Broadband Cable Association of Pennsylvania

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November 6, 2013

Charter Communications Inc. Chief Executive Tom Rutledge said he has been "surprised" by the number of customers opting to take Internet broadband service only, which amounts to more evidence of online video gaining on traditional TV.

Mr. Rutledge hinted at that issue in his comments, made on an analyst conference call for Charter's third-quarter results, when he attributed the growth in "broadband-only customers" in part to changing consumer tastes. He said, however, that the trend was largely due to the inferiority of Charter's television service, which had suffered in recent years in part because the company underinvested in its services while going through a bankruptcy reorganization. Since Mr. Rutledge's appointment nearly two years ago, he has taken steps to make Charter's TV service more competitive, through measures such as addition of more high-definition channels.

The growth of broadband-only subscribers is being closely watched in the TV industry. Some TV executives see the rise of subscribers taking broadband without subscribing to traditional TV service as a sign that some consumers are opting to watch video online, through services such as Netflix Inc. That trend, if it continues, has serious implications for the entertainment industry, as growth in TV subscription fees on television networks has fuelled revenues and profits at most major media companies in recent years.

Broadband-only growth has been "greater than I thought" it would be, Mr. Rutledge said on a conference call with analysts on Tuesday. "While you can see some of these trends occurring throughout the whole industry, it's more exaggerated at Charter because of the way we let our video product deteriorate." Charter has 1.3 million broadband-only customers, he said. That makes up the vast majority of Charter's residential non-video customer count, which grew 26% to 1.319 million in the quarter, Charter said on Tuesday. Video customers dropped 3% to 4.18 million.

The growth in Charter's Internet subscribers for the period was largely driven by "single-play" customers-those who just take broadband and no other products, the company's disclosures showed. On Tuesday Charter reported a narrower loss for the third quarter, compared with a year earlier, thanks to higher revenue and lower interest and tax expenses. The loss shrank to $70 million, or 68 cents a share, from $87 million, or 87 cents a share. Its rate of video customer defections slowed sharply, to 27,000 from 71,000 a year earlier. Charter has been trying to beef up its video service, by for instance, adding more high-definition channels, in hopes of making its video service more competitive with satellite rivals.

Meanwhile Charter gained 86,000 broadband customers, up from 77,000 in the year-ago quarter. Mr. Rutledge said Charter's base of broadband-only customers is a "real selling opportunity"-people who potentially could be enticed to add video service to their package. To do that, he said Charter needs to improve its branding, its video product and customer service. Revenue in the quarter rose 13% to $2.12 billion, driven by the July acquisition of Bresnan Broadband Holdings LLC from Cablevision Systems Corp. If Charter had owned Bresnan for the entire year, revenue growth would have been 5.4%. Video services and Internet revenue growth continued to offset telephone revenue declines. Interest expenses declined 6.6% while tax costs were off by 17%. Meanwhile, Charter and its largest shareholder, Liberty Media Corp., have attempted to interest Time Warner Cable Inc. in a merger and have talked up the benefits of cable consolidation to investors. So far, however, Time Warner Cable has rebuffed Charter and Liberty's approaches. Charter's improved results, coupled with Time Warner Cable-s weak quarterly results, reported last week, are likely to continue stoking deal speculation. Mr. Rutledge didn-t address the issue on Tuesday. Wall Street Journal

Time Warner Inc. said its third-quarter earnings jumped 44% as the media company's cost-cutting and asset gains helped make up for essentially flat revenue. Time Warner is spinning off its publishing business-whose titles include Time, Sports Illustrated and People-as print media has struggled with a years long downturn in ad revenue because of more marketers shifting spending to the Internet. In the latest quarter, revenue at Time Inc. fell 2.4% to $818 million, on 2% lower advertising revenue and 4% lower subscription revenue. Operating income dropped 9% to $115 million. After the magazine unit's spinoff, Time Warner will be exclusively focused on film and television entertainment businesses, primarily cable networks that continue to drive the company's growth. TV network revenue grew 5.5% to $3.52 billion in the quarter, as ad revenue jumped 11%, while operating income rose 20% to $1.47 billion. The film and TV entertainment division reported 7% lower revenue at $2.69 billion, as the segment faced a tough comparison from a year-ago period that included "The Dark Knight Rises." Operating income fell 6% to $307 million.

Overall, Time Warner reported a profit of $1.18 billion, or $1.26 a share, up from $822 million, or 84 cents a share, a year earlier. The latest period included $113 million in asset gains, mostly from the company acquiring a controlling interest in HBO Asia. Excluding those gains and other items, per-share earnings grew to $1.01. Revenue edged up 0.2% to $6.86 billon. Analysts polled by Thomson Reuters had expected earnings of 89 cents a share on $6.94 billion in revenue. Cost of revenue fell 4.8% to $3.48 billion. Shares of Time Warner, which backed its full-year outlook, closed Tuesday at $68.23. The stock has risen 43% so far this year. Wall Street Journal

Few people who have engaged the maw of regulation that has historically characterized the Federal Communications Commission would be likely to call it the "Optimism Agency." But Tom Wheeler, the newly installed chairman of the F.C.C., told staff members on Tuesday that he expected the agency to be just that - a conduit for encouraging competition and expanding opportunities for businesses and individuals. "The connective technology that will define the 21st century flows through the F.C.C.," Mr. Wheeler said in his first full day on the job, according to a post on the commission's blog. "Our challenge is to be as nimble as the innovators and network builders who are creating these great opportunities." "Nimble" would be a welcome change, given what companies have said in recent years. Typically, the commission takes over a year to finalize a regulatory change; its requests for comments from the public on proposed new initiatives generally extend to more than 100 pages, and the final rules are usually longer yet. But Mr. Wheeler also offered a word of caution to the network builders: "A change in technology may occasion a review of the rules, but it does not change the rights of users or the responsibilities of networks."

It remains to be seen what that statement means in terms of the chairman's views on issues like open access or net neutrality, the principle that Internet service providers must treat all traffic on their networks equally, not favoring their own content or that of paying providers. Could he be saying that the nation's broadband providers must open their networks to competitors, as the long-distance and local telephone companies had to do on their networks in the 1990s?

Is he referring to the F.C.C.'s net neutrality rules, as the commission awaits a federal appeals court ruling on whether the agency has the authority to write rules and regulations for the Internet? Mr. Wheeler has not revealed his thoughts on those issues, but he did urge F.C.C. staff members to pursue ideas that might not work, without always waiting for direction from the commissioners. "The power of our new networks is that they distribute activity away from the center to the edge," he said. "The industries with which we work are always taking reasonable risks. I hope we won't shy away from a similar approach." New York Times

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