Powell

Decades of bad service, rate increases, and abusive employees have given the cable industry a bad name and America’s top cable lobbyist, former FCC chairman-turned-president of the National Cable & Telecommunications Association is sad about that.

“I hate the name […] cable,” Powell lamented Tuesday in Chicago during the opening of the NCTA-rebranded INTX 2015 show (formerly known as The Cable Show).

While years of bad service have done little to tangibly affect the industry’s fortunes in a barely competitive marketplace, Powell seemed convinced it was Comcast’s appalling reputation with customers (including regulators and politicians working in Comcast’s District of Columbia service area), that did more to derail its recent merger effort with Time Warner Cable than anything else.

Cable’s bad reputation has come home to roost, allowing everyone to assume the worst and see a need to erect protective fences like Net Neutrality to keep cable companies from capitalizing on new fees for Internet usage.

As long as cable has a “frayed relationship” with customers, Powell said he believed the industry will lose more policy battles than it wins, and it should be aware of that.

But those in attendance later told Communications Daily (subscription required) they disagreed with Powell and believed the industry has faced down bigger threats than Net Neutrality and online video. They also disagreed with any name change that de-emphasized “cable” and complained the industry didn’t get enough credit for its role in bringing faster Internet to American homes.

Because cable operators both own the pipes and have a strong working relationship with content producers, many attendees believe cable is in an excellent position to face down competitors, because most depend on cable broadband to deliver their services.

[flv]http://www.phillipdampier.com/video/NCTA Michael Powell and ReCode Kara Swisher Kick off INTX 2015 5-5-15.mp4[/flv]

NCTA president Michael Powell talks with ReCode’s Kara Swisher about the state of the cable industry and the Internet at the start of INTX ’15 in Chicago. (18:53)

The Cable Show (now known as INTX) is often used by the cable industry to announce and preview new products and services, and at this year’s convention in Chicago, Comcast CEO Brian Roberts used the occasion to introduce the company’s new DOCSIS 3.1 multi-purpose Home Gateway capable of delivering gigabit speeds over its existing hybrid fiber-coax network.

Apart from Comcast’s intentions to deliver 2Gbps broadband over a new fiber to the home network the company is planning for customers in near its local fiber backbone, the new Gigabit Home Gateway was designed by Comcast engineers in Philadelphia and vendors in Silicon Valley to work on Comcast’s existing coaxial cable network.

Comcast will first need to deploy the next generation standard for delivering broadband over cable networks – DOCSIS 3.1, which can combine several “channels” devoted to broadband service to create a super high-speed online experience. Comcast has spent the past several years moving analog TV channels to digital service, freeing up bandwidth it can devote to faster Internet speeds.

Although Comcast’s 2Gbps fiber service will be a limited offering, its 1Gbps cable broadband service should be available “to virtually all Xfinity customers once the DOCSIS 3.1 networking standard is deployed nationally,” according to Tony Werner, Comcast’s chief technology officer.

In addition to supporting gigabit Internet, the new gateway will support gigabit Wi-Fi, IP video, and integrate Comcast’s existing home security and automation services.

The device will go into production this year with plans to introduce it to consumers sometime in 2016. No pricing details were available.

Your credit worthiness now plays a more important factor in determining whether you can sign up for service with Charter Communications, and if you fail to pay the company has stepped up collection efforts to bring past due or canceled accounts up to date.

Charter Communications reported to investors it lost more than 7,000 video customers during the first quarter of 2015, many lost to the company’s tightened credit policies. Customers with challenged credit will be asked to pay a substantial deposit before cable service will be provided and those who lost service will have to bring their accounts current before service can be restored.

Thomas Rutledge, CEO of Charter Communications, told investors on the company’s quarterly conference call Charter could no longer depend on picking up video customers that used to steal analog cable service. Charter largely terminated analog service last year, forcing unauthorized customers to subscribe legally or find another provider.

Rutledge

Charter is hoping its new Spectrum Guide software, now being tested, will help improve video service for customers. The new cloud-based user interface is supposed to make search and discovery easier and better supports Charter’s on-demand video offerings. Spectrum Guide is expected to launch in Reno and St. Louis in the next few months.

“Over the coming months, we’ll increase the number of on-demand titles we have on our set-top boxes and on the Charter TV app by a factor of three,” said Rutledge. “The coming months will also see the wider rollout of our Worldbox, our new more advanced and less expensive downloadable security infrastructure in several markets.”

Rutledge emphasized Charter intends to continue emphasizing its full video packages and will not follow others testing slimmed down packages and a-la-carte channel selection. Rutledge told investors he doubts any of the current lower-priced packages with fewer TV channels will prove compelling to customers.

Charter’s chief financial officer reported Charter spent $23 million on transition costs related to the company’s failed deal with Comcast to spin off certain customers to a new entity – GreatLand Connections, which has since been terminated. That contributed to an increase in the company’s expenses, joined by increasing cable programming costs.

Rutledge called the Comcast transaction “distracting” and its all-digital conversion project “very disruptive” to customers.

“I guess when you think about our incentives as a company, our biggest opportunity was the transaction that was in front of us,” Rutledge said. “We were about to divest 40% of our business. And so, our focus was somewhat distracted. But all in all, the operational issues of changing – credit policies changing year-over-year, outcomes as a result of the termination of the all-digital project and the management of the service issues around the all-digital project, we’re comfortable with where we are, and we are comfortable with our growth prospects for the year.”

In the last week, executives from both Charter Communications and Time Warner Cable have talked to the Newhouse Family, controlling owner of Bright House Networks, about an acquisition of the cable company.

Time Warner may hold the stronger hand. In addition to being a much-larger and wealthier cable company, Time Warner has the advantage of a long-standing partnership dating back to the early 90’s with Bright House in which Time Warner shares its volume discounts on cable programming and technology with Bright House in return for an annual fee. As part of that arrangement, Time Warner has the right of first offer if Bright House ever chose to sell. If Time Warner matches or beats a competing offer, such as that now on the table from Charter Communications, it wins Bright House for itself.

Bright House decided it had to sell to someone after the Comcast-Time Warner Cable merger threatened to end its arrangement with Time Warner. Bright House would pay substantially more for programming and equipment without the volume discounts Time Warner received. With the Comcast deal off the table, Time Warner remains an acquisition target.

Bright House is coveted by Charter as a stepping stone to a much larger acquisition of Time Warner Cable. Charter’s balance sheet is loaded with debt and its stock isn’t worth as much as that of Time Warner Cable. Combining Bright House’s two-million subscribers with Charter’s own five million customers strengthens Charter’s balance sheet and increases its borrowing capacity as it prepares to acquire Time Warner Cable for a second time.

Time Warner Cable’s interest in Bright House would make life more difficult for Charter, preventing the company from leveraging a quick deal for Time Warner. It also would make Time Warner Cable considerably more expensive (and complex) to acquire. In January 2014, Charter offered $132.50 a share to Time Warner Cable shareholders to acquire the cable company. Time Warner Cable executives immediately recommended shareholders reject the deal as undervalued. Today Time Warner stock is worth around $156 a share, meaning Charter would have to offer at least $160 a share, and probably more than that, to interest Time Warner executives.

The Newhouse family is sitting in a lucrative position as it is courted by the two larger cable operators. One of those familiar with the talks suggested Time Warner was offering the Newhouse family influence in a combined Bright House-Time Warner Cable, because its offer would leave the Newhouse family as the largest individual shareholder of the combined company. Charter’s offer would hand power to John Malone’s Liberty Broadband, and leave the Newhouse family with little, if any voice.

Based on that, the Newhouse family may gravitate towards Time Warner Cable unless Charter significantly sweetens its deal and Time Warner drops out. With the Comcast-Time Warner Cable merger in tatters, both sides have a 30-day “good faith” period to renegotiate and tweak their respective offers.

Despite all that, Bright House may decide not to sell after all, at least until after the bigger players settle their own deals and acquisitions. In that case, Charter may have other targets in mind. At the top of the list are Mediacom and Suddenlink.

Time Warner Cable held its first post-merger-flop conference call with investors this morning and reported surprisingly good subscriber numbers for the first quarter of 2015.

Despite disappointing investors for not meeting projected profit and revenue numbers for the first three months of the year, Time Warner managed to add 30,000 net video customers for the first time since 2009. High-speed data customers grew by 315,000, compared with 269,000 a year ago, while voice customers increased by 320,000, compared with 107,000 in the prior-year period. The company also reported $26 million in wasted merger-related costs.

Time Warner’s latest triple play promotion has fewer gotchas in the fine print than usual, but the modem fee is still there so buy your own.

A renewed love for Time Warner Cable was not the reason the cable company added customers. Aggressive pricing with fewer fine print “gotchas” and Time Warner Cable Maxx upgrades helped the company pick up new subscribers. Last October, Time Warner added a $90 triple play offer valid across much of its service area, offering unlimited calling phone, Preferred TV, and 30Mbps broadband with one set-top box for $89.99 a month for one year, an offer Artie Minson, chief financial officer of Time Warner Cable called “clean.”

For the last two years, Time Warner Cable executives decided to de-emphasize promotional pricing on phone service, preferring to draw more attention to its double-play television and broadband offers. This year, that thinking is long gone as the cable company re-emphasizes its triple-play packages and offers current customers the chance to add phone service for as little as $10 a month. The strong growth in new phone customers during the quarter reflects the success of those promotions.

Minson was less impressed with the sales of “skinny bundles” of bare basic cable television, HBO, and broadband service, noting it had little impact on Time Warner’s subscriber growth. The allure of its $14.99 everyday low price, low speed Internet offer has also waned.

“There’s a lot of attraction in the press about skinny packages,” echoed Dinesh C. Jain, chief operating officer of Time Warner Cable. “I think a lot of the times, customers don’t want to get bogged down in a lot of choices to make on those kinds of things. There’s a lot of value in our triple-play packaging right now and it’s a simpler sale.”

Marcus used the conference call to re-emphasize the company has not been distracted by 14 months of merger talks with Comcast and has executed on its pre-merger business plan all along.

Coming in 2017 (If We Live That Long)

Network upgrades under the TWC Maxx program are continuing on schedule.

“New York City, LA and Austin are complete, Dallas, San Antonio and Kansas City are underway and Charlotte, Raleigh and Hawaii on the docket for later in the year,” said Marcus. “We also plan to begin the Maxx process in San Diego this year and finish up in early 2016. It’s still early days, but Maxx certainly appears to be making a difference. Customer feedback has been great and churn among Maxx customers with new DOCSIS 3.0 modems is dramatically lower.”

But it will take another two years to complete the entire Time Warner footprint, of which 40-50% will be upgraded by the end of this year.

“The exact pace at which we continue that process in 2016 and 2017 depends on the experience we have in 2015. We’re feeling better about our ability to roll out all-digital this year than we did last year, which was really the first year of the program,” said Marcus. “And we’ll evaluate, as we go into 2016, how quickly we think we can ramp the next batch of systems.”

In a recurring theme throughout the conference call, executives emphasized Time Warner does not want to pioneer tinkering with the traditional cable package.

For example, Marcus acknowledged Cablevision’s experiment with Wi-Fi calling as a cellular replacement strategy, but said Time Warner Cable will take a wait and see approach.

“I’m inclined to watch and see how that evolves and then we’ll see how best to develop our own strategy on that front,” Marcus said.

Marcus

“There’s a lot of talk and a lot of work going on out there from other guys,” said Jain, referring to slimmed down cable packages and unbundling. “And if any of their things work, we’ll just be fast followers on that stuff because I think there are some segments of our customer base where that is going to have appeal.”

Marcus also complained there was far too much attention being paid on Millennials as an excuse to break up the traditional cable experience.

“There tends to be, in my opinion, an obsessive interest in Millennials, maybe at the expense of the broader customer base,” Marcus said. “For the vast majority of our customers, the way we currently deliver the video product is pretty darn attractive. That said, sure, there’s a group of customers who might very well like to access video via other means. So it is definitely the case that over time, I can see a world where more and more customers consume our offering without needing to lease a set-top box from us. But that doesn’t mean we’re going to abandon the largest portion of our customers who actually do like the current model.”

On other subjects, the implementation of Net Neutrality under Title II regulations will have no impact on Time Warner’s future plans or investments, according to Marcus.

“We’ve said in the past that our normal business practices comply entirely with the notion of the open Internet, no blocking, no discrimination, no throttling, and transparency are fundamental parts of the way we do business. So to the extent that that’s the full scope of what’s getting incremented under Title II, I think you won’t see a change in the way we do business.”

But he warned if the FCC intends to more broadly regulate Internet access, that could have an impact on pricing and future investment.

Marcus also re-emphasized his intention not to change the way Time Warner sells broadband. That means no compulsory usage caps or usage-based pricing.

“We’re very focused on delivering compelling products to customers at a price that delivers real value,” said Marcus. “We can’t think in terms of taking gross margin dollars that are lost because we lose a video customer and somehow embedding those into high-speed data [with usage pricing] and not seeing an impact on high-speed data.”