Charter video losses accelerate to 405K in Q1

Charter Communications – now the largest U.S. cable operator by subscribers – on Thursday reported its worst-ever quarter for video customer net losses, which reached 405,000 in Q1.

Traditional pay TV operators, including Charter, have long been dealing with linear video subscriber declines, but Charter has largely managed to stem its flow of TV customer exits better than industry peers. However larger industry trends appear to have caught up with the cable operator, which reported losing 392,000 net residential and 13,000 net business video subscribers the period. It marks an acceleration from the 237,000 net residential video subscribers it lost in Q1 of 2023. The quarterly subscriber results were also significantly worse than the 242,000 video losses that Wall Street analysts expected.

Charter’s total video base now stands at 13.7 million, including 606,000 SMB video customers. That still leaves Charter larger than Comcast, the latter which earlier in the week reported traditional video subscriber losses of 487,000, for a pay TV base of 13.6 million.

On the back of subscriber losses, Charter saw video revenue decline 8.1% year over year to $3.9 billion in Q1.

Since at least last year Charter has been pushing its vision for a reimagined video ecosystem, including a new type of carriage deal with Disney in the fall that saw the media company’s ad-supported DTC Disney+ and ESPN+ apps included in certain Charter Spectrum TV packages at no extra cost. Charter also plans to include ViX, the Spanish-language streaming service from TelevisaUnivision, as well as regional sports DTC products, within certain TV packages at no extra cost.

Ensuring customers don’t have to pay twice for content that comes in their pay TV package but is also available, often at a lower cost, on DTC apps is part of Charter’s aim, where it’s focused on providing flexible entertainment options that provide value and utility to its customer base – including broadband-only subscribers.

With the cost of programming rising and the proliferation of streaming options, Charter is seeking ways to keep video as part of its offering – which can help reduce churn of higher-value customers when bundled with services like broadband and mobile (where Charter also reported broadband subscriber declines in Q1) – but wants to be able to offer more packaging and pricing flexibility.

During the first quarter Charter launched two new internet-delivered streaming TV packages, Spectrum TV Stream and Spectrum Stream Latino for its broadband-only customers. Spectrum TV Stream is a 90-channel, non-sports, general entertainment package that sports a lower cost of about $40 per month. It’s also deployed the Xumo Stream Box (part of a joint venture with Comcast), which combines access and discovery for linear and streaming content within one user interface and is now the main go-to-market video product.

On the company’s earnings call Friday, Charter President and CEO Chris Winfrey said the company expects its hybrid DTC-linear model to be fully deployed next year. Through this, he said the company will “be able to deliver value for our customers and programming partners through fully bundled hybrid services, genre-based packages, selling DTC a la carte, and potentially bundled DTC services to our broadband customers.”

The deal inked with Disney last fall, which also includes Charter utilizing its marketing might to promote Disney DTC apps to its millions of broadband subscribers, is a model the operator has said it intends to similarly pursue for all of its carriage deals going forward.

However, analysts at MoffettNathanson aren’t convinced.

In a Friday note to investors, analysts led by Craig Moffett noted that Charter’s video declines “are finally catching up to the rest of the industry’s.”

“There had been some speculation that Charter’s landmark Disney agreement would be part of a resistance movement, if you will, in video, The resurrection of the linear bundle,” wrote Moffett. “We never bought that narrative. It is becoming clearer that American TV viewers didn’t either.”

The firm noted that, as mentioned, despite Charter starting to offer Disney+ to subscribers in January, video losses in the quarter sped up. And compared to the first quarter of 2023, Charter’s video base shrunk 8%, which MoffettNathanson said marked “a sharp acceleration from the 6.8% decline last quarter.”

That said, the firm overall noted darkest before the dawn for Charter’s overall business, where it sees challenges for the operator short-term from the forthcoming expiration of the ACP program and impact on broadband (where subscribers declined in Q1) but is more upbeat over a longer timeline.

Looking at the company’s broadband business, Moffett wrote that the firm expects the end of the government subsidy ACP program to “distort subscriber and ARPU metrics for some time, without perfect visibility as to the cause, though the company has committed to providing transparency – for a stock we otherwise believe is dramatically undervalued. For investors with a longer time horizon, Charter looks to us to be very compelling (emphasis Moffett’s).”

As for video, on Friday’s earnings call Charter executives continued to emphasize a belief in the opportunity to reshape the video ecosystem into one that benefits programmers, distributors, streamers and consumers alike.

“While the video business is clearly under pressure, we believe that flexible and attractively priced packaging options across all forms of video… channels really, integrated within a modern user interface in a more frictionless environment can recreate value in the ecosystem for our customers, programmers and distributors,” Winfrey said.

Still, the executive noted the environment is one “where video these days really is coming in as an attach rate to internet” and where, when Charter has less opportunity for internet sales, it impacts video. He cited a combination of both lower selling opportunities for internet, and therefore lower attach rates for video, alongside a programming cost rate increase pass-through to customers in Q1 as contributing video losses in the quarter.

“I do think that as we add more bundling of these DTCs in a hybrid linear model over time, I think we have the ability to stem a lot of the churn and actually add back to both the gross addition side coming from potentially new calls coming in, but also higher attach rate to internet primarily as we provide more value into the package, which offsets the significant programming cost increases that we’ve been forced to pass through,” he explained.

And as Charter works through renewals to hammer out new models, he also emphasized the operator’s ability, going forward, to sell traditional linear and DTC hybrid model packages.

“We have 25,000 in-house sales representatives in sales and retention. And so we have a workforce that’s very cable of being a distribution engine for linear hybrid DTC” as well as a large base of broadband-only customers to offer apps to.

Winfrey reiterated a belief that the video ecosystem model has been broken and thinks that now is the first time in the past 20 years “where we can have a product that we’re proud to put on our internet bill at some point soon.”

He noted that bundled customer churn is lower, meaning “a high-quality video product has always been an asset.” But that’s not the case as rates go up and consumers need to pay twice for content. Going forward it’s about rethinking the sale of video to create value for customers, as well as programmers and distributors.

While acknowledging it takes some time to work through, Winfrey expressed optimism.

“I’m confident we’re going to continue to make progress in this space,” he said.

Total Charter revenues were $13.7 billion in the period, while net income was $1.1 billion, up 8.4% yoy. Quarterly Adjusted EBITDA was $5.5 billion, up 2.8% yoy. StreamTV Insider