In a bold move, Altice Chairman Patrick Drahi vowed that Altice USA would rival Comcast and Charter as one of the three dominant U.S. cable providers and become an even greater force on this side of the pond than it is in its native France. This came after the company acquired U.S. cable companies, Suddenlink and Cablevision.
Six years after, Altice USA has a mere 5 million customers. That’s not even close to how many their major competitors have! Altice has just announced its acquisition of Morris Broadband which will give them 36 thousand more customers. But that’s still a far cry from their arch rivals’ 31 million users.
CEO Dexter Goei spoke to CNBC about how Altice USA’s rapid expansion is being hindered, why he believes cable and wireless will eventually merge in the U.S., and when it might be time for Americans to say goodbye to their beloved cable T.V. service.
(We have edited this interview for clarity and length.)
Alex Sherman, CNBC: Altice Chairman, Patrick Drahi, announced that their company would have an “open boulevard ahead of us.” This was following the deal Altice completed buying two U.S. cable companies: Suddenlink and Cablevision, which he said would make them as big as Time Warner Cable by acquiring five more small operators. It’s over five years now. How many customers do you guys currently serve?
Dexter Goei, Altice USA CEO: We only have about five million customer relationships.
So you have about five million subscribers? While that’s a lot, you’re not as big as Time Warner Cable; they were at 12 million back then. It appears that Patrick’s comment about Charter and Comcast not being able to buy anything else is no longer irrelevant. Did anything happen between then and now?
The reality is there’s been nobody selling, and we haven’t had a chance to show our skills on something of significant size. The most considerable transaction that has taken place is Cable One’s couple billion dollars acquisition, and that was specific to places that we’re not in.
Why? What happened? The machine to consolidate just seemed like it stopped? I remember Charter bought Bright House and Time Warner Cable, and you guys bought Suddenlink and Cablevision within a couple years of each other. But then the consolidation suddenly all came to an abrupt halt with no explanation. Why did that all happen?
I cannot tell exactly, but it’s no secret that the cable companies have been in business for a long time, and we’re not even talking about their icky-uncle type of ownership. The people who own these other conglomerates, like Cox Communications or Charter Spectrum/Comcast Corp., are families with decades’ worth of experience within this industry!
And it’s about the same thing nationwide. People have held ownership for 10, 20, 30 years, and many of them say they are not interested in selling because they like their businesses too much or it’s created a lot of value. They’ve been pioneers in their respective communities for a long time, and they plan to continue doing what they do best – providing cable services. Your local cable company is an invaluable mainstay of the local business community. What if you’re not looking to make a quick buck and don’t know what else to do with your money? These businesses are generating so much free cash flow that they can sustainably pay out dividends of three or four hundred million dollars every year without issue. So, yes – it’s possible for them to sell at five billion. For us, we’ll just keep doing what we’re doing.
The owners are still the same as five years ago. Wasn’t this clear to you then?
We believed that if everyone were selling, we would see a follow-through of more asset sales. But then it stopped abruptly.
We succeeded in getting Chuck Dolan from Cablevision to sell. At the time, it was an asset that everyone had been trying to get for years, and finally, we managed to! Time Warner came up on sale, but because our company still hadn’t dealt with U.S. regulators yet, they dropped us in favor of another buyer. We saw three sizeable assets come onto the market: one mega-asset (Time Warner) as well as two smaller ones (Cablevision and Suddenlink). We were able to scoop the smaller two.
Now that your offer to buy Atlantic Broadband out of Cogeco was turned down, what is your next move? Obviously, they were not interested in a deal, in line with what you just said.
The company is focused on organic operations, including building out our footprint and upgrading our fiber-to-the-home. We also plan to look for smaller M&A opportunities as long as there are no larger ones available. In the absence of that, we’re putting all of our free cash flow back into buying back our shares since we’re still trading at close to a 10% free cash yield. We have our debt complex currently trading in the 3s. So we’ve got kind of an interest rate difference between our cost of debt and how much goes into current investment projects. We’ll continue to buy up shares and retire them for more. We have also looked at other types of business like wireless or ad tech companies. When it comes down to what is best with our capital investment opportunities, M&A always looks good but only if there are exciting options on the table for us!
The wireless world is becoming more and more competitive. It’s been beautiful to see the evolution that Altice has made in Europe, as it owns both cable and wireless assets in this region. In fact, they are one of the only companies with these two business lines within a single organization! This begs an important question: will we ever see such changes happen here?
I’ve been speaking out about it for quite some time now. There’s no reason not to: strictly on an operating synergies level (from what I understand), in terms of both capital allocations that can result in higher returns overall and also by way of brand recognition benefits. It’s also ultimately about the clients. When they get more products or services from one provider, they’re less likely to switch providers because their stickiness is better than ever before! That’s why cable companies are entering into the mobile business scene as well.
But we have all gone into a mobile business that might not be as attractive, but it does offer many benefits. Renting someone else’s network will always provide reduced economics when compared to owning and operating one of your own networks. So, this is something you can expect us to push for as we go on — if it doesn’t happen sooner, then it’ll later.
The next wireless race is underway with all the major players in the game. AT&T has been focusing on building out more fiber, while Verizon’s focus seems to be expanding fiber even for their 5G aspirations. T-Mobile also wants a piece of the pie. They have an excellent mid-band strategy that would make them an ideal partner for any large cable operator looking into purchasing spectrum or assets from other companies.
How do you feel about the regulatory environment in America? Do you think there is a chance for one of those deals to go through, with T-Mobile as the smaller company. Could Comcast and Verizon be allowed to merge if they really wanted it?
No one knows absolutely what the future will reveal, but we should all be prepared for anything. So, I’ll make any predictions about M&A.
I do not think the antitrust division should be concerned with strategic transactions between companies that have different services. I can’t imagine why they would care in a situation like this, and frankly, it seems to me as if their attention might better be directed at other areas of concern.
What I do know is that strategic transactions involving different services should be allowed by the antitrust division. Obviously, if the Fios element of Verizon were to merge with Comcast, in certain regions, it would not go well for them from an antitrust standpoint. Yet, I know there are buyers for those assets, ourselves included, and likely Charter and other people!
You need not be a simpleton to understand the benefits of taking Verizon wireless and Comcast fixed. The regulators should see this as an attractive option for better performance and pricing, which would benefit consumers immensely!
With only five million customer relationships, it’s clear that Altice USA has yet to make waves across the country.
We are huge proponents of wireless, and we have a lot to offer in this arena. But if there was the opportunity to acquire a national provider, that would be another investment thesis all by itself!
While it is clear that we could have some synergies, the suggestion of acquiring a mobile or trying to merge with another company would be based on our belief in being able to do something better with it as we move forward.
I see what you’re saying now. So you’re saying that the acquirer will be the parent Altice?
That’s correct. It is our opinion that consolidation of the wireless industry would be a good idea, and we think it’s possible to do it in such a way where there are still enough players for competition. Whether that be with T-Mobile or the major telecom providers joining forces to create one big powerhouse of national coverage across all states and territories in America!
I’m confident that we will see consolidation among both fixed and wireless providers. There is already a lot of it in every other developed country, so I don’t know why the U.S. would be an exception to this trend! Still, you never can tell the exact way things will turn out.
Those not familiar with cable operations will love to know what has been Altice’s strategy within that footprint. So can you tell us? I know Altice has invested a lot in its fiber network. This is because it gives the company potential to offer high-speed internet and other services over that network, not just cable T.V. Why is this such an effective investment for you?
Every two or three years, DOCSIS (Data Over Cable Service Interface Specification) HFC networks undergo an upgrade cycle. Several updates are made to both the software and hardware of the networks to accommodate a rise in internet speeds on demand and allow for faster speeds than 1 G.B. downstream, as well as symmetric upload and download. These upgrades occur as needed because consumers will always need speedier download and upload rates. You cannot get such on cable today.
We have been and are still rolling out in our sister companies throughout Europe — France, Portugal, and Israel are just a few of the countries — fiber to the home. Fiber is currently the best technology available for fixed-line broadband in terms of upload and download speeds. Fibre has the best response rates due to its top-of-the-line engineering and physical properties. The U.S., on the other hand, still relies on much slower copper cables which are no match for modern-day needs like fiber high-speed internet connection speeds.
Cable companies are often accused of being greedy, but the truth is that they can’t just keep prices low. The content providers like MSNBC and other channels don’t feel obligated to reduce their costs for cable subscribers; when these networks charge more money per person, we have no choice but to pass it on with a price increase—and all in good faith since customers need high-quality video too!
You may not be happy with how your company is doing, but don’t blame CNBC.
But then a lot of customers are calling in for their bill issues or network problems they’re experiencing because of weather-related congestion and usage-related traffic jams. And many of these are not issues from the cable companies.
Irrespective of what it is, the service you receive on cable networks can be shaky. And so, one of the most prominent cost elements is all that servicing and repairing required after a call to customer support. Sometimes service people have to visit the technical side two or three times before they can fix what needs repairing and maintain expensive networks. All of these adds to and increases the cost of operations and maintaining cable networks.
What if we could create a network with speeds that go up to 10 gigabytes per second? That would be super awesome! It also means fewer people will call in for service, and the ones who do come into your house won’t have muddy boots on. Imagine how much capital expenditure you’ll save by not having to pay so many technicians coming out all the time.
So we can see that there are some underlying factors about the ROI in this equation. There’s not just one way to make a successful investment; you need something with more potential and higher speeds which is why our company has been focusing on fiber optic cables for homes as opposed to cable television networks. With about 20% of the Optimum footprint already fiber to the home, we know that’s where most people want their data. We can sell it better than cable and get you gig speeds much more quickly – all over HFC with DOCSIS! It’s the best technology. And I think we know that our customers will love it too because of how much better their experience is going to be with us for all those reasons – not only so they can enjoy a great product but also since there’s never any need to call and talk about your cable company. The customer response has been incredible. I think we’ll be proven absolutely right relative to the investment cycle going forward.
As the network continues to be upgraded, have you considered a trading multiple for pure-play cable companies that seem fair? This is meant to help in adequately judging the cable companies against each other. Currently, they are all over the place.
In my opinion, the most prominent factor in determining how well a company is operating is penetration level or rates. With lower market share levels, there’s more room for growth and greater potential upside without being as threatened by competitors from all angles. We’re competing majorly with Fios, a competition many cable operators don’t have. The competitive landscape – those you’re competing against – is crucial and plays a significant role.
In the future, it has been predicted that 90% of people’s households will have broadband. Today, most homes with a connection are connected by 60-70%, and only 20%-30% still use DSL or never had a fast internet service provider available to them at all.
The increasing trend of data consumption will continue to be a large part of the service consumers rely on. The penetration levels are only going up as more and more people become interested in broadband providers, which means that if household formation continues at its current rate, there is potential for even higher subscriber numbers than before!
Also, due to the pandemic, people have been regularly upgrading to higher bandwidths (or internet speeds). You’re probably not immune either. I’m sure that you’ve upgraded your speed since then too. I’m also sure there’s one household or family member of yours that has gotten access to a faster internet connection these days than they did before things got bad.
The future is bright for broadband. It will continue to grow and be more accessible as time progresses, requiring only a few minor adjustments along the way; namely better connectivity speeds, which are already in progress. With the internet continuing to advance and develop, more connectivity is needed for computers. A good upload speed will be required in order for households to take full advantage of Zoom’s video conferencing with friends or family members who live far away from each other. The future looks even brighter than ever!
Moving on to something subtly different, what are your thoughts on the recent movement to hold cable companies accountable for misinformation on their network potentially? I’m interested in hearing more about what you think of this concept.
I’ve got my personal views, but I’ll keep them to myself for now. From a business standpoint, our customers require and request certain content from us – some of the names mentioned in this letter are precisely that kind of content. And so we’re providing what they want: an increasing amount of channels like these ones! We don’t force people into watching it if they don’t want to; however, those who do enjoy these kinds will be happy with their options as time goes on.
You’re discussing Fox News, Newsmax T.V., One America Network…
That’s correct. We understand that a lot of names were spoken about in the press, but we want to make sure our customers are happy. If they don’t like this type of content or other channels, then they can disconnect from us and do something skinnier or just stick with Netflix/HBO Max for now. This is not really a battle geared towards companies like ours, so I hope it doesn’t happen anytime soon. Consumers make the choices by themselves and are voting with their feet and wallets today. And if someone in government thinks otherwise, they should speak to the right person about it- not us!
Let’s talk about linear cable’s future for a minute. Will there ever be a time where Altice does not offer linear cable T.V.?
For sure! The story is always the same. Every year, things just seem to get worse for us content creators and distributors. Since we’ve been speaking, since I’ve known you over the last five years – it’s still a constant struggle with price levels on our side of content continuing to rise while eyeballs continue to fall when they’re spread across larger bundles that don’t offer as much value-added services like H.D. or 4K streaming options.
The long-term outlook for cable providers and fiber companies is still strong as broadband continues to be a market they can capitalize on. However, the video solution has two different types of customers, making it difficult to provide an offer that will resonate with both groups.
The equation played out quarter over quarter in public markets remains true – but only if you’re invested in either broadband or one of the firms providing this service (cable company/fiber). The pure video option does have its drawbacks because there are truly 2 different sets of subscribers: those who want high-speed internet at all costs and just need basic television, whether live or streaming; then we also have people who watch everything from Netflix to their favorite sports games online via subscription services like ESPN.
It’s common knowledge that anyone who has been a subscriber for more than three years is profitable because video cable bundles still provide value. However, there are those who have only subscribed for less than three years, and they’re unprofitable to the company.
Cable television has been around for decades, but the landscape is quickly changing. As more people sign up and attach rates on gross adds continue to decline, then how can you protect your long-term customers who are really just enjoying still having a cable bundle? I’m confident that we can find ways to work with our partners in the content world to make a smooth transition from cable T.V. over time. This way, we don’t have as much economic play and can avoid diminishing returns- which means more for us. But in the end, most content will be consumed over broadband. As people abandon cable bundles, everything is going to the OTT world via broadband connections–by definition!
So at this point, I have to ask, is it compulsory that I have to provide bundles too? Out there, there are already many people who do it. In my opinion, it’s only a question of time before cable operators in general start to rethink whether or not they are all meant to be in the video business.
If you’d allow me, I want to ask that question in another way that’s slightly different from the previous one. Do you foresee a time when conventional cable television will be obsolete?
Yes. Definitely! This is the future, and it will be everywhere soon enough. Everything will be IP-based, but that also leads to a whole lot of different choices. What cable is simply doing right now is collecting and organizing all the channels (everything) available on OTT services to make them more accessible to viewers so that they can choose what type of shows (content) they want from lots of different options.
With the ever-changing technological advances, you’re able to aggregate your favorite entertainment apps on a single platform. You can already see this happening with Samsung T.V.s, which have loads of different branded apps, including Netflix and Hulu! Having all these options is fine, but it also means that switching between them gets old quick because every time I want my showtime fix, for example, I’m forced to leave where I currently am in order to go back into T.V. Land or whatever app has what’s coming on next. Once you’ve got all the content ready and aggregated up nicely so they’re looking just like how cable providers bundle on T.V.s, then that interactivity shouldn’t be much different than if someone were doing it for an over-the-air broadcast. It doesn’t matter who does the bundle because it could just be your set-box provider or your smart T.V. provider.
So are you saying this idea that some media executives have, the one where there is a floor just below 50 million subscribers? You’re saying that’s nothing but fantasy?
Absolutely! Because I’m not sure I’ve ever met anyone who’s under 30 and has a cable video connection. Can you name any you know?
That’s right. And it’s only a matter of time. All day long, I’m surprised at my kids, at how they’re able to spend 10 hours a day on their iPhone? And their response is, “Daddy, that’s our life.” They didn’t go out in the woods and build bricks or castles, so now everything is on their phone. People grow up with specific influences around them from media to friends while at school-kids can get away with anything these days because of social media! Technology is evolving rapidly, and the way we consume information has changed drastically in just ten years. The evolution will continue to change what people are used to seeing every day.
It might be excused that this change to streaming is good news. I, however, see a scenario where media companies end up with worse financial results in the new world of streaming than they did during cable’s reign. What do you think about the transition? Is it suitable for the industry?
Listen, I don’t run a media company today. However, there is some truth in what you say, and it makes sense to me too. But when people start getting valued on an OTT subs basis instead of affiliate fees coming from cable operators who are returning less money than before – psychologically, this doesn’t make sense for them.
With the help of a new OTT platform, distributing content may be easier than it is now. However, as people start to become more and more selective in what they watch on T.V. due to all these different streaming options available today, I think we’ll see some traditional companies lose out because viewers will leave for other services with their habits intact. People are going to say it’s not worth paying for these networks. They’ll say, “I don’t need Peacock or CBS All Access.” There will be people who subscribe, but there will also be those that refuse altogether. We shall see what the future holds!
The markets have been crazy for growth lately. But in a couple of years, as all this settles out, there are going to be some winners and losers emerging. Actually, there already are. My household is just the start – people want Netflix or Disney+ because you’ve got children, but do they need Hulu? HBO Max? Discovery+ and Peacock, too? I reckon my kids don’t want that!
I can’t watch my favorite show anymore without the kids yelling at me to change it. They know I enjoy HBO Max and their children’s programming isn’t that great.
I agree with you completely. Our children are going to be the ones holding their wallets in 20 years, and they’re not going to want things to run any other way but how THEY like it!
The big 3 wireless operators in this country have been touting their 5G products as the actual competitors to cable broadband. Do you feel threatened by them, and are they a real threat to your dominance?
I don’t believe that that or that 5G is a problem. I think it’s complimentary, and people want better or faster internet connections inside the home as well as outside of their homes.
You can’t have a wireless connection without some kind of fixed-line. It doesn’t matter if it’s 5G, 10G, or 20G. The fiber optic wire is what ultimately connects you to the World Wide Web, and this guarantees that your data will be transferred in one way or another.
If wireless still has to connect through airwaves to fixed-line, it will be less efficient and robust than a fixed-line connection. Not only does this create problems with speed, but you also have to pay more for the service. You will never get the same quality and speed as a full end-to-end fiber connection, not just because of performance or bandwidth but also due to price. Wireless may seem like a bargain, but it comes with hidden costs that are not worth the savings. If everyone had unlimited data and it was never throttled, we would be in a world of trouble. The wireless infrastructure may not even hold up to the amount that people are using now!
So, you need both – 5G and broadband. With 5G, your driving experience will be safer and more efficient, thanks to the increased data connectivity. When you’re commuting or are out and about, the need for 5G connectivity isn’t as huge. You only really want to be connected when driving with your phone in a car mount. Apple car play will work really well. But as long as you’re driving, you’re not necessarily going to be interacting, right? And you don’t have much time for a commute too. Then the second you step into the office, you switch over to a fixed-line network. Without a doubt, people would subscribe to 5G service; they want better and faster wireless capabilities than what is currently available. However, I do not believe it will replace cable in any way nor be able to compete with it.
Cable companies are becoming more and more diversified with their services, branching out from cable to telehealth, home security systems, and more. I’m curious if you think there’s an unexplored or moderately explored business that could work nicely with the industry?
For many years, large corporations like Google or Apple attacked your living space through apps, services, and more. When you consider wireless providers, they are invading all aspects of a consumer’s life – both inside and outside their homes!
Speaking about the cable companies or fixed-line companies, they’re attacking the home from inside your walls. You start with their T.V. service and move to owning broadband for all of your internet needs. What else can they do?
The world is becoming smart. Even your fridge and coffee machine are talking to you now, with the ability to do telehealth seamlessly from home! Is there anything left that doesn’t? And all of these are dealing with broadband.
And it’s clear that, where we stand today, yes, telehealth is something to be reckoned with and home security as well. I think that it’s time we turn our attention to the smartness of consumer goods. Why are we not also in this space?
This is why I believe that everything converges between technology companies. Companies such as traditional tech, wireless, and fixed-line all have an audience in the home area with different pieces of their pie. But there’s no reason for them not to be able to own more slices of these pies!
What are the best ways for investors to play cable? There is a lot of talk about towers, fiber providers, and operators themselves. But what’s really going on with these investments outside of Altice, which you have vested interest in? Investors should be able to make smart decisions by reading this article because it provides the correct information they will need when it comes time to invest.
You know I have to tell you what my opinion is about this. But there are some things that will stay true for a long time going forward, and one of them is broadband connectivity. It continues to grow in popularity while cable companies continue dominating market share by providing the best possible home internet service available anywhere! This trend should only increase as people want better speeds and newer technology on their phones/laptops, etcetera, so they can enjoy more data-intensive applications like video streaming or online games without dropping out because of slow connection speed.
The same can be said about wireless too. But there’s a significant difference, and it is that with wireless, your phone only lasts about 2-3 years before it’ll need to be replaced again. And this costs around $1k if buying the higher-end models! Secondly, while 4G and 5G or even 3G are different, their differences are not so profound that they warrant significant price improvements. In fact, the competition in wireless has become more competitive than ever before, instead of less competitive.
As a result, we’ve long been supporters of fiber-to-the-home, and we are firm believers that this type of infrastructure will continue to be the best for consumers. We appreciate the attractive economic free cash flow yield, which is predictable and continues growing year over year as well.
The predictability and growth of free cash flow is a unique story. And that’s the phenomenon the cable and fixed-line industries are experiencing today.
Original article on CNBC can be found here.