Charter Communications lost fewer cable video subscribers than expected in Q2, but while its base is shrinking more slowly than peers, executives indicated it’s no longer focused on video as a standalone product and the forthcoming Xumo platform will be a primary offering going forward.
“The video platform adds value to our connectivity services, on a standalone basis we’re at or near the point of indifference,” said Charter CEO and President Chris Winfrey during the company’s earnings call Friday. Still, he noted the company is committed to trying to find a path forward for video. “If we can have the flexibility to package and price it the right way we think it’s good for customers and it’s good for us, and ultimately it’s much better for programmers over time as opposed to having the cord-cutting continue to accelerate at the pace it’s going.”
Charter like others in the industry has put less emphasis on video as it focuses on higher growth businesses like mobile and broadband, while in the video business programming costs continue to rise and pay TV subscriber bases contract.
Charter CFO Jessica Fischer on Friday noted that margins on the video product have shrunk over time and reiterated the operator’s position that they’re not willing to lose money on it.
The finance chief said during the earnings call that the product is valuable, but Charter wants to continue to seek paths to offer video through avenues that provide financial returns, be it via set-top box revenue or how the company packages product.
“Ultimately, we’re continuing to try to sort of defend having margin in that business,” she said
In Q2 Charter lost 200,000 video customers (including 189,000 residential), better than Wall Street expectations for 243,000 net losses.Charter curbed losses compared to the 240,000 it shed in Q2 2022.
Despite continued losses, Charter has taken less of a hit on video then some others such as Comcast, which lost 543,000 net video subs in the quarter. Charter is inching closer to the spot as the largest U.S. cable operator with a base of 14.1 million, not too far behind that of Comcast, which now has a base of around 14.98 million.
And while Winfrey expressed nearing indifference over video as a standalone product, the company has been making various moves to boost that value and serve customers different options.
“We're losing the least amount of video customers of any of our peers or competitors,” Winfrey said. “The reason that we've been able to do that is for two reasons. One is that we have flexibility, and we've tried to use that wisely in a way that is valuable to consumers to create products, pricing and packaging that will stick.”
Winfrey also took the time to express earlier sentiments that the video product is good and designed for most consumers but the issue continues to come back to price. He said programmers are asking for higher rates while requiring Charter to include programming that consumers don’t necessarily want or value.
“You’ve price out a large number of customers out of the marketplace through that strategy by the programmers,” he said, adding that those same media companies have also gone and sold the same content at a lower price in other environments, devaluing the content and creating a structural problem for the business.
Fischer attributed an overall residential revenue per customer relationships decline of 0.3% year over year in Q2 to a higher mix of non-video customers and more lower-priced video packages within the base, partially offset by promo step-ups, rate adjustments and growth of its Spectrum Mobile MVNO business.
Total residential revenue of $10.8 billion was down 0.3%, which the company attributed to lower video revenue. Video revenue declined 6.6% in Q2 to $4.18 billion.
As Charter’s video customer base shrunk 5.1% compared to last year, the subscriber declines contributed to a 7.8% drop in programming costs, alongside a higher mix of lighter video packages, partially offset by higher programming rates. Charter's Q2 advertising revenue was down 16.5% to $384 million, driven by lower political ad revenue.
Adjusted EBITDA of $5.5 billion rose 0.2% year over year, with net income of $1.2 billion in Q2.
On the call Winfrey discussed elements of the video strategy, including a recent reworking of regional sports networks distribution and packaging, and the Xumo joint venture with Comcast.
Xumo: Winfrey reiterated excitement for the upcoming release of a Xumo streaming platform, which will allow users to access all linear and direct-to-consumer video content in one place, with unified search and discovery via voice remote. The chief executive said the company is currently conducting field trials for the product and is on track to deploy later this year.
Importantly, Winfrey said that together with Charter’s linear MVPD connected Spectrum TV app, Xumo will be the operator’s go-to-market platform for new video sales.
“That will be our platform of choice to deliver our video subscriptions going forward. And ultimately, I expect us to provide that to some broadband customers over time as well,” he said, adding it is not only good for Xumo as an independent platform but also a way to offer a level of video services attached to the operator's connectivity products.
He noted that two-thirds of video sales are already without a set-top box, meaning they’re going on Roku, Apple TV, Samsung TV or other platforms. Winfrey also said that historically equipment revenue from set-top boxes has been on the decline, so financial implications of a Xumo box aren’t that material.
RSN changes:
Winfrey said that even before Sinclair’s Diamond Sports and its regional sports networks (RSN) business entered Chapter 11 bankruptcy to restructure, Charter had already created the ability for significant flexibility in its packages.
“We’ve achieved that across the RSN space for the vast majority of the country, and we’re rolling out versions of our select expanded basic [TV package] with and without RSNs” something that will happen shortly, he said. This enables to Charter to have lower cost video packages for those customers that aren’t interested in RSNs.
“I think as a result, we’ll sell more video,” he said.
Winfrey also noted that a planned direct-to-consumer app will be available not only in the general marketplace but to all affiliates, including DirecTV and Charter’s own customers.