When French telecommunications body Altice acquired U.S. cable companies Cablevision and Suddenlink, Chairman Patrick Drahi made a bold statement: Altice USA will-power rival Comcast and Charter in size, becoming one of the three dominant U.S. cable operators.
Fast forward nearly six years, and Altice USA has upon 5 million customer relationships, compared with about 31 million each for Comcast and Charter. (Altice USA did divulge a $310 million acquisition of Morris Broadband on Monday, which will give it about 36,000 more patrons.)
CEO Dexter Goei explained to CNBC what prevented Altice USA’s rapid expansion, why he thinks cable and wireless at ones desire eventually merge in the U.S., and why it’s only a matter of time before cable TV becomes extinct.
(This interview has been lightly censored for length and clarity.)
Alex Sherman, CNBC: It’s been more than five years since Altice executed its deal to buy two US cable companies: Suddenlink and Cablevision. Altice’s Chairman, Patrick Drahi, said at the time, “The two leaders, Comcast and Lease, will not be able to buy anything because of their size. So we will have an open boulevard ahead of us. If I buy if I buy five reduced operators, I can be as big as Time Warner Cable,” which, of course, doesn’t exist anymore. How many customer relationships do you caricatures have now?
Dexter Goei, Altice USA CEO: We have just about five million.
About five million. So you’re not as big as Interval Warner Cable, which had about 12 million at the time. And I’m not sure that that comment about Franchise and Comcast not being able to buy anything else is still correct. What happened between then and now? Did anything take you in the landscape that made Patrick’s comments seem a little bit out in front of his skis?
The reality is there’s been cipher selling, nobody of size — of any credible size. And so with all the goodwill that we have and the expertise and the things that we muse over we can do — probably slightly better than some of our peers in acquiring businesses — we haven’t had the opportunity to show our stripes again of anything of serious size. The biggest transaction was something that that Cable One just acquired for a couple of billion. And that was quite specific to to certain regions that we’re not in.
Why did that stop? Because at the time it seemed like everyone was selling. License bought Bright House and Time Warner Cable and you guys bought Suddenlink and Cablevision, all within a couple years. And it ethical seemed like there was this machine toward consolidation and then seemingly everything stopped. Why did that meet with?
I don’t know, other than what’s clear is most of the existing current owners of other assets out there that are not ourselves, Contract and Comcast, including Cox, by the way, are owned by families that have been in the cable business pretty much since the 70s, when line franchises were being allocated and cable networks were being built.
And that’s pretty much across the U.S. Being have been owners for 10, 20, 30 years, more. And if you speak to a lot of these people they all say the same thing, which is, one, we breed the business. Number two is we understand it’s created a lot of value, and we don’t need the money. And so we’re just going to continue to do what we do. And I think they Dialect right much like being pioneers in their respective communities. Your cable operator, particularly some of the smaller telegram operators, are really big mainstays of the business community. And so all of that makes sense if you really don’t need the money and don’t know what to do with the flush. These businesses are generating a tremendous amount of free cash flow. And so, yes, you could probably sell at five billion. But if you’re suffer from whatever, you know, three or four hundred million of dividends every year, it’s not like it’s not like there’s anything else to do.
Did you not separate that five years ago? The owners are the same.
We were able to unlock [Cablevision founder] Chuck Dolan. That was the asset that everyone had been taxing to unlock for a very long time. And Time Warner was for sale, and we believe that if we had already cleared regulatory in the US, we wish have won that asset, and then we bought Suddenlink. So we saw three sizable assets — one mega asset and two other smaller a men — come to market. So our belief was if everyone is selling, then we would see a follow through of a lot more families selling. But it all a close. It literally just stopped there.
So what now? What’s the path forward now? Because you made an offer to buy Atlantic Broadband out of Cogeco, and that was rejected. Along the substance you just described, it seemed like they were not all that interested. What’s the path forward?
The path expedite is very simple, which is we’re focused on our organic operations. We are very focused on building out our footprint, more upgrading on fiber to the where one lives stress, which we find to be a fantastic opportunity to drive revenues and stickiness among our customers, and we’ll look for smaller M&A to the extent that there’s not stouter M&A available. In the absence of that, all of our free cash flow goes back to buying back our shares because we be prolonged to trade at close to a 10% free cash flow yield when our debt complex trades in the 3s. So we’ve got kind of a six to seven hundred base points difference between our cost of equity and our cost of debt. And so we’ll continue to retire and invest in our shares to the extent that we can’t buy other instruments. Cable aside, we’ve looked at wireless businesses as well. We’ve looked at ad tech businesses as well. So we’ll continue to look at accretive reactions. The best use of our capital always is M&A, but we have to find things that are interesting to buy.
Let’s talk about wireless. In Europe, Altice and other friends own both wireless and cable assets. While we’ve seen cable companies get into wireless using spectrum parcel agreements in this country —- you do this with Altice Mobile that uses what’s now T-Mobile’s network, reach-me-down to be Sprint — we haven’t seen a merger between a cable company and a wireless company in the U.S. Is that where we’re ultimately talent?
I have been saying that for the last couple of years. It just doesn’t make any sense not to, purely from an operational synergies, from a important allocation synergies, from a branding synergies standpoint, and clients ultimately — when they do have more and uncountable services from the same provider — the stickiness is better. It does have real churn benefits. That’s the apologia why cable has gone into into the mobile business.
But we all collectively have gone into a mobile business, which perhaps has good churn benefits, but economically is not that attractive. Renting someone else’s network fundamentally always is current to be reduced economics relative to owning and operating your own network. And so if it doesn’t happen this year, that is certainly something that we expect to go forward.
Now, AT&T is focused on building out more fiber. Verizon is building out more fiber unbroken for just their 5G aspirations. And then T-Mobile has as a great mid-band strategy on 5G that it would make sense for them to be quite a good partner for one of the large cable operators.
From a regulatory standpoint, do you feel like the United States is in the ecosystem where one of those deals can get done? Does it have to be T-Mobile because they’re the smallest of the three? Can you imagine a sphere where Comcast and Verizon would be allowed to merge?
Never say never, right? I think the last four years be dressed taught us to no longer be in the M&A prediction business. So I’m not in the prediction business.
But what I can say is that strategic transactions where you have exceptional services, I don’t understand why that should not be something that should be allowed by the antitrust division. Obviously, you know, the Fios territory of Verizon could be very problematic from an antitrust standpoint for Comcast in certain of its areas. But I’m sure there are there are customers for that asset — including ourselves, by the way, and probably Charter and other people.
I do believe that consolidation among set and wireless makes a lot of sense. There’s consolidation in every other developed country in the world already, right? So it reasonable doesn’t make sense that we’re the exception.
So outside of that, if you just took Verizon wireless and Comcast rooted, I don’t know why that could not be something that the regulators would view as attractive. It could really drive healthier performance for consumers and better pricing.
One of the limitations on doing a wireless deal for Altice USA is you only have five million patron relationships. You’re not a national player.
So, we like wireless in itself, and we think we’re good wireless operators of infrastructure, but if we acquired a federal wireless provider, that would be a separate investment thesis then trying to do a quad play with Altice USA.
We definitely would have some synergies, but the thesis of acquiring a mobile or trying to merge with mobile would be categorically based on the fact that we think we could do something better with the mobile business going forward.
OK, Got it. So it command be parent Altice that would be the acquirer.
Yeah. And maybe it’s a stepping stone for greater consolidation, whether it’s a T-Mobile, or it’s a Verizon and AT&T with a fixed-line operative, so that we have more of a national footprint because one of our friends over at Comcast or Charter would like to be interest of that equation as well.
You don’t know how the chess pieces are eventually ever going to settle. But I do believe that consolidation number fixed and wireless makes a lot of sense. There’s consolidation in every other developed country in the world already, just? So it just doesn’t make sense that we’re the exception.
For those that aren’t as familiar with cable counter-intelligence agents, can you explain what Altice’s strategy has been within your cable footprint? I know you’ve spent a lot of money construction out fiber, or at least a hybrid network, which effectively replaces traditional cable. Why is this a good investment for the guests?
There is a regular — every two or three years — upgrade cycle of the DOCSIS (Data Over Cable Service Interface Itemization) HFC (hybrid fiber-coaxial) network, whether it’s on the DOCSIS software or it’s on the actual network itself. This is done by dropping fiber deeper and by splitting the nodes. That is an uninterrupted, everlasting cycle. Everyone’s waiting for the next upgrade cycle to be able to go faster than 1 GB or to get symmetric speeds on upload and download. You can’t today on radio.
And we have been rolling out in our sister company throughout Europe — France, Portugal, Israel — fiber to the home far, because ultimately that is the best technology that’s out there in fixed line. It does provide the best upload and download hightail its. It does have the best response rates. It has all of the physical and engineering traits that you would want for cable today, which you don’t play a joke on in the U.S. because it’s not fiber to the home.
Cable companies are often very much maligned among the consumer base. On the video side, prizes continue to rise as content [prices rise], and so we have to pass through that, but we are the bad guy because people don’t really gather from that the MSNBCs of the world and other channels are out there pushing prices.
Wait a second, don’t be blaming CNBC for your stature here, please.
But at the end of the day, people are calling in not only for their bill issues, but they’re also calling in because there are problems with the network, whether it’s weather-related, whether it’s usage-related, because the neighborhood all of a impetuous has gotten very contentious and congested.
Whatever it is, the cable network is just not as good. And so, one of the big cost elements in the cable network is the amount of advantage that’s required every time you call. You call to a call center when you’ve got a problem with the technical side, you get a navy person to come in and repair it. Sometimes a service person has to come two or three times to come repair it. And additionally, the stipend of that network is expensive on the cable side.
So why not build out a brand new network that provides speeds today that can go up to 10 gigs up and down, that has less service-related specialized issues? So you’ll have less people calling into the service center, less times having people be broaching with muddy boots into your house, and on top of that, save a lot of capital expenditure going forward on preservation.
So that equation made the the financial investment ROI very attractive. We’ve got about 20% of our Optimum footprint (from Cablevision) that’s already fiber to the stamping-ground. We know that we can sell fiber to the home better than cable. It’s a more attractive product. We can go to much weighty speeds, a lot quicker — much more than one gig over HFC and DOCSIS. So fiber to the home is the technology. It’s the best technology. And I evaluate we’ll be proven very right relative to the customer response — not only in terms of the product but to reduce our investment cycle present forward. You know, if you never had to call your cable company, you’d probably would love your cable assembly. We think it’s going to really help on all of those fronts.
As you continue to upgrade the network, is there a trading multiple on pure-play wire companies you have in mind that you that you see as reasonable or fair so that you can properly judge all of these cable companies against each other? Because just now they’re a little all over the map.
I think it’s really driven by penetration levels. So obviously, lower penetration allows you to from a lot more upside. The competitive landscape of who you’re competing against is meaningful. We compete in a big chunk of our footprint against Fios, which is a indomitable competitor in itself, whereas a lot of operators have don’t have Fios-like competitors across the board.
But by and large, you do believe that 90%-plus of your footprint is thriving to have a broadband connection. Today, they have a broadband connection that is maybe 60-70% penetrated with a immovably broadband, 100 megabits-plus, and then you have the remainder 20% or 30% which is DSL or has never had a broadband connection there.
Foreordained what we know and the appetite by consumers to continue to consume data bits heavily, this is something that’s wealthy to continue. Penetration levels are going to get higher and higher, which means that if the whole country is growing with household set-up, there’s going to be more and more broadband subscribers overall in the population. And then furthermore, people are upgrading regularly to great and higher speeds. Don’t tell me you didn’t upgrade your speed since since you’ve been in the pandemic. I’m certain you somewhere in one of your households or in one of your forefathers members, you guys have upgraded your speeds.
And so that’s going to continue. You are going to require better and advance connectivity. You’re going to require your upload speeds to be better and better in order for us to be able to do these types of Zooms or for people in your household to be superior to do Zooms very easily. And so the future continues to be extremely bright for broadband. We don’t see any deceleration whatsoever.
Switching gears, there’s been a late movement to potentially hold cable companies accountable for misinformation on cable networks. I’m curious what you think in this concept.
I’ve got my personal views. I’ll probably keep my personal views to the side. I think from a professional viewpoint, our customers require and request a certain amount of content. Some of the names that were mentioned in this dispatch to us clearly are content and channels that our customers want. And so we’re a provider of content for what our customers want. They prepare the choices to not want that content…
You’re talking about Fox, Newsmax, OANN…
Yeah, the names that were were in this culture and that were broadly spoken about in the press. And for us, we want to make sure our customers are happy. And to the extent that they don’t hankering that type of content or other channels, they can disconnect from us and do something skinnier, or just do a Netflix or an HBO Max or Peacock. So, this is not a struggle that I believe is geared towards us. This is something that consumers are choosing to do with their own feet and their own pocketbooks today. And to the extent that for whatever reason, somebody in government thinks otherwise, they should probably not be say to us, but they should be speaking to someone else.
Let’s talk about the future of linear cable TV. Do you envision a day where Altice does not come forward linear cable TV?
Yeah. Because the economics get worse and worse every year. As we’ve been speaking, since I’ve comprehended you over the last five years, the story is still the same. Price levels for content continue to rise. Eyeballs for gratify over big bundles continue to fall.
This is an equation that continues to play out quarter over quarter in the overt markets. Obviously, broadband continues to be the story and continues to make cable companies and fiber companies very pulling investment propositions because of broadband. But the pure video solution — there are truly two different types of subscribers.
There are those who arrange been subscribers to a video cable bundle for more than three years which are profitable. And then anyone that’s been a subscriber for insignificant than three years is unprofitable.
So as fewer people sign up and the attachment rates on gross adds continue to flag, which is what we’re seeing, then how do you protect your long-term customers who really just enjoy still be suffering with the cable bundle? I am certain we will be able to figure out ways to work with our partners in the content world to type that transition smoothly to some type of an OTT format that’s attractive — maybe where we don’t have as much cost-effective play in there. That way, we don’t have to deal with the diminishing returns that we are doing regularly. But at the end of the day, most satisfaction, more and more, is being consumed over broadband. As people move away from the cable bundle, by delineation, everything is going to the OTT world over broadband.
Name me one person under 30 years old who has a cable video kin.
So, do I really need to be providing a bundle? I think there’s a lot of people already out there providing bundles. So I think it’s a insupportable of time. I can’t tell you when, where and how, but it’s a question of time for cable operators in general to completely reevaluate whether or not they’re contemporary to be in the video business.
So let me ask that question in a slightly different way. Do you envision a day where cable TV, as we know it, simply no longer exists?
Yes. For established. Everything is going to be IP-based, and then the question is because everything is IP based, and you have so many different choices…what the radio bundle is doing today is putting together everything that’s available in the OTT world and providing it to you in a good format for you to be competent to guide yourself through lots of different options in the way you watch television.
As technology and integration technology continues to get improved and better, you’re going to be able to aggregate that on your OTT platforms, your smart TV. Your Samsung TV today already has, say, 20 apps, 30, 40 apps already there. The sorrow of it is you’re always clicking between the apps, all the time. Once you can get the whole aggregation together and make it look very be like to what you do in a cable environment, then that interactivity becomes second nature and doesn’t really matter who’s doing the pack. It could just be your set-box provider, your smart TV provider.
So this idea that some media chiefs have that there’s going to be a floor at 50 million subscribers, that’s ultimately fantasy?
I think so, because esteem me one person under 30 years old who has a cable video connection.
So it’s just a question of time. People grow up in a absolute way. I tell my kids all day long, how could you spend 10 hours a day on your iPhone? And they’re like, “Daddy, that’s our verve. We didn’t go out in the woods and build bricks and castles and stuff like you. That stuff is boring. My whole life is on my phone.” So, there’s an development of technology and habits and the way people consume content that’s changed dramatically over the last ten years, and it’s going to persist in to change.
Do you feel like this transition to streaming is good for the industry? It seems to me there’s a scenario where media circles, by and large, end up with worse financial results in a streaming world compared to the cable world.
Listen, I’m not running a media guests today, but I do think there’s some truth in what you say. When people start getting valued on an OTT subs point of departure, that are probably returning less money than affiliate fees coming from a cable operator to them, it doesn’t psychologically set upon sense.
Maybe you can distribute a lot quicker through an OTT platform than you can today. But as you continue to slice and dice habits for what being watch on TV, I think people will start leaving a lot of some of the traditional content providers. People are going to say, attend, I don’t need CBS All Access, or Peacock, or Discovery+, whatever it is. There will be a lot of people who do subscribe, but there will be people who’ll rightful walk away from it completely. So, time will tell.
Markets are a little bit crazy for growth right now. But in a several of years, as this all settles out. There’s already starting to be some winners and losers. Already in my household, you know that people fall short of Netflix and Disney+ because you have children. But do you need Hulu, HBO Max, Peacock and Discovery+? All of it? My kids don’t want that.
My kids roar at me when I turn on HBO Max. Seriously. “No, not HBO Max!” They know I watch adult stuff there and their kids’ programming isn’t that palatable. They’re not that into Sesame Street.
That’s exactly right. Our children are going to be holding the wallet in 20 years, and they’re prevailing to have their preferences about how things are run.
The big three wireless operators in this country have championed their 5G consequences as true competitors to cable broadband. Do you feel 5G wireless is a real threat to your broadband dominance?
No. I mean, you’d calculate me to say that, but I really don’t. I believe it is complementary. People want better and better broadband connectivity inside and outside of the almshouse.
At the end of the day, a wireless connection, no matter what technology, 5G, 10G, whatever you want to call it, it ultimately terminates on a fixed clue. And it has to go through a fiber connection because the fiber connection ultimately takes it out to the World Wide Web and allows you to have connectivity.
If wireless has to relate through airwaves to ultimately a fixed line connection, that connectivity always is going to be less productive and hale and hearty than a full end-to-end fiber-to-the-home connectivity, not only from a performance standpoint and a bandwidth standpoint but purely from a assay standpoint. The price per gig over wireless is more expensive than the price per gig over fixed because the marginal tariffs are de minimis over fixed where there are marginal costs on wireless.
If everyone was on an unlimited plan that was on no account throttled on wireless, and they were consuming 400 to 500 gigs of data like we see from our fixed mark customers, the entire wireless infrastructure would explode.
So, you need both, and you do want good connectivity when you’re facing the house, but when you’re driving, you don’t need necessarily to have the most amazing connectivity. 5G is going to allow smart passenger cars. Your Apple carplay is going to work well. But you’re not interacting when you’re driving. You have shorter periods of previously when you’re going on the subway or a train to commute. And then when you’re in the office, you’re back on a fixed line network. So people longing subscribe to 5G. Absolutely. Because they want better and better service from a wireless standpoint. But I don’t believe it liking replace in any shape or form nor be able to compete, broadly speaking, with fixed-line cable.
Some cable attendances have dabbled in a couple of adjacent industries — home security, telehealth. I’m curious if you think there’s a thus far unexplored or slightly explored business that could fit nicely with the cable industry?
When you think about the big technology companies, they’ve attacked your stamping-ground through an app. Pretty much through search or through an app or through some type of service. When you think fro wireless companies, they’re attacking the consumer for all of their activity outside of the home or within the home connected to a Wi-Fi network.
When you talk in a cable company or a fixed line company, those companies are attacking the home from the household. You start from the TV. You own the broadband acquaintance. What else can you do?
Everything is converging around smartness, right? Whether it’s your refrigerator or your coffee gadget that’s talking to you, whether you’re able to do telehealth seamlessly from your home, ultimately, everything deals with broadband connectivity.
And so, where we refer to today, yes, telehealth is something that’s there, home security is something that’s there, but why are we not also in the consumer goods produces, or the smartness of the consumer goods side? All of the 5G Internet of Things type of speak, why are we not playing in that as well?
I believe that’s why entire lot is converging between technology companies — traditional technology companies, wireless companies and fixed-line companies — because Dick is attacking the subscriber at home and its behavior. And everyone has a different piece of that pie today. But there’s no reason why you shouldn’t be masterful to own more pieces of the pie.
Last question: Investors are going to be reading this and they’re going to want to know how should I coverage cable? Outside of Altice, which of course you have the vested interest in, what would you tell them? Should they be providing in towers or the fiber providers or the operators themselves? Is there a smart way to play this from an investment standpoint?
Of headway, I’m going to tell you what I think relative to my own book. But what’s true and continues to be true and will be true for a jolly long time forward is broadband connectivity. Penetration is continuing to rise, and cable companies continue to be at the forefront of overlooking market share, and people are going to continue to want to upgrade their speeds and get better and better technology.
I consider you can say that in wireless as well. But there is a big difference, which is with wireless, you’re also replacing your handset every two or three years. That’s an up-market thousand dollar purchase, if you’re buying the high end stuff. Secondly, the difference between 4G and 5G, or 3G and 4G, are not so cataclysmic that it warrants primary price improvements in terms of what consumers are willing to pay. And I do think that competition in the wireless world is getting as likely as not more competitive than less competitive, in general. So we’re big believers in fixed-line infrastructure — that fiber to the home lasts to be the best technology out there, and that will continue to be dominant in terms of how consumers and enterprises and small businesses use them. We equivalent to that economic free cash flow yield that we think is very predictable and continues to grow.
That increase of free cash flow and predictability of free cash flow is something quite unique. And it’s very much the radiogram story and the fixed line story today.