Charter Communications (NASDAQ: CHTR) followed industry trends in 2017. The company lost cable customers in each of the year's first three quarters, but it more than made up for those losses with broadband additions.
That has been a recipe for short-term success, but it may become a harder feat to pull off in 2018. It's possible that cord-cutting could accelerate and that broadband growth could either slow or see incumbents face increased competition.
These are trends that put Charter in a challenging position. That's compounded by the fact that unlike its chief rival Comcast (NASDAQ: CMCSA), the company does not have any major content assets it can leverage to keep customers from leaving. That also stops Charter from building a streaming service, or even profiting from cord-cutters as Comcast does from its stake in Hulu.
Cord cutting may be a bigger problem in 2018. Image source: Getty Images.
What happened in 2017?
At casual glance, Charter's trajectory looks good. The company has posted relatively small cable customer losses each quarter while adding about four times as many broadband users through three quarters of 2017.
Data source: Leichtman Research Group.
Comparing year-over-year numbers is challenging because Charter completed its purchase of Time Warner and Bright House in May 2016. That more or less doubled the company's size and gave it the scale needed to compete with Comcast.
In Q3, the first full quarter where the merger was factored into the previous year, Charter saw revenue grow by 4.2%. Earnings per share, however, decreased from $0.70 in the year-ago quarter to $0.19 this year. The decrease was driven by an increase in depreciation and amortization in the third quarter of 2017.
CEO Tom Rutledge seemed happy about where the company stands. He explained the path forward in his remarks in the Q3 earnings release.
Our integration is going well and remains on schedule. And despite the complexity that comes with changing the way we do business in 75% of our footprint, we continue to generate solid customer, revenue and EBITDA growth. Through our integration, we are creating one company, with a unified and centralized operating strategy, which will put Charter on a path to be able to grow quickly over a multi-year period.
Storm clouds ahead?
In Q3, Charter added 196,000 more customers than it lost, but those numbers could be hard to maintain. Cord-cutting has steadily gained steam since 2013. In that year, major pay-television companies lost 105,000 subscribers. That was followed by losses of 125,000 in 2014, 385,000 in 2015, 795,000 in 2016, and 1,470,000 through three quarters of 2017.
If you assume that the final 2017 loss will be at least double the previous year, that trend does not bode well for Charter. That would mean pay-television would lose over 3.2 million customers in 2018, while broadband adds have stayed about the same (around 3 million per year) since cord-cutting began.
Be wary, not worried
Charter is a subscription-based company whereas Comcast has its cable channels, broadcast network, film studio, theme parks, and more. That puts Charter at a disadvantage in the current marketplace since it has very few tools with which to combat cord-cutting.
Going forward, the company may look to partner, acquire, or merge with content owners or even a digital streaming service to diversify revenue. That's not something the company has to do immediately, but the current course is one that's likely to turn to declines if not in 2018, certainly by 2019.
Charter has time and resources. It also has an attractive customer base. It just needs more to sell them and more reasons to tie them to the brand.
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