Charter Appears to be in Much Bigger Bind than Other MSOs

Implications: 1.      Last year was the first time ever that the MSOs collectively lost video subscribers.   2.      In leaving its CAPEX flat for 2008, it is hard to see how Charter pays for the all-important upgrade to Docsis 3.0. 3.     At the same time, Charter acknowledges that it has to get more “sources of liquidity by early 2009.”  

Analysis:  As far back as the 1970s, the cable TV operators have always increased the number of subs as an industry.  Competition from satellite providers and the telcos are taking their toll – along with a very small, but growing portion of the population, which is either not acquiring or just outright canceling traditional cable television. 

In many ways, cable is like one big company – just spread out among different owners -- including Comcast, Time Warner, and Cablevision.   A lot of times, in comparing metrics between MSOs, they all look the same.  An exception is Charter, which has lower penetration of digital cable, Internet, as well as voice – compared with the rest of the market.  

Despite a major headend reduction program since 2000, in which about 70 percent of all its headends were eliminated across the country, Charter still has major CAPEX issues – as it tends to serve capital-intensive, small metropolitan and rural areas.  In being spread out across the nation, there is very inefficient use of each headend.   

In terms of liquidity, Charter seems to be a little disingenuous to state that it “is not the driving force behind our M&A decisions.” Anytime it has received a good offer, it has taken it such as the transactions with Orange and New Wave.   Of course, there is uncertainty about the kind of multiple companies will pay for households when Charter is losing subs.  

Fundamentally, if Charter does not change its financial model, it is going to continue having cash flow problems.  In fact, tall of the MSOs have to stop just relying on the business idea of only using set top boxes to provision their services.  While they are able to pass through rate increases every year, and the voice market continue to grow, high-speed Internet is starting to max out.  At least the telcos have business customers and other services besides just utilizing a set top box.   

More ominously, the demographics of television watching (temporarily helped by an election year) are worsening, especially with younger people.  Use of the Internet, mobile phones, and other devices is occupying more of their time.  Although this trend is still relatively small, it is certainly poised for growth – as more and more individuals stop watching conventional cable programming.  This is one area in which Charter is a little less exposed because the abandonment of TV is happening more with tech-savvy persons in the large cities.