Contrary to popular belief, cable is not a starving dinosaur of a service clutching to survival with its last legs -- in fact, many of them are doing very well.
In this week's episode of Industry Focus: Consumer Goods, Motley Fool analyst Sean O'Reilly and Fool contributor Daniel Kline talk about how cable companies are facing up to the challenge of shifting consumer expectations. Then, a look at what might be the sexiest thing we've ever covered, spectrum -- what it is, how it affects consumers, and what background you need to know for the soon-upcoming auction.
A full transcript follows the video.
This podcast was recorded on March 29, 2016.
Sean O'Reilly: We're talking cord cutting and spectrum actions on this consumer goods edition of Industry Focus.
Greetings, Fools! Sean O'Reilly here at Fool headquarters in Alexandria, Virginia. It is Tuesday, March 29th, 2016, and joining me via Skype is Motley Fool contributor, Dan Kline. Mr. Kline, how are you?
Daniel Kline: I'm doing great, how are you, Sean?
O'Reilly: Not too shabby. It's nice to hear your voice, I'm used to just editing your content and putting it out for all our readers on Fool.com.
Kline: I appreciate the editing help.
O'Reilly: I do feel the need to complement you -- you're one of my favorite people to edit, because it's always so clean and your insights are always really good. So, thank you for joining me on the show.
Kline: I think I'm also one of our sillier contributors, sometimes, so that might help as well. (laughs)
O'Reilly: There's a reason we have you around. How's life in Connecticut, before we dive right in here?
Kline: Well, it's raining, and has been for the last two days. But I think, perhaps, we're only going to get a little bit of snow over the weekend. So, it looks like--
Kline: --the winter has ended.
O'Reilly: Alright, I'm not going to complain about the crazy winds here in the nation's capital right now. So, diving right in, since I have you on the line, for those of our listeners who do not know, not only is Dan Kline a prolific writer about all things cord cutter-y or cable-y, I don't even know what we want to call it right now, but he also regularly writes about what's going on in the wireless industry with AT&T (NYSE:T) and Verizon (NYSE:VZ) and T-Mobile (NASDAQ:TMUS) and all that stuff. I don't think I've done a really good -- I'm excited for their second half, but I don't think I've done a good spectrum show since I did the tech show with Nathan Hamilton over a year ago, so I'm really excited for that.
Kline: It's hard to make spectrum interesting.
O'Reilly: We're going to try, darn it! So, before we get to that, I wanted to get your thoughts on what's going on in cable lately. Can you give our listeners a quick update on what you see going on with the trend toward content being king and cord cutting and all that?
Kline: Sure. For a while, everyone just assumed the sky was falling. We saw it in the music industry. Once digital started, that was the end of the traditional model. So, it made sense. You could get Netflix, and then everybody is going to cut the cord. The reality is, though, it didn't really happen. In 2013, you had about 100,000 cord cutters. 2014, you had 150,000. And then last year, where it looked like the numbers were going to explode based on the first three quarters, they actually came back to Earth and finish the year at only about 385,000.
O'Reilly: And this is out of how many tens of millions? I mean, this is nothing.
Kline: It's out of 94 million. It's a trickle. Yes, it's happening, but it's not necessarily going to be widespread, because on some level, sure, Netflix and Hulu offer good programming. But they don't offer everything. And I've written lots of articles on all these clever ways using HD antennas, you can still get football and all the network stuff. But do you want to switch between 17 different devices? I like flipping around. I'm a Frontier customer, whichever I've written about, and they've actually made it easier in the other direction. They embed Netflix in their cable platform.
So, cord cutting could happen. There's cost incentive for it. But it's not as big as it was, and for all these companies, from an investor point of view, any losses they have in customers from a cable side, they're more than making up on the broadband side, because if you're going to get Netflix, you're not going to go with a cheap Internet connection. You're going to go with high quality. And there were about 3.1 million broadband gains last year.
O'Reilly: That's exactly right. I recently wrote a piece, I think it ran on March 20th, and I titled it "Your Best Bet to Profit from the Death of Cable," and it was actually about Starz and how I like the valuation compared to Scripps or whatever, it's just slightly cheaper. But, I start off the first third of this piece -- actually, so everybody knows, I actually don't think Comcast is up the creek without a paddle. I think Comcast, Cablevision, and Charter are going to be fine. Then I just talk about what's going on with Comcast in southern D.C. here. I do bare bones, just because I'm at the office a lot, writing writing everything and our needs are very small. But, even like the basic Internet package, the broadband that you're referring to, with no cable channels whatsoever, is $40. That's for 3 megabits per second. And, just $10 more gets you 10. It's like, "Okay, fine, take my money."
Kline: Yeah, and they're being very clever. I'm a little bit older than you, I think, so my generation -- I'm 42 -- we've always had cable. So, the odds that we're going to get rid of it if, financially, we don't have to, are relatively small. For some of the people in their twenties and thirties, well, you've never had cable, you've stolen Mom and Dad's HBO password--
O'Reilly: How'd you know that? I'm just kidding. (laughs)
Kline: (laughs) You're somewhat used to doing without. And I think that's where the tipping point is going to be on cord cutting. As cable, can I subtly make it attractive that, hey, maybe for $70, not only are you going to get a great broadband connection, but you're going to get ESPN and 35, 40 top channels, Spike, TBS, TNT, some of that kind of stuff, and ease you into cable. And then, when you have kids, when the Millennials grow up -- and I know you're a little older than that -- the kids will want Disney channel, and then all of the sudden, they'll be back in to this 130-channel universe. And I think that's just as likely to happen as the idea that we're all going to go, "Well, we can spend $30 instead of $150 and just have streaming services."
O'Reilly: Right. I do think it has to be said that the days of the 300, 400-channel cable packages are probably over.
Kline: Well, the economics on some of those channels, which I've written about, just isn't going to make sense. If you're not getting paid a carriage fee, and 30,000 people are watching VH1 Soul at any given point, that's going to disappear. I think VH1 Soul is real, I may have just made that up, but I think it's an actual channel.
O'Reilly: ESPN 8, The Ocho. (laughs)
Kline: Yeah! And like, you know, ESPN maybe could pull it off, because all of their channels are actually -
O'Reilly: Right, they're the one.
Kline: There's a couple hundred thousand people watching whatever they call ESPN Classic at any given time. But there are some channels that essentially have no viewers that are being subsidized, and that's going to go away. But who's going to miss it if Palladia disappeared? Okay, maybe occasionally you stop on a concert, but for the most part, you're not going to notice.
O'Reilly: Awesome. While we're talking cable, I also wanted to get your thoughts on a little bit of M&A and what's going on at Charter and Time Warner Cable. Looks like it's been approved. What else could happen?
Kline: It always seemed like the FCC was going to say yes, and now it seems like they're going to say yes with the expected conditions. You have to build some capacity for some poor neighborhood, you have to hold prices in certain areas. Now, as we've seen in the cable space, those conditions are absolutely unenforceable, and they've been ignored by companies. So, this isn't a merger where they're holding a big hammer. They could either say yes or no, and once they say yes, I'm not so sure that last rural mile in Vermont is going to get the service they've been promised.
But, what's interesting is, once Time Warner and Bright House are off the board, it becomes very tight in that space, and really there's only a couple of companies out there. I mean, the big prize is Dish (NASDAQ:DISH). The problem is, Dish is run by Charlie Ergen, who doesn't really want to sell his company. He's not likely to become part of something else. And the rumored play there has always been T-Mobile, but the two companies have struggled when it comes to valuation.
O'Reilly: Got it, cool. Before we move on, I wanted to point out to our listeners that April is financial literacy month. In that spirit, we are giving away 10 books to 10 lucky winners. These books include favorite financial picks from David Gardner, Morgan Housel, and many more. To enter to win, just go to podcast.fool.com and click on the yellow Super Podcast link at the top of the page. Once again, that is podcast.fool.com.
Alright, so, Mr. Kline, we're moving on to the coolest, most exciting, I'm bouncing off the walls here, cannot wait to talk about this--
Kline: (laughs) I'm wearing my Go Spectrum Auction t-shirt.
O'Reilly: You are not! I'm going to need a photo of this.
Kline: I am not.
O'Reilly: But, we're talking spectrum. And really quick, before we get into what's going on with AT&T, Verizon, and T-Mobile, give us a little bit of background on what spectrum is and the state of the wireless industry right now.
Kline: So, think of spectrum as the highway for the wireless business. Data is your tractor trailer, your three-tier car carrier. So, the more data that moves, the more spectrum you need. So, to build a good network, you need to keep buying spectrum, you need to use spectrum more effectively. And in the past, the reason Verizon and AT&T have led the way is they've owned the most spectrum. But we're heading into another major spectrum auction, which give some other people chances to either enter the market or catch up.
O'Reilly: Got it. So, what's going on in the industry right now with AT&T, Verizon, and T-Mobile? I recently defected from a carrier who shall remain nameless for T-Mobile. This happened about 6 months ago. Then I brought my parents over. Now we're all on the same plan with T-Mobile. And I have no regrets. So, what's going on?
Kline: I've written pretty extensively that I left Sprint (NYSE:S) for T-Mobile. And same thing, no regrets. Because, the reality is, if you look at the two major surveys, the RootMetrics and the OpenSignal survey, on RootMetrics, which is probably the more widely reported of the two, AT&T and Verizon are still winning, but T-Mobile, and to a lesser extent Sprint, are making some gains. And if you look at it with an LTE with the latest iPhone, you're getting a much better service on T-Mobile than you did only a year ago. So, yes, the top is still better. But in some ways, you're talking really good versus--
O'Reilly: Versus totally acceptable, in most situations.
Kline: Yeah. You're talking the difference between the Patriots and the Broncos. Both teams are very good, one wins sometimes. So, sure, if you're a traveling salesman who's going to be in all 50 states, then Verizon or AT&T is probably the way to go. If you live in a relatively populated area and only travel to relatively populated areas, T-Mobile is a lot cheaper, and you can see in their numbers that people are starting to get it. And sure, better matters, but it doesn't matter that much.
O'Reilly: Right. I quickly realized that. I spend 99% of my time in the Washington D.C. metro area. The one time that I noticed a difference with my cell signal was when I was in The Motley Fool's garage on the very bottom level. I still had signal with Verizon, but I didn't with T-Mobile. But who -- you know what I mean?
Kline: Yeah. There's always going to be coverage holes. But T-Mobile is also good about finding ways to help with that. They have their signal boosters, which they provide for free, so if maybe they have great coverage in your neighborhood but not your house, you can get one of those. And, with the wifi calling option -- we're in a T-Mobile hole in New Hampshire. We have zero coverage. And they don't pretend, it shows up in their maps as zero coverage. But it doesn't matter. In my house, it's on wifi. I can check my email, I can make a phone call, it's really not a problem.
O'Reilly: Got it. Before we move on to talk about the sexiest thing out there, spectrum, which carriers, in your opinion, have the best deal? From a consumer angle.
Kline: I actually wrote about this a few weeks ago--
O'Reilly: What was the title of the article? Do you remember?
Kline: I don't remember. Probably "Which Wireless Carrier Has the Best Deal." (laughs) It's something along those lines. And the answer is, it's usually T-Mobile and Sprint. AT&T and Verizon are not price competitive. Everybody is about the same for a phone except, sometimes, somebody's running a two-for-one or a deal on a phone, or if you're willing to go to an older phone or a refurb. But, in terms of service plans, I think T-Mobile is the best deal because in addition to being cheaper than AT&T and Verizon, they have no overages. So, even if you're not opting for unlimited, you could get a relatively cheap 1 gig or 3 gig plan, and if you run out of data, you're not being punished for it. And with the free video streaming through Binge On and the free audio streaming, you can watch your YouTube videos and listen to Pandora or whatever else you like to stream, and not be penalized. Sprint is close, but it doesn't offer those same benefits.
O'Reilly: Awesome. I found the article, for our listeners who are curious, it is "AT&T Versus Verizon: Which Offers Consumers A Better Wireless Deal?" You were close.
Kline: It was pretty close.
O'Reilly: Yeah, and that ran on March 5th, 2016. Alright, so, from what I remember, and this is the cobwebs of my mind right now, there was one player, I think it was Dish Network, that was buying spectrum at auctions just to have it as an asset, a speculative holding or something?
Kline: During the last auction, Dish -- and, I won't get into the mechanics of it -- used a bunch of subsidiaries to buy a whole bunch of spectrum.
O'Reilly: That's right.
Kline: They had to give some of it back, because it was determined that they were improperly taking discounts. But they still ended up with quite a bit. And there's a couple of plays here. In theory, Dish could launch a wireless service. That's not very likely. It would be a great asset if Dish and T-Mobile were to join forces, even if that was just a business relationship, but not an actual merger or acquisition. Or, Dish could partner up with anyone else in the space, and bring a pretty big asset to the table. So, obviously, Dish isn't going to work with AT&T, because they own DirecTV, but it would certainly be enticing to Verizon, it would be enticing to Sprint. And just resale value, they'll make their money back. It's a smart play.
O'Reilly: Yeah, and that's what I got from conversation back then. So, why is this auction different this time?
Kline: This time, the FCC has looked at and said, "How can we open up some auction?" So, what they did is they went to television companies. Do you remember in the old days, in your local market, you'd have channel 39 and it would be a clown in the afternoon and Brady Bunch reruns at 4 o'clock?
O'Reilly: Yeah, it's like filler.
Kline: Yeah. Those stations still exist, they're still on in cable, and as part of this auction, those channels have the opportunity to sell their spectrum. They could sell their spectrum and just go out of business. And in some local markets, those stations no longer make economic sense.
Kline: Or, they could sell their spectrum, and what's going to happen afterwards is, all the spectrum that's sold versus all that's left, the technology is better, so they can pack channels into a smaller group of spectrum. So, you might have a channel that was in the VHF area move to UHF, which would matter if you had an old-school TV with a dial. But given the fact that most of these aren't over-the-air for the most part anyway, it's not really going to affect your viewing experience. So, it's kind of a one-time reverse auction, where they can take a really valuable asset and turn it into some cash.
O'Reilly: Got it, OK. Now, really big questions on the tip of my tongue: why the heck is Comcast in this thing? (laughs)
Kline: (laughs) Because Comcast is probably going to look at, much like Cablevision did, is offering wireless phone service that's primarily wifi-based--
O'Reilly: Oh, as part of the cable packages and all that? Because they offer a landline, right?
Kline: Yeah, they do. But, if they offer a primarily wifi-based phone, and Cablevision does it really just regionally, when they have a concentration. If Cablevision owns spectrum, they could either leverage that spectrum in a partnership with one of the carriers. So, they could say, "Hey, why don't you use our spectrum, but we want a good rate when we need to use your spectrum?" Or, it's just a way where they can say, "Jeez, we have great coverage in these markets, but we have nothing in Chicago, but hey, we just bought some spectrum in Chicago, we'll offer traditional service to supplement our wifi in that market."
O'Reilly: Got it, cool. Alright, Mr. Kline, that is it for us. I cannot thank you enough for joining us on the air today.
Kline: Thank you for having me.
O'Reilly: Have a good one, stay warm.
If you're a loyal listener and have questions or comments, we would love to hear from you, just email us at IndustryFocus@Fool.com. Again, that's IndustryFocus@Fool.com. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear on this program. For Dan Kline, I am Sean O'Reilly, thanks for listening and Fool on!