Charter CEO: Content Companies Starting to Recognize Threats of Piracy, Password Sharing

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Charter Communications chairman and CEO Tom Rutledge

The cable giant lost 75,000 pay TV subs in the third quarter as CEO Tom Rutledge says content firms in the streaming age become distributors and focus on security issues: "That has not been part of their DNA."

Cable operator Charter Communications, in which John Malone's Liberty Broadband owns a big stake, on Friday reported that it lost 75,000 pay TV subscribers in the third quarter as cord-cutting continues in the U.S.

Management, which has focused on its connectivity services as the company's core business, lauded the fact that the cable giant's overall customer relationship growth continued to gain momentum though amid broadband and mobile gains.

Charter chairman and CEO Tom Rutledge on an earnings conference call discussed the continued challenges of selling traditional pay TV bundles and the newer problems posed by streaming products and piracy via password sharing. 

"Pricing and lack of security continue to be the main problems contributing to the challenges of paid video growth," Rutledge said in his prepared remarks before adding during a question-and-answer session with Wall Street analysts: "The traditional bundle … is very expensive, and the actual unit rate of that product continues to rise, and that’s priced a lot of people out of the market. And it’s free to a lot of consumers who have friends with passwords. So our ability to sell that product is ultimately constrained by our relationship with content [companies], and we have to manage that in terms of the kinds of power that the content companies have."

He added: "The bulk of our customer relationships long-term in video will continue to be big, packaged, expensive bundles of content, because that is what is sold to us and dictated that we provide in that form.” 

Piracy was another topic of debate on the call, especially with more Hollywood giants pushing into the streaming space with their own offerings. "There is some recognition in the programming industry that they are now distributors and as result of being distributors that they need to know where their content is going," Rutledge said. "That has not been part of their DNA. So streaming products have been sold with five streams and with no location-based kind of security. Most households in the United States have two or less people in them, and as a result of that there are more streams than there are households available for free."

That and the fact that TV Everywhere products allow "massive numbers of streams replicated through virtual [distributors] and so forth" means that "it’s just too easy to get the product without paying for it." He said Charter's data consumption shows that video consumption doesn’t come down "even if people disconnect their paid video," which, he argued, "makes the price-value relationship really difficult when it’s free."

Content companies must come up with new standard of security, the Charter CEO concluded. "They need to know where their services are being viewed and they need to have a business model that works for them," which requires effort and collaboration, he said. "It’s a slow process."

Charter lost 77,000 residential pay TV subscribers in the third quarter, compared with a loss of 66,000 in the year-ago period. As of the end of September, Charter had 15.7 million residential video customers.

The company added 2,000 small and medium business video customers in the third quarter, compared with 12,000 in the year-ago period. Overall, Charter lost 75,000 video subscribers in the third quarter, compared with a loss of 54,000 in the year-ago period.

The broadband business once again led the growth charge in the third quarter as Charter recorded 351,000 residential internet subscriber net additions and 380,000 when including business customers. Management on its earnings call said the increased number of devices, video streaming and growth in online gaming are among the drivers of demand for higher-speed, higher-quality broadband service. The company also added 276,000 mobile lines in the quarter, up from 208,000 in the second quarter, bringing its growing mobile business to a total of 794,000 lines.

Charter's overall residential customer relationships grew by 282,000 in the third quarter, compared with 192,000 in the year-ago period. As of Sept. 30, Charter had a total of 27.0 million residential customer relationships, up 3.7 percent over the year-ago period.

Charter also highlighted that as of Sept. 30, it had 29.0 million total customer relationships, having added more than 1.1 million net new customer relationships over the past year.

The company' quarterly earnings came in at $387 million, down from $493 million in the year-ago period, which was boosted by a pension re-measurement gain. Earnings per share of $1.74 were down from $2.11 in the same period last year, but exceeded Wall Street estimates. Adjusted earnings before interest, taxes, depreciation and amortization, another profitability metric, rose 3.4 percent to $4.1 billion. Third-quarter revenue increased 5.1 percent to $11.5 billion.

"Our strategy of offering high-quality products with good service at attractive prices is working and continues to produce strong customer relationship growth," Rutledge said. "In the third quarter, customer relationship growth continued to accelerate, and our operating strategy keeps us well-positioned to take advantage of the growth opportunity in front of Charter."