Finance

Charter’s New Road Map

With Time Warner Cable in the fold, the cable giant ponders its next moves 5/30/2016 8:00 AM Eastern
Charter Communications chairman, president and CEO Tom Rutledge
TakeAway

Charter faces hard challenges and high expectations as it reshapes its operations in the wake of its acqusisition of Time Warner Cable and Bright House Networks.

With its much-awaited purchase of Time Warner Cable and Bright House Networks in the books, Charter Communications now embarks on what is expected to be a years-long journey to put the pieces of all three companies together.

 

The deal, which closed May 18, put new Charter firmly in place as the second-largest U.S. cable operator and the nation’s third-largest multichannel video programming distributor (MVPD) — behind AT&T (owner of DirecTV) and Comcast. It now boasts 17.3 million video customers, 19.4 million high-speed Internet subscribers and 9.4 million telephone customers.

 

The new Charter has a lot of challenges ahead, and expectations are high. Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak has put a $285 per share 12-month price target on the stock, a 26% premium to its $225.58 close May 25.

 

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With barely two weeks under its belt as a combined company, investors and cable watchers have a lot of questions about what lies ahead for the newly combined colossus.

 

What will Charter CEO Tom Rutledge do now?

 

Charter chairman and CEO Tom Rutledge knows Time Warner Cable’s markets. Prior to running Cablevision Systems for about 10 years as chief operating officer, he worked at Time Warner Cable for 24 years, starting at predecessor American Television and Communications (ATC) in 1977, and has been through several large integrations.

 

Still, mergers are rife with unexpected pitfalls: Frontier Communications ran into several issues after it transitioned former Verizon Fios systems in California to its network on April 1, including sporadic outages that, in some cases, lasted for weeks. Frontier has said it will give bill credits to customers affected by the problems. Back in 2006, Time Warner Cable weathered a difficult integration of former Adelphia Communications systems it acquired in Southern California.

 

The differences, most analysts believe, are time and quality. Time Warner Cable is in much better shape than it was even when Charter made its winning May 2015 offer

 

“Unlike the Frontier acquisition that has had all sorts of service issues, which we would have been vulnerable to in the last deal, we’re a little more comfortable with acquiring all the assets of both of these companies, intact and operating,” Rutledge said at the MoffettNathanson Media & Entertainment conference earlier this month. “We’ve had sufficient time to map all the relationships between the companies and create clear, accountable authority throughout the organization. We are able to execute the existing business plan as of now.”

 

Wlodarczak said he believes Rutledge will take the same approach with TWC and Bright House that he did with Charter when he joined the MSO in 2012 — a sharp focus on improving customer service and product offerings.

 

“Except Time Warner Cable is in much better condition than Charter was,” he said.

 

When Rutledge took over in 2012, Charter had 33.7% high-speed data penetration and 29.9% triple-play penetration; it had lost about 155,000 video customers over the year. By the end of 2015, broadband Internet and triple-play penetration had ticked up to 44.5% and 32.4%, respectively, and Charter reduced its residential video losses to just 2,000 customers. In the first quarter of this year, the company added 15,000 residential video subscribers.

 

With Time Warner Cable and Bright House, first on the agenda is to unify pricing and packaging across the companies, an effort that will be done slowly and deliberately to ensure customer disruption is at a minimum. Time Warner Cable and Bright House have different video and data packages than Charter — Charter’s minimum broadband speed is 60 Megabits per second, while Time Warner Cable has a 3-Mbps tier and Bright House offers speeds up to 25 Mbps in its lowest tier. Those services will eventually be brought up to Charter-level in the next 18 months to two years.

 

Rutledge also said Charter expects to pause Time Warner Cable’s all-digital rollout in some markets to replace some equipment. As is the practice with the rest of the industry, Time Warner Cable uses DTAs for secondary outlets in the home, while Charter installs set-top boxes in every outlet.

 

Said Rutledge: “We want to have all our call centers look at the same information, have the same training systems so that we can change the plumbing out underneath, but keep the education process, the sales process and the service process uniform. The goal is over the next two years to fully integrate the company.”

 

Taking it slow with the Charter Spectrum brand is a wise move, Telsey Advisory Group media analyst Tom Eagan said. “Usually in these types of mergers you want to fi x the underlying issues before you start changing the names on the trucks; if you do it before, all it does is reinforce a bad reputation.” he said.

 

Eagan said he expects Charter to focus initially on issues like customer service and subscriber churn. Rutledge has said Charter plans to hire 20,000 new employees over time, mostly in service and maintenance positions.

 

Will deal conditions slow progress?

The Federal Communications Commission has already imposed several conditions on the merger, including offering inexpensive high-speed Internet service to low-income customers and expanding its broadband network to 2 million additional homes, including 1 million homes outside of its footprint.

 

That last stipulation has caused a lot of agita among small, independent cable operators, who see that mandate as a threat to their existing broadband business. Rutledge has tried to alleviate their fears, claiming that Charter plans to overbuild telcos, not cable companies.

 

At both the MoffettNathanson conference and the Media and Entertainment Analysts of New York (MEANY) meeting during INTX in Boston earlier this month, Rutledge said Charter would focus on new construction for the overbuild, especially housing developments that have a telco but no cable company offering service.

 

“It is not a cable-overbuild provision,” Rutldge said at the MEANY meeting. “There’s a provision that allows us to buy cable companies to meet that provision — up to 250,000 of that 1 million [homes] can be purchased cable systems that don’t currently provide high-speed data and can be interconnected with our assets.”

 

While even that practice would still probably encroach on a cable operator’s territory (albeit an area where service hasn’t been extended yet), Charter spokesman Justin Venech said the idea is to be the least disruptive.

 

How will Charter handle new over-the-top competitors?

 

The FCC also requires that Charter not impede its over-the-top competitors, something Rutledge said Charter has been doing all along. He has often said OTT service providers like Netflix and Hulu help drive Charter’s highly profitable broadband business.

 

Charter has been somewhat of a cheerleader for subscription video-on-demand services and the operator has pledged not to throttle back such offerings on its broadband network, a stance that earned it a critical endorsement from Netflix in the early stages of the TWC deal’s approval process.

 

At the MoffettNathanson conference, Rutledge said he expects the number of OTT players to expand and said that, in addition to chewing up bandwidth, the proliferation could have another positive effect on cable providers. “Most people who buy Netflix buy cable or satellite; they see it as a premium service,” he said.

 

He also plans to make it easier for customers to access OTT services like Netflix, Hulu and Amazon by making their apps accessible through Charter set-tops.

 

Who’s in charge?

 

Charter’s core management team will remain intact — on the corporate side, chairman and CEO Rutledge, chief operating officer John Bickham and chief financial officer Chris Winfrey will remain in those roles.

 

Several at Charter will essentially maintain their current roles: executive vice president of field operations Tom Adams; EVP, engineering and information technology James Blackley; EVP and chief marketing officer Jonathan Hargis; EVP and president of media sales David Kline; EVP, customer operations Kathleen Mayo; and EVP, business planning James Nuzzo.

 

New hires include Phil Meeks, formerly head of Time Warner Cable’s business-services unit, as president of business services; former PepsiCo executive Paul Marchand as EVP of human resources; and David Kline, a former Cablevision executive who joined Charter as EVP and president, media sales, in October.

 

On the TWC side, several top executives are expected to or already have left the company, including chairman and CEO Rob Marcus; chief operating officer Dinni Jain, EVP; chief product, people and strategy officer Peter Stern; EVP and COO media services Joan Gillman; EVP and chief video and content officer Melinda Witmer; EVP and COO, residential services John Keib.

 

Of the PR staff , EVP and chief communications officer Ellen East; group VP, corporate communications Anthony Surratt; and VP of public relations Bobby Amirshahi were expected to depart by June 2, but nearly half of the Time Warner Cable PR staff is planning to stay, including Maureen Huff and Rich Ruggiero. Charter also hired TWC’s David Gray as group VP of field marketing and TWC diversity and inclusion director Rahman Khan to oversee social-responsibility communications.

 

The bulk of TWC departures will be of executives at the EVP level or higher, as is typical in such mergers. People familiar with the situation said that Charter has handled the transition well and has been generous with departing personnel.

 

The top echelon of TWC executives were already set to receive healthy separation packages — Marcus headed the list with a $92 million payout, followed by Jain with a $35.3 million package, general counsel and secretary Marc Lawrence-Apfelbaum at $19.8 million and Stern at $16.9 million. Former chief financial officer Artie Minson took a $5 million payout in June 2015 and is now president and chief operating officer of online office-space provider WeWork.

 

Time Warner Cable went through a major restructuring in 2013, carving itself into three distinct business units and, according to people familiar with the matter, all of Charter’s business units have made their structures known to employees, with the exception of programming, sports and legal.

 

Multichannel News has reported that Rutledge has brought in former MSG Media president Michael Bair to oversee its local and regional channels: Time Warner Cable’s 17 news networks and three regional sports networks (Time Warner Cable SportsNet, Time Warner Cable Deportes and SportsNet LA) plus Bright House news channels in Tampa Bay and Orlando, Fla., and Bright House Sports Network.

 

Bair would inherit the mission of expanding carriage for SportsNet LA, the home of the Los Angeles Dodgers, beyond Charter, TWC and BHN — all part of the same company now. Other distributors in the market have resisted the channel because of its high price of about $4.90 per subscriber per month, according to SNL Kagan estimates.

 

On the programming side, Charter senior vice president of programming Allan Singer will continue to head up those eff orts. Always known as a tough negotiator, Singer will have added leverage in future negotiations with Charter’s newfound scale.

 

Charter and Rutledge have been outspoken critics of programmers who make their services directly available to OTT providers yet try to extract higher rates from MVPDs. Rutledge has argued that programmers that do so dilute the value of their content. “It will be interesting to see how they approach their first retrans and affiliate renewal,” Eagan said.

 

Is Charter still hungry to buy more cable systems?

 

Rutledge has said repeatedly that Charter will digest the TWC and Bright House deals before trying to increase its scale, and the federal government, which frowned on Comcast’s attempt to purchase Time Warner Cable because of broadband scale issues, could look unfavorably on a bigger Charter.

 

But that doesn’t mean that the Stamford, Conn.-based operator couldn’t buy smaller systems — part of its FCC conditions allow for the purchase of up to 250,000 cable customers in non-served or underserved broadband areas. That could mean smaller MSOs with systems close to the new Charter, such as Mediacom Communications, could be on the radar in the not too distant future.

 

While swaps with other operators are a possibility — Charter had planned to swap systems with Comcast when that company was going to buy TWC — Rutledge said that is an unlikely scenario.

 

“As beautiful as swaps are, and as efficient as they would be from a service perspective, they are very difficult to execute and getting more so every day,” Rutledge said at the MEANY meeting. “I’m not expecting it would be easy to negotiate a swap that everyone would want to go do.”

 

Wlodarczak said he expects Charter to focus on organic growth for the time being, but it could use its substantial cash flow, minus capex outlays — estimated to be about $6.1 billion in the first year — for deals. “I also think there is a good chance they will play the role of industry leader at their size in regards to such things as working with other cable companies to create a national SMB [small and medium-sized business] brand, perhaps working with Comcast to make a joint bid for T-Mobile,” he said.

 

What’s Charter’s approach to wireless?

 

As part of the deal, Charter inherits a mobile virtual network operator (MVNO) agreement with wireless powerhouse Verizon Communications from both Time Warner Cable and Bright House. The MVNO agreement results from the 2012 sale of wireless licenses to Verizon by SpectrumCo, the cable-industry consortium that also included Cox Communications and Comcast. Comcast already said it has activated its MVNO rights, but has been quiet as to its intentions. Rutledge said recently that Charter is aware of its wireless rights, and is investigating its options.

 

But Rutledge, like other pay TV executives, is well aware of the potential power of wireless offerings after his successful experience building out Cablevision’s WiFi network.

 

“When we look at WiFi and inside-out strategies using less expensive private spectrum or small cell service, our network is particularly laid out well to take advantage of that,” Rutledge said. “I’m still a big believer in that inside-out strategy, both in the business and the residential marketplace.”

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