Post-Merger, Charter Has the Scale to Start Thinking Beyond the Cord

Job one for Tom Rutledge, now that his Charter Communications has gulped down Time Warner Cable and Bright House Networks, is to make customers happy with their cable company.

A quixotic endeavor? Not to Rutledge. The Charter chairman and CEO, regarded as one of the cable biz’s top operational minds, has pledged to hire 20,000 employees post-merger to boost customer service, on top of the new company’s workforce of nearly 90,000. “We intend to continually improve the way we do business in order to be the very best at what we do,” he said after the three-way merger closed last week, following a year of regulatory reviews.

He’s not all talk. Since taking the helm in 2012, Rutledge has upped Charter’s customer-satisfaction ratings on the American Customer Satisfaction Index, as TW Cable’s already bottom-of-the-barrel scores have drifted lower in each of the past four years. Charter held steady at 4.3 million residential cable TV subscribers at the end of 2015, flat for the year — but a win given that the pay-TV industry overall shrank by 385,000 subscribers (down 0.4%), according to Leichtman Research Group.

Rutledge’s initial focus will be the massive undertaking of integrating the three companies’ sales, billing, and technology teams and systems, which he has acknowledged will be a “tremendously complex” two-year process. For example, Charter will now have 11 regional operating divisions, up from four.

And say adieu to the TW Cable “eye” logo. Over the next few months, Charter — now the second-largest cable company after Comcast — will launch its Spectrum-branded triple-play services in Time Warner Cable and Bright House markets, which include New York and Los Angeles, along with more “consumer friendly” pricing and packaging options.

But the potentially new-and-improved Charter may soon have to think outside the box. The company — along with its pay-TV peers and rivals — must face the increasing prospect of cord-cutting amid a groundswell of new broadband-video services. Analysts expect Charter, now that it has the muscle to negotiate more flexible programming deals, to break the unwritten rule of the cable fraternity and launch a nationwide internet-TV service. Dish Network has done that with Sling TV; AT&T is gearing up to take DirecTV over-the-top later in 2016; and Hulu has pegged a 2017 launch for a live TV package.

“Look for Charter to do something aggressively there in terms of skinny bundles — or even launching their own over-the-top offering — because they have more scale,” says S&P Capital IQ Market Intelligence analyst Tuna Amobi. “[Charter] will be easy pickings if they don’t do anything.”

Rutledge is now sitting on a much bigger pile of programming bucks, and that could help him grab OTT rights: The new company will spend $9 billion on content annually, he says, whereas in 2015 Charter paid $2.7 billion for programming. “No question, with greater size comes greater negotiating clout,” says VideoNuze analyst Will Richmond. “And it’s not just what they pay, but what they pay for: skinny bundles, repackaging, or expanded rights.”

Charter’s deals for TW Cable and Bright House, backed by John Malone’s Liberty Broadband, make it the No. 3 pay-TV provider overall, behind AT&T/DirecTV and Comcast, with about 17 million video subscribers.

The new Charter has a number of large carriage agreements coming due in the near term, including deals with Time Warner, 21st Century Fox, Disney, and CBS. TW Cable has not cut many long-term programming pacts for more than two years, ever since Comcast attempted and failed to acquire the company in February 2014. Charter’s bigger stature means senior VP of programming Allan Singer will be in a position to drive harder bargains with the media conglomerates. By getting grandfathered into TW Cable’s existing contracts and growing its video base, Charter expects to save a not-so-skinny bundle: Of the $800 million projected cost synergies in the first three years, about half are from reduced programming expenses, according to Rutledge.

For now, Rutledge is looking to bring OTT services into the cable bundle, rather than splinter off its own untethered video product. “There’s no reason why we can’t integrate Hulu or Netflix or Amazon right into our [user interface] and all the other products we have and make it available seamlessly to our customers,” Rutledge said last week at the MoffettNathanson Media & Communications Summit. He added that Charter is actively pursuing such deals.

Rutledge downplayed the threat of OTT video, characterizing it as “nibbling around the edges,” and said OTT products in fact make Charter’s broadband more attractive. He also questioned whether the forthcoming live TV package from Hulu—owned by Fox, Disney, and NBCUniversal — is in programmers’ best interests. “If [Hulu’s owners] underprice what they already have [with existing distributors], someday they end up with less,” the exec warned.

In other words, Rutledge is sticking to his knitting. Still, industry watchers say it’s only a matter of time before Big Cable is forced into the over-the-top fray.

Comcast is testing Xfinity Stream, a $15-per-month package that includes local TV channels and HBO, available in four markets to its internet customers (no set-top required). CEO Brian Roberts told reporters at the INTX tradeshow last week that the cable giant isn’t planning to offer any kind of OTT bundle beyond its service areas. But given the frothy competitive waters, Comcast and Charter will find themselves compelled to do so, says Macquarie Securities analyst Amy Yong: “Over time, they’ll both explore opportunities to bring OTT services outside their footprint.”

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