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Will 2016 Be Charter Communications' Best Year Yet?

By Daniel B. Kline - Jan 17, 2016 at 10:36AM

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The company could get a lot bigger and become one of the industry leaders as long as one thing happens.

Mark 2016 as the year Charter Communications (CHTR 2.56%) officially joins Comcast (CMCSA 1.52%) at the top of the cable and Internet industries.

That is, of course, assuming that the Federal Communications Commission approves the company's deal to merge with Time Warner Cable (NYSE: TWC), and a separate transaction to purchase Bright House. Most analysts think those deals will be approved, but the FCC has been a bit of a wild card recently.

The federal agency gave a thumbs down to Comcast's efforts to buy TWC, but in that case, it would have been a case of the rich getting richer. In the Charter deal, a true rival for Comcast will emerge. That makes it more likely the FCC will approve the deal, setting the table for Charter -- which will take on the name New Charter after the acquisitions are complete -- to have its best year ever.

Source: Charter's Twitter feed. 

Why will 2016 be so great?
In some ways, it costs just as much to serve 5 million cable and Internet customers as it does to serve 10 million. Yes there are incremental increases in personnel needed, but both a small cable company and a large one need billing, customer service, websites, and all sorts of infrastructure.

In getting bigger -- in this case, a lot bigger -- Charter will lower its per-customer cost of doing business.

In addition, by serving more customers, the new cable and Internet giant will be able to amortize its research and development spend over more customers. That should turn out well for the company, and it may lead to innovations that benefit the consumer.

How big is big?
At the end of the third quarter, Comcast had nearly 22.25 million cable customers and just under 23 million broadband users, according to reports from Leichtman Research Group (LRG). Charter had 4.27 million cable and 5.44 million broadband customers.

After the deal is completed, New Charter will add nearly 11 million cable customers from Time Warner Cable, along with just over 13 million Internet subscribers, according to LRG. It will also add about 2.5 million users of one or both services when it buys privately held Bright House.

Add all of that up, and the new version of Charter will service roughly 20 million cable customers and 21 million or so Internet subscribers. That still puts it a tick behind Comcast, but it makes the company either the clear No. 2 or a co-No. 1, depending upon how you look at it.

Bigger is better
Everything hinges on the FCC approving the deals, but there is reason to believe the federal regulatory agency has an interest in creating a strong No. 2 to battle with Comcast. If that happens, Charter goes from a relatively small player to an industry leader.

That status change does not come without challenges. Being a bigger cable player adds certain consumer biases, and it makes the company vulnerable to customer poaching from satellite and niche players. In addition, the entire pay television business faces some market headwinds from the growing pressure on consumers to cut the cord.

But, despite the risks in the cable business, Charter will be becoming an industry leader at a time when broadband growth should be steady. Yes, the company may lose cable customers to cord-cutting, but it should add broadband users (maybe even at a premium price) because you can't replace cable with streaming services without good Internet.

It won't all be rosy, but in the years ahead, it's very clear that being bigger will make it easier for cable and Internet players to adapt to the changing marketplace. Comcast should, at some point this year, ascend to the near-top of the mountain. That will most likely propel it to its best year ever.

Daniel Kline has no position in any stocks mentioned. He wishes it was warmer. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Comcast Corporation Stock Quote
Comcast Corporation
$40.00 (1.52%) $0.60
Charter Communications, Inc. Stock Quote
Charter Communications, Inc.
$478.12 (2.56%) $11.93

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