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Charter Narrows Loss with Internet Gains

Broadband at the Center of Charter’s Growth Strategy   

Charter Communications (Nasdaq:CHTR) posted a loss for the sixth consecutive quarter in 3Q11, but its bottom line showed improvement year over year. The cable provider lost $85m, or .79 a share in 3Q11, compared to $95m, or .84 a share in 3Q10. Charter’s gains were largely attributable to the improved performance of its commercial segment and to additions of residential Internet subscribers.

The cableco reported slight YoY revenue gains in 3Q11: 2.3% on an actual basis and 3% on a pro forma basis after factoring in its recent slew of acquisitions and divestures. Revenue from commercial services, which includes cellular backhaul and communications services for enterprise customers, jumped 19%, or $22m YoY. Charter added 22.9k commercial PSUs (primary service units) in 3Q11 from its small and medium sized business customers.

Charter experienced moderate 7% revenue growth in its residential Internet services during 3Q11; having added more than 185k high speed data subs since 3Q10. For the quarter, residential Internet services accounted for 24% of its top line, or $433m—up $29m from 3Q10. Elsewhere, video revenues slipped 2% YoY in 3Q11 to $902m.

Increasingly, Charter, the fourth largest cable provider in the U.S., is taking an Internet-first approach to marketing, branding and its overall business growth strategy. Ceo Mike Lovett even commented during the 3Q11 earnings call that within the company there is a mantra to think of themselves more as an ISP as opposed to a cable television provider.

The shift to an Internet-centric business focus is borne out through Charter’s strategic imperatives as laid out by Lovett during the call. Lovett stated that the company plans to “to lead with our superior Internet product in our sales, promotion, and branding efforts, to leverage our structural broadband advantage and create new customer relationships.”

Essentially Charter feels that while television is still key to its business, its Internet product is what will win customers and separate itself from the competition in the future. Charter comments that its data speeds are higher than its competitors’ speeds in a vast majority of its service areas and that 95% of its Internet customers have speeds of 12-mbps or higher.

Consistent with its broadband focus, Charter identifies improving Internet penetration in its non-video homes as its top priority looking ahead. Currently, only 10% of the households (700k houses) in Charter's footprint that are not Charter video customers choose it for Internet services. Interestingly, Charter does not emphasize improving the video penetration of these households, again indicating that Internet is its lead product.

In order to stem video subs losses, Charter aims to position its broadband Internet service as an enhancement to its television products. It offers its customers on-demand video content online through charter.net, and it recently announced a new online search and discovery feature that will integrate content from a variety of sources into one directory—including charter.net, Hulu, Netflix and other providers.

Rich DiGeronimo, Charter's svp of product and strategy, commented on the shift in television viewing habits and Charter’s strategy looking ahead. “Consumers are watching streaming video from a variety of content providers on multiple devices at an increasing rate. Charter is embracing this change in landscape. We're starting by expanding our online functionality, but this is just the beginning of our aspiration to deliver the best customer experience with all video content on all devices, everywhere our customers go."

Charter exhibits an awareness of the changing needs of its television customers and a willingness to embrace the trend to streaming and mobile video, but the question remains: how does a cable provider profit from this change? The shift to position itself as the best ISP with the fastest speeds for streaming content online is part of Charter’s strategy, but it still has a long way to go before returning to profitability.

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