Tom Rutledge CEO Of Charter: The Rate Of Cord-Cutting Will Slow

The following is the unofficial transcript of CNBC EXCLUSIVE interviews from Liberty Media Investor Day across CNBC’s Business Day programming today, Thursday, November 21st. Charter chairman and CEO Tom Rutledge sits down with CNBC’s David Faber to discuss cord cutting, and m&a activity in the television cable industry.

Charter CEO Tom Rutledge

Image source: CNBC Video Screenshot

Rate of cord-cutting will slow: Charter CEO Tom Rutledge

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DAVID FABER: Alright. And I will take it. Thank you, Dom. You know what, we’ll start with cord cutting. You didn’t hear the introduction, but that was one of the questions, of course, that we have. Tom, first of all, thanks. It’s nice to see you again.

TOM RUTLEDGE: Glad to be here.

DAVID FABER: It’s been a while. Cord cutting. We talk about it all the time, endlessly, a huge important trend in your business—in our business--but there are some people who believe that sort of things are going to become a little less severe, I guess. Are you one of them?

TOM RUTLEDGE: Yeah, I actually think that’s right. You know, what cord cutting is, it’s actually a bad term because we’re actually adding lots of cords. Broadband subscription connections that we sell, mobile, broadband, they’re increasing in terms of the rate of growth. But television viewing, the big bundle of services that people historically bought, those have-- that’s been under a lot of pressure for a lot of reasons. But I think some of that has been slowing down.

And one of the reasons is because a lot of the damage from the high-priced environment we’ve been in and the lack of security with password sharing and everything, you know, kids going to college with their parent’s passwords, that whole college market’s gone and the second home market’s gone to a certain extent and high transaction multiple dwelling units with young people in them. You know, new behaviors –

DAVID FABER: Most of the costs, most of the losses to be fair have been at the direct broadcast satellite companies to begin. Not that you haven’t – not that we don’t follow closely your video sub losses each year.

TOM RUTLEDGE: Right. Ours are relatively minor comparatively speaking. But I think in aggregate, they’re going to slow down.

DAVID FABER: You do.

TOM RUTLEDGE: Because most single-family homes have big TVs in them and that’s where you get sports, that’s where you get news, that’s where you get live TV, like this. And, you know, it’s going to still be under price pressure. Not saying the category’s not under pressure, but I think the rate of decline will slow.

DAVID FABER: That gets me to another question. Which is this theory that’s been out there and actually, in speaking to John Malone earlier, he brought it up as well, which basically goes something like this. You’re better off actually getting out of the video business. I’ll quote him to you, so you can respond. Because he’s not alone in this. ‘It’s been discovered that margins improve, as you lose video customers and you become less capital intensive. So, you shrink the video base, your margin goes up, cap ex goes down, stock takes off.’

TOM RUTLEDGE: Yeah. Well, that is the narrative. And it’s true. But I actually still think there’s margin in the video business. And it’s as great as it is in the broadband business and yes, the it’s more capital intensive but becoming less so. So, I think that having a lower margin video business attached to a higher margin broadband business makes a lot of sense, as long as there’s margin in the business. And so, I think you can have it both ways. But, it is true that capital intensity’s come down. And it’s come down for a lot of reasons. You know, we have over 4 million app based services now in the marketplace.

Meaning people with a big TV that’s app-based don’t need a set top box. So, our customer premises hardware capital has come down, and IP technology has allowed capital costs to come down. So, the whole business is less capital intensive going forward for a variety of reasons. But it is true video has been more intensive than--

DAVID FABER: It is, but there’s this theme that says you’re happy to see them go. That’s not really true.

TOM RUTLEDGE: No, I don’t think that’s really true. It would be true if they had no margin but they still do. And it’s less than it was ten years ago, it’s less than it was five years ago. But, it’s still a good business on the margins.

DAVID FABER: How much of your revenue growth right now is coming from price increases? There have been rate hikes. I’m a Spectrum customer in one place and I’ve seen it as well for broadband. And how much from volume?

TOM RUTLEDGE: The majority is volume.

DAVID FABER: It is. Not price.

TOM RUTLEDGE: That’s right. Our strategy has been not to raise prices significantly and we have not, as a proportion of revenue. The bulk of our revenue growth is volume.

DAVID FABER: Can you continue that?

TOM RUTLEDGE: Yes.

DAVID FABER: Why?

TOM RUTLEDGE: Because we’re still underpenetrated. We have about a little over 50% broadband penetration and 31ish video penetration. And we have almost a million mobile customers. So, minor -- we have almost 1 million mobile customers. So, we have 51 million homes that we pass with our infrastructure. We still have an opportunity to grow customers and customer relationships and that’s our primary strategy. And most interestingly about that growth strategy and not using price to drive our revenue is that every customer we create on our fixed network costs us less to operate than the current customers.

Because you have a fixed capital investment that’s being spread over a bigger base. So, we think it’s a virtuous growth cycle that we’re in and we don’t want to use price to knock it down even though in the short run, it looks attractive from a revenue perspective.

DAVID FABER:  We’re already running out of time, Tom, but you mentioned a million mobile customers. There’s a thought that perhaps the MVNOs that you’re using, the capacity agreements, won’t be enough eventually. That you would need to actually buy a wireless player down the road. Is that a possibility?

TOM RUTLEDGE: Well, look, I think there are a variety of ways to get the owner’s economics through time. And we’ve done a bunch of experiments using the new spectrum that’s available – C-band spectrum. And we found a way to actually use that to take traffic that’s currently on the MVNO and move it to us. So, does that mean we have to buy a wireless carrier or we can invest our own capital in converging our network? I think both of those things are alternative pathways, but today, we’re using the MVNO and it’s perfectly satisfactory. It’s margin positive and it’s driving customer relationships. But as time passes and our penetration goes up, we’ll be more interested in owner’s economics.

DAVID FABER: Future interviews. Finally, wouldn’t be a Rutledge interview if I didn’t ask you about M&A, but it won’t be about past, whether it’s Verizon or Softbank. Malone brought up this morning that Patrick Drahi, who controls Altice USA, calls him all the time. And says I want to get these two companies together. It’s hard to imagine how they could buy you, but would you be interested in buying them?

TOM RUTLEDGE: Well, look, we think cable assets properly run are really good assets and really a great business. We buy a lot of our own stock back because we think the business is good and its future is good. And I think that way about all cable companies. There’s obviously price issues and how you run the company and where it is. I’ve run those assets myself.

DAVID FABER: That’s right. The old Cablevision assets.

TOM RUTLEDGE: So, I know what they are. And I know what they can be. But you know, getting price discovery and getting to an agreement is a really complicated thing. And all of the companies in our industry that are left from an M&A perspective are controlled companies.

DAVID FABER: Right. As is Altice. But you certainly don’t seem to be saying it’s not a possibility.

TOM RUTLEDGE: No, but it’s a price problem and a timing problem.

DAVID FABER: Right.

TOM RUTLEDGE: As most M&A is.

DAVID FABER: So much of life is like that, too.

TOM RUTLEDGE: It is.

DAVID FABER: And speaking of time, we’re out of it unfortunately, but tom, always appreciate you’re taking some with us.

TOM RUTLEDGE: Thank you, David.

DAVID FABER: Tom Rutledge, Charter.



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