John Malone’s recent $2.6bn investment in Charter Communications, the fourth-largest US cable provider, is not just noteworthy because it marks the return of a legend to the industry where he first made his name (and his billions). But because it also broadcasts that the real opportunity in cable is not in television.
Mr Malone’s bet seems curious given that Charter shares are expensive (up 40 per cent in the past year), and because of the deteriorating economics of distributing pay TV. At Charter, its core residential cable TV customers are down nearly a tenth in the past two years while programming costs are up a tenth.
Luckily for Charter, its network has another use – high-speed internet. Revenue from its internet services has grown 16 per cent since 2010 to $2bn, which is almost a third of all of its residential revenue. SNL Kagan estimates that the operating profit margin for cable companies on internet services approaches 60 per cent compared with only 26 per cent for distributing TV.
Now the scenario exists where consumers can pull the plug on Charter’s cable TV but keep its internet service to stream the TV shows from Netflix that they used to watch through Charter cable. Of course, the cable companies have caught on and the days of all-you-can-stream internet plans are numbered. Charter has limits on data, based on which plan customers select. Others have experimented with tiers of fees based on usage. With 36m US internet subscribers still choosing slower DSL (digital subscriber line) technology, according to Broadbandtrends, Charter may see the opportunity to convert those to cable internet. But look out for fibre internet choices from the likes of Google (who else?) whose 1 gigabyte per second download speed is light years ahead of what even cable can boast today.
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