Without mentioning names, he said that “there are some smaller companies there that have questionable pricing power and you can see them wanting to align themselves to get it.”
That could backfire: Rising programming rates “on the margin is negatively affecting the whole category because you’re pricing people out of the market for video — rich, fat bundles of full service video.”
Still, they can only expect to see growth from higher rates. As a result “you’re going to still have the kind of environment we’ve been in going forward for a significant period of time,” he says. “Our objective is to manage that and manage our customer relationships and keep the video business working for us. But it is a high cost business, and one of the big inputs is programming.”
Rutledge says he’s engaged in “some experimental marketing activity” with skinny bundles, offerings with fewer channels than the expanded basic package but with lower pricing.
“It hasn’t yet been demonstrated to be a significant niche. Most of the people looking at skinny bundles are looking for price. The problem is that they don’t satisfy from a consumption perspective. So people come in and out of the category, there’s more churn. The demand is still there, but the ability to pay for it isn’t.”
As a result, “it’s not in programmers’ interest to have themselves get disaggregated from the big bundle and become much lower penetrated niche services.”
The big bundle “will continue to drive the model of programming distribution.”
Charter shares are up more than 5% this morning, touching a new high, after it released a Q2 report that showed progress in reducing subscriber losses.
The No. 2 cable operator lost 90,000 residential video customers, an improvement from the 152,000 drop in the period last year, leaving it with 16.6 million. It just completed its effort to introduce its “Spectrum” brand in the Time Warner Cable systems it acquired in May 2016.
The numbers may “appear optically better” than they should, Barclays’ Kannan Venkateshwar says, due to an accounting change that affects how the company counts seasonal customers at the Bright House Networks systems it also acquired with TWC.
“Although this issue was broadly known, we believe consensus numbers did not fully reflect this adjustment,” the analyst says.
In any event, investors see the glass as half full: Charter reported net income of $139 million, down from nearly 44%, adjusting for last year’s acquisitions. And revenues improved 3.9% to $10.36 billion, a little shy of the $10.38 billion that Wall Street expected.
Earnings at 52 cents are share were well short of the expected 81 cents.