of a favorable impact on growth opportunities.


 


David Carl Joyce - Miller Tabak + Co., LLC, Research Division


And where are you generally on the evolution of the TV Everywhere product becoming more available?


 


Thomas M. Rutledge

Our plan -- we have it in our product roadmap for this year. And our plan is to roll it out. I should say, TV Everywhere, but a tablet-based video product, some elements of which will be TV Everywhere, but parts of it will be cable television as well inside the house. 


 


Benjamin Swinburne - Morgan Stanley, Research Division


And, Tom, do -- you mentioned the video product getting better and talked about HD and adding more programming. What about the guide? That's been an area where customers, I think, have probably had some negative experiences, and particularly, on some of the legacy boxes. What's the plan for the guide at Charter over time? Are you happy with the product today?


Thomas M. Rutledge

Well, we have an issue with the product and our legacy boxes and how to deal with that. And as part of our -- my prior answer about TV Everywhere, what we're contemplating is putting out IP products in the home and out of the home that give you control over your existing set-top boxes. So the ability to program a DVR to do search and to do other kinds of -- even to change channels have been deployed in other parts of the cable industry as applications on tablets, smartphones and PCs. And I think that, that opportunity allows us to take our legacy boxes and make those legacy boxes work better from a user interface perspective and allow functions like search and discovery to appear on all of our existing set tops. So I'm actually fairly positive on the situation we have in terms of the way that the consumer electronics industry has evolved. It actually creates an opportunity for us to take our existing capital base of deployed boxes and make them really work a lot better without having to replace all those boxes with a new or more powerful box that has a capability of carrying a more robust guide. And I think that has long-run implications for the kind of money that we're going to have to invest in CPE. I think it means that we can have thinner clients CPE going forward, which means that it should cost less on an incremental basis.


 


 


Bryan D. Kraft - Evercore Partners Inc., Research Division


I'm sorry if you said this in prepared remarks, we got dropped off the call for a little bit. But I'm just wondering if you could just update us on where you are with the TiVo rollout. I think that it was originally scheduled for second half and then that was going to be delayed. And then also, I just wanted to see if you could comment on the gross ad versus the churn trends. I know gross ads obviously accelerated with the increase in marketing spend, but I was wondering what you're also seeing on the churn side.


 


Thomas M. Rutledge


Yes. And we continue to work integrating the TiVo product. We have a complicated VOD infrastructure, and we're continuing to work on getting that product developed.


 


Bryan D. Kraft - Evercore Partners Inc., Research Division


Do you have any kind of update on the time frame for the commercial rollout or...


 


Thomas M. Rutledge


We do have some customers in place in Texas, but we haven't announced the general rollout as of yet.


 


Operator


Your next question comes from the line of Frank Louthan from Raymond James.


 


 


Alexander Sklar


This is Alex Sklar here for Frank. Follow-up on the TiVo question, given what you were saying earlier on finding ways to improve existing boxes rather than spend on new equipment, does TiVo -- is TiVo still going to fit into the long-term plan or can you go all IP without it?


 


Thomas M. Rutledge


And your question about going all IP in terms of set-top boxes, there are TVs that are coming on market that are all IP or can take an IP feed, I guess, is a better way of saying it because they can take the regular feed as well. It creates an opportunity to have with cable system that both feeds IPTV and MPEG TV. And there are multiple variations of MPEG as well, which actually, from a technical perspective, are more efficient than IP from a total data throughput perspective. And our network, because of the server-based architecture that we've constructed, can serve multiple kinds of devices. So we can serve legacy set-top boxes with MPEG-2. We can create new hybrid boxes that are IP and MPEG using more efficient MPEG standards for server-based programming. And we can mix and match all of that in the same cable system, and there's enough channel capacity to serve all of those functions. So as I look forward, I think our CPE evolution will result in a world where our incremental cost of CPE per customer will go down as we buy world-class CPE -- world vendor class CPE, and buy that in multiple formats. And so how that'll all evolve, I'm not sure, but the architecture that we've constructed allows us to follow the marketplace to its most efficient place.




Jeff Baumgartner 12/5/2012 | 5:33:36 PM
re: Can Charter Repeat the Video Feat?

They mentioned in February that the original plan to roll TiVo across its footprint by mid-year was indeed delayed because they needed some more time integerating and testing TiVo with Charter's VoD backoffice. So, you're right that there won't be much help coming from TiVo in Q2, but they still plan to roll this out... just not as quickly as they had originally hoped. JB


 

cmmurrey 12/5/2012 | 5:33:35 PM
re: Can Charter Repeat the Video Feat?




So you didn't get the sense that Rutledge is trying to reduce Capital Expenditures by slowing down the replacement of legacy boxes?


The analyst asked Rutledge directly the TiVo question and his response was, "And so how that'll all evolve, I'm not sure, but the architecture that we've constructed allows us to follow the marketplace to its most efficient place."


My translation is they don't want to replace the legacy boxes with TiVo and will slow-roll the deployment and marketing to be compliant with their TiVo agreement. 


Questions on TiVo were asked about 3 or 4 times and Rutledge was very evasive on his answers. I thought one of his answers was hinting at the upcoming IP-STB and transcoding box from TiVo but who knows.


I think Rutledge is dreaming if he thinks he can achieve a superior consumer TV experience with current Cloud-based solutions but I think he's definitely heading in that direction. 


 




Jeff Baumgartner 12/5/2012 | 5:33:34 PM
re: Can Charter Repeat the Video Feat?

I did get that sense (or at least I agree that he did appear a bit evasive about TiVo...perhaps that's because it's turned into a 2nd half of the year project).  And his comments do remind me a bit of the playbook he was trying to put in place at Cablevision with respect to cheaper set-top boxes (but that was tied to the deployment of the network DVR, which doesn't seem to be on Charter's near-term roadmap).  We'll have to see how Charter rolls out and markets TiVo and if they try to target it to higher end customers and price that to match. So if customers want it, they will have to pay for it.  Charter did strike that TiVo deal before Rutledge came on board, so he doesn't really have ownership of it in that sense and how it fits into his vision for Charter's video future, so that may also be factoring into why his excitement about TiVo is muted. But let's keep this conversation going... the 2nd half of the year will tell the tale. JB


 


 

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