On Nov. 19, CNBC host David Faber interviewed Charter Communications (NASDAQ:CHTR) CEO Tom Rutledge at Liberty Media's annual investor meeting. For those not familiar with Charter Communications, it's quietly becoming a force in pay-TV. If the Comcast/Time Warner Cable acquisition goes through, Charter will become the second-largest cable provider by number of subscribers, with Mr. Rutledge boasting of 8.3 million video subscribers.
Investors have noticed: During the last five years, the company has returned investors 346% -- more than four times the return of the S&P 500 during that period. Recently, it was revealed that legendary investor Warren Buffett's company Berkshire Hathaway added to its Charter Communication position. Considering the traditional pay-TV model is under attack, it's good to hear from a shrewd operator in the pay-TV space.
Anybody who sells their content over the top and also expects to continue to exist inside a bundle of services sold to cable or satellite providers I think is really deluding themselves... Because if the product is available over the top or elsewhere there's no reason to pay for it...from an operator's perspective.
Mr. Rutledge went on to mention that those who sell their content are actually "sewing their own seeds of destruction," while singling out Netflix as an OTT service before generalizing to include all OTT services. Initially referring to cable and pay-TV as "more than just distribution," but rather "an ecosystem of content providers," Mr. Rutledge fiercely defended pay-TV's value proposition. However, the comment appears to be a not-too veiled threat aimed at channels like Hulu, CBS, and Time Warner's HBO, which have gone over-the-top or are planning to.
Does he have the ability to enforce this warning? It will be interesting to see.
[Title II] It's an interesting solution in search of a problem. I've been managing ISPs for... since when they began, since broadband began, literally was there at the beginning and I've never had anyone come to me and ask for a fast lane. I've never had anyone propose a deal like that, of any type. So, we're worried about something that theoretically could happen but has never happened... There are reasonable ways to solve the problem; Title II is not a reasonable way.
Later Mr. Rutledge went on to compare Title II to using a sledgehammer to drive in a nail, but reiterated he's in fundamental support of Net Neutrality. And although I'm sure he's being honest in his assertion that nobody's ever asked for a fast lane, many critics and Net Neutrality advocates argue that Netflix's paid-peering deal with Comcast and Verizon essentially amounts to a fast lane. After paying for the agreement, Netflix's speed was boosted by 65%.
On odds for Comcast and Time Warner's Merger to be approved by FCC
I have no reason to think that's not the right number [in response to Liberty Media Chairman John Malone's estimate of 80%]. I mean there's no person I've talked to that has a point of view that would change my attitude about that. It doesn't really change the competitive landscape and the deal ought to be approved. So our expectation is it will be approved.
The interesting assertion here is it doesn't change the competitive landscape -- because he's right. Essentially, due to pay-TV providers working with local governments and each other to carve out geographies, Time Warner Cable and Comcast never competed with each other before the merger. Therefore, the argument for not allowing them to merge is mostly moot.
The complicated relationship between cable providers -- that use government to limit consumer choice, but then complain when rules are drafted to protect consumers -- is clearly on display here. The key takeaway from Mr. Rutledge's comments is the federal government shouldn't intervene to prevent a monopoly, because the government already allows both companies to operate like monopolies.
The changing landscape
Overall, Mr. Rutledge's company is performing well. However, the industry is one in the midst of change. With subscriber losses accelerating in video, telecommunication firms have been able to use broadband Internet growth and video rate increases to offset those losses. Others have taken to acquisitions as a competitive tactic. One thing's for sure... investors should watch how Mr. Rutledge and Charter Communications handle these big issues moving forward.