Charter Communications, Inc.
Q3 2014 Earnings Call Transcript

Published: 31 Oct 2014

[Operator:]

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Charter Communications Third Quarter 2014 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Stefan Anninger. Please go ahead.

[Stefan Anninger:]

Thanks, Regina. Good morning, and welcome to Charter's 2014 Third Quarter Earnings Call. The presentation that accompanies this call can be found on our website, ir.charter.com under the Financial Information section. Before we proceed, I would like to remind you that there are a number of risk factors and other cautionary statements contained in our SEC filings, including our most recent forms 10-K and 10-Q. We will not review those risk factors and other cautionary statements on this call, however, we encourage you to read them carefully. Various remarks that we make on this call concerning expectations, predictions, plans and prospects constitute forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ from historical or anticipated results. Any forward-looking statements reflect management's current view only and Charter undertakes no obligation to revise or update such statements or to make additional forward-looking statements in the future. During the course of today's call, we will be referring to non-GAAP measures as defined and reconciled in our earnings materials. These non-GAAP measures as defined by Charter may not be comparable to measures with similar titles used by other companies. Please also note that on July 1, 2013, Charter completed its acquisition of Cablevision's Bresnan Broadband Holdings, LLC and the subsidiaries also known as Bresnan. Unless otherwise specified, all customer and financial data referred to on this call are pro forma for the Bresnan transaction as if it had on January 1, 2012. Please also note that all growth rates noted on this call and in the presentation are calculated on a year-over-year basis, unless otherwise specified. Joining me on today's call are Tom Rutledge, President and CEO; and Chris Winfrey, our CFO. With that, I'll turn the call over to Tom.

[Thomas M. Rutledge:]

Thanks, Stefan. Good morning. Our improving results demonstrate that Charter's strategy is working. We're providing more value to customers with superior products at competitive prices combined with high-quality service. We continue to generate more sales, grow market share across all our products and increase revenue per household. Over the last year, our increasing customer penetration and revenue per customer have translated to growing EBITDA for home passed. And as we complete our all-digital initiative at the end of this year, we expect our operating and financial results in our existing footprint to continue to improve. Our network is now over 80% all-digital. And by the end of the year, we will be delivering a superior HD-content package essentially everywhere we operate. Our video product is delivered in HD, on HD sets with interactive guides and full Video On Demand libraries on every outlet. That superior video product is now available for our customers on mobile devices, inside the home and increasingly, outside the home. The lowest Internet speed you can get from Charter inside our latest offering is 60 megabits per second, faster than what our competitors can provide virtually everywhere. All of that is bundled together with a fully featured voice product at a $90 price point with no contract, no hidden fees and taxes, that is the Charter Spectrum brand. And whether it's Charter's video product in the home or an Internet device, we provide a more valuable product within a real service infrastructure. Our ability to be a good service operator has also improved significantly, despite putting nearly all of our customers through an all-digital service transaction in the past year. It's not just about competing well today, but providing a superior product when compared to potential new entrants as well. We're far from done. We have a full set of products and service enhancements at different stages of development. And we're preparing to apply the same operating strategy that is succeeding today on a larger base of subscribers for the benefit of Charter shareholders and the future shareholders of GreatLand Connections, which includes Charter. Looking back at the last quarter, our residential customer growth continues to accelerate. During the third quarter, we added 68,000 new residential customer relationships versus 46,000 last year. And over the last 12 months, we've grown our residential base of customers by 4.9%. We added 94,000 broadband customers versus 86,000 in the prior year period. And our third quarter video performance also improved with a reduction in net video losses versus the prior year. Over the last 12 months, we've grown our expanded video base by 74,000. The total third quarter revenue grew by 8% versus 5.4% for the same period last year with residential growth of 6.7% versus 5.1% the last year. Commercial continue to perform well with revenue growth of 18%, while advertising grew at 16%, which includes the benefit of political advertising. And adjusted EBITDA grew by 7%. However, our underlying EBITDA growth was over 8% and Chris will walk you through that in a moment. So we're growing market share, developing new products and preparing to integrate a large set of new assets, but our largest value driver is just being a good service operator. And we continue to improve our execution in field operations, customer care and network operations. Our simplified product sets and higher-quality service operation leads to fewer customer transactions, lower costs and longer customer lives, driving higher market share and better margins. We've invested in simplicity for our customers and employees and process improvements to reduce transactional volumes in the business whether it's repairs, repeats, upgrades, downgrades or disconnects, our field operation and customer care units are now properly structured and organized to provide a better service experience with in-house employees trained and compensated to our standards. It's also about making it more convenient and efficient for our customers to do business with Charter. We've increased our operating hours, reduced appointment window times. And in the coming months, we'll launch a completely reengineered online customer portal, which will provide a leading, modern service experience, which adds to our competitiveness. So I'm very pleased with the operational progress we're making. Our all-digital initiative, which will be complete by year-end is on plan. Slide 5 outlines the volume of customers that we have migrated to an all-digital platform on a monthly basis since we started all-digital. We also introduced HD Auto Tune, a feature that auto tunes HD set-top boxes to the HD version of selected channels, and an instant upgrade feature on our set-top boxes, which allows video customers to instantly upgrade their level of video service. We continue to enhance the value of the Charter TV app designed for tablets and smartphones. We now have over 150 linear channels available in the home and a growing number available outside the home as well. In coming months, we'll add both VOD streaming and downloadable to-go features, giving our customers the ability to stream or download content to tablets and smartphones. Our new cloud-based guide has now been launched to over 25,000 of our Fort Worth customers. Spectrum Guide is scaling well and working as intended. We will deploy the guide in our retained footprint in 2013. The guide, which will work across our entire based set-top boxes, provides a dramatically improved user experience, making content, search and discovery easier and more Internet-like and highlights the quality and large quantity of on-demand assets we offer. We're also close to launching World Box, more powerful but less expensive set-top box, which relies on downloadable security. This smaller, more elegant box can be sourced from a broader base of manufactures. Customers will have the same search and discovery experience, whether they have a legacy box or a World Box. But on the increment, World Box gives us the ability to do more with a more robust DDR, a DOCSIS 3.0 modem and it provides a better box platform and economics for digitizing acquired cable systems. Which leads us to the update on the Comcast-TWC transactions. We're making good progress on the regulatory process, long-form documents and the necessary carve-out financial statements and filings. We have the necessary financing for the TWC portion of the transactions. We remain confident that from a regulatory perspective, these transactions will support the successful close of the Comcast-TWC transaction, which we expect in early 2015. We expect to close our deal about 30 to 45 days after the Comcast-TWC transaction closes once the spin-off financing for GreatLand is complete. Our transition and integration planning with Comcast and TWC is making good progress, and we remain very pleased with the deal that we've done. There's a lot of effort involved in transitioning the carved out assets among the parties and setting up the service agreements with GreatLand. There's still work to be done, but we remain confident that these transactions will be transformational for Charter and will bring significant benefits to both our customers and shareholders. Finally, while M&A is not a necessity for Charter to be successful, future acquisitions could be added to our opportunity set. We continue to believe that attractive opportunities may present themselves. And we've experienced transactional and operating -- we have experienced transactional and operating teams and our recent experience with the Bresnan integration and the pending transaction with Comcast and Time Warner Cable provide a good framework for future activities. And with that, I'll turn the call over to Chris.

[Christopher L. Winfrey:]

Thanks, Tom. Turning to Slide 7 of today's presentation. Third quarter residential PSU growth improved by 14,000 compared to the same period last year. We lost 9,000 residential video customers versus a loss of 27,000 last year. That's an 18,000 improvement. But our third quarter residential video customer net adds include approximately 20,000 bulk digital upgrades versus 3,000 a year ago, driven by all-digital activity. In Residential Internet, we added 94,000 customers, up from 86,000 last year. And we added 29,000 residential voice customers compared to 41,000 last year. Over the last 12 months, our residential customer base has grown by 4.9%. And third quarter revenue per customer relationship grew by 2% year-over-year, primarily driven by higher-product sell-in, rate adjustments and higher-average dollars step-ups of commercial roll-off, that's partially offset by continued strong sell-in of single-play Internet relationships. And Slide 9 shows our accelerating customer growth, combined with our ARPU growth, resulting in residential revenue growth of 6.7% year-over-year. Looking at commercial, we added 5,000 PSUs versus 21,000 last year. And excluding the impact of digitization on our EBU accounts, PSU growth would have been 18,000 this past quarter. Total commercial video billing relationships have increased slightly since the third quarter of last year. Commercial revenue grew by 18%, driven primarily by small and medium businesses. And excluding the lower growth hospitality video base, commercial telecom revenue continue to grow by over 20%. So turning to expenses and adjusted EBITDA on Slide 10. Programming expense grew by $67 million, accounting for about 57% of the increase in total operating expense versus the prior year quarter. Programming cost grew by 12.1% on an absolute basis really driven by 4 factors. First, contractual rate increases; second, 1.9% growth in our expanded video customer base, so volume-related over the last 12 months; and some onetime benefit last year; as well as, finally, higher penetration of our tier's broader carriage and the launch of new channels like the SEC Network. If you look to cost to service customers, which includes field operations, customer care and network operation costs, these expenses grew by 4% year-over-year, about half of our total revenue growth. In marketing spend increased by $5 million, up 4%, giving continued sales channel development and sales activity. All other costs grew by $28 million or 15% year-over-year, driven by higher labor cost to support commercial as well as some additional administrative and labor expense. In total, adjusted EBITDA grew by $51 million or 7% year-over-year. As Tom mentioned, our third quarter underlying EBITDA growth was just over 8%, really if you exclude the impact of onetime expense benefits last year relative to this year, a few million dollars of transition costs for the Comcast transactions and if you also net out the benefit of political advertising. Turning to Slide 11. Third quarter capital expenditures totaled $569 million. About half of that spending is driven by CPE to support our all-digital initiative and new customer acquisition. In total, $115 million of our CapEx in the quarter was directly attributable to our all-digital initiative with most of that spend inside CPE. For the full year 2014, we continue to expect approximately $2.2 billion in capital expenditures for the plan we've laid out with $500 million of that spend relating to all-digital and our in-sourcing initiatives. As I mentioned on our last call, we've approved additional projects and CapEx spend for the M&A transactions, really as we position the company to serve roughly twice as many customers as we did previously. So whether the $2.2 billion is inclusive of that activity or we have a rounding difference really won't be known until later in the year. I recognized people can get a little locked in on rounding differences, so we'll provide the appropriate disclosure at that time. We ended the quarter with $14.2 billion of debt with a weighted average borrowing cost of 5.6%. And our leverage ratio was 4.6x on an LTM basis but lower on an LQA basis. Note that those figures exclude recent financings for the transactions, which I'll discuss in a moment. So that covers our normal third quarter operating and financial performance. As Tom mentioned, we remain focused on planning the integration activities for the announced transactions. And from a financial perspective, we recently completed the 2013 audited carve-out financial statements for each of the pieces of the transaction. And today's presentation includes a few slides in the appendix, which provided those updated operating and financial data. In Slide 13, you can see the estimated purchase price for the TWC assets exchange and sale has come down from $8.4 billion to $8 billion due to some allocation of costs in the final 2013 carve-out audit of TWC systems, some higher Charter divestiture EBITDA and updated consensus figures to get an estimate of net 2014 acquired EBITDA. The key takeaways, we're receiving all the systems, subscribers, assets and employees we expected. And the final purchase price will be ultimately calculated on audited 2014 carve-out EBITDA. On Wednesday, this week, we launched a senior secured notes offering, raised $3.5 billion of 8- and 10-year notes at 5.5% and 5.75% fixed, respectively. Together with the $1 billion of Term Loan A and the $3.5 billion of Term Loan G, which we already raised in August, we've now completed the current estimate financing needs for the sale and exchange transactions with Comcast. That sums up the $8 billion I mentioned a moment ago. We also have an additional $400 million of available financing commitments, if needed. The $3.5 billion of previously funded Term Loan G bank debt and the $3.5 billion of notes we raised this week will be held in escrow in unrestricted subsidiaries until closing. In fact, you'll see in today's 10-Q that the cash associated with the Term Loan G is already reflected in nonrecurring assets as it's intended for the purchase price payment and again, it sits in escrow. Over the coming quarters, our interest cost leading up to close will be a bit higher than usual as a result, and that already started in September. Finally, similar to what we mentioned on the last call, we'll provide regular updates on transition and integration operating expenses, capital expenditure and financing that sits in the numbers. In Q3, it's really just a few million dollars in each OpEx and CapEx roughly $7 million in interest expense. With that, I'll turn the call over to the operator for Q&A.

[Operator:]

[Operator Instructions] Our first question will come from the line of John Hodulik with UBS.

[John C. Hodulik:]

Now that you guys are winding down the all-digital conversion, obviously, you pointed out how much of that was in the CapEx. But when should we start seeing the benefits on the CapEx line. I imagine you bought a lot of the boxes that you're deploying now in the third quarter, but should we see some leverage in the CapEx line starting in the fourth quarter? And then similar, as it relates to cost to serve, I mean, can you talk about what benefits we should see in that line as that initiative winds down? And potentially, when we should see them?

[Christopher L. Winfrey:]

So I'll take at least the first one. So we updated our guidance today. For business as usual, Charter, the estimate remains at $2.2 billion for the year. So you can do the first 3 quarters and add it up and find out that we still have a healthy Q4 CapEx in total for Q4. But you're right, the mix will change a little bit because a lot of the boxes have been bought and they're being deployed right now. As is typical for cable, you tend to see a lot of the support and scale will be a little bit more back-ended towards the back half of the year. On the cost to service, which includes network operations, field operations and customer care, predominantly, we have invested in the past in these areas significantly, whether it was through preventative maintenance or in-sourcing, which continues to take place. I think when you sit back and take a look at 6.7% residential revenue growth, 8% overall, or a 4% growth -- half above 4% growth in our customer relationships. Take any one of those measures and in fact, the cost to service customers is only increasing by 4%. at the same time we're significantly improving the quality of the service operations. It means that we're already -- we have been getting, and this has gone on for several quarters, we have been getting significant operating leverage out of better service operations. And we're reducing transactions outside of all-digital along the way. Could there be more? Maybe, but we're pretty pleased with the direction it's heading already.

[Operator:]

Your next question will come from the line of Jeff Wlodarczak with Pivotal Research Group.

[Jeffrey Duncan Wlodarczak:]

A couple for Tom. Tom, I wanted to get your take on the decision by CBS and HBO to go direct to consumer. And what effect do you think that's going to have on you all? Any comments you can make on the potential for the FCC to at least partly try to establish some sort of Title II regulation on the sector?

[Thomas M. Rutledge:]

Sure, Jeff. I think that there are a lot of discussions about direct-to-consumer relationships, we've seen programming and over-the-top. And they have interesting implications from a business model perspective that I think in some ways are favorable. You can look at it a lot of different ways, but the opportunity to -- for us to be potentially to put more specific customer-oriented packages together or packages that meet customer needs would be an attractive thing. And to the extent that programmers voluntarily break up the very fat basic bundle that they have put together contractually, would be an opportunity for us to actually build a more compelling product. The interesting thing about the business is that people want our products and the biggest strain on the business from a video perspective is -- cord cutting is really financially driven more than it is content driven. And the reason it's financially driven is because incomes have not kept up with the cost of the product. And it's true that the fat basic could be better put together for specific segments of the population. And if we have that ability and the programmers are willing to allow us to have that ability, I think we could actually have a better, more successful video product. With regard to the regulatory situation, we don't think there are actually any issues in terms of net neutrality that are being violated by the industry or ever have been violated. We think that there are solutions that don't require Title II regulation. And we would like to see the FCC come up with a conclusion that does not include Title II.

[Operator:]

Your next question will come from the line of Craig Moffett with MoffettNathanson.

[Craig Moffett:]

Two questions, if I could. First, as we -- Tom I think you're still sort of the intellectual father of the idea of WiFi first wireless back from your days at Cablevision. I wonder if you could just update your thinking now that you're at Charter as other developments from others sort of pushed that forward. How could Charter participate since you're not party to the MVNO agreement with Verizon? And then second, if you could just share some thoughts about Time Warner Cable's recent results in general. It seems like they're quite reliant on aggressive broadband pricing. And does that change your perspective on how you might operate those systems given how hard they've pulled that lever in the past?

[Thomas M. Rutledge:]

Craig, with regard to WiFi, I still think that the WiFi is a great opportunity for the cable business. Charter is beginning to deploy WiFi. We had not put that at the top of our list over the last several years because of the general condition of Charter and the need to put it into a good operating situation, which we have done. And so we've turned our attention to the opportunity that wireless presents. Yes, it's true we don't have an MVNO relationship, but I think that we could. We have not been actively seeking that. I think that there are also sorts of value propositions that come from the current WiFi situation. Charter's begun marketing a wireless, a WiFi product inside the home that is actually consistent with the speed of our broadband network. And we have the claim, and it's true, we've tested it in our labs that we have the fastest WiFi in the country. And we think that, that's a differentiator for us. But in terms of where WiFi takes us, we think it takes us into initially an improved value proposition for our whole broadband product and already today, we're the dominant provider of data to smart devices that our customers buy regardless of who their subscriber relationship for those smart devices is. So you see the WiFi networks becoming increasingly used as content changes and content gets richer. And so we think that investing in WiFi ultimately leads us to an opportunity to either monetize it directly or monetize it through our overall relationship. In terms of TWC, I think that their strategy has been consistent, and we've understood it all along. And we accounted for it in our valuation of the assets and they're doing what we thought they would do and what they said they would do. And we're prepared to step into that and put our business model on those assets. And so there's nothing going on that is a surprise to us.

[Operator:]

Next question will come from the line of Vijay Jayant with ISI.

[Vijay A. Jayant:]

Tom, you just talked about your program has gave you some flexibility to repackage your products to really target the millennials and potential cord cutters. Can you talk about what you've done so far? Are there any skinny packages that you're offering? Any comments on the success of that? And then just a quick question for Chris on the mechanics of the GreatLand Connections deal. The shares that Comcast shareholders are going to get in GreatLand Connections and implicit shares that GreatLand Connections is going to have in Charter. Are Comcast shareholders going to own the shares directly or GreatLand Connections is going to own those shares?

[Christopher L. Winfrey:]

So to the extent I heard the first part of your question, what are we doing with our products to serve the millennial audience. We have been growing our expanded basic tier, which is the full package of video. And we've been shrinking by 9,000 subscribers, our basic-only subscription universe. And what that means is that we're actually growing video market share against all of our competitors across the country. And that's because we've put a better video product together with higher -- more channels than our competitors offer. And so it's actually richer, and it's 2-way interactive and on-demand. So yes, it's expensive and the expense of the product is an issue. But because it's a better, higher-quality product, it can carry the expense to some extent, better than it could historically. And it's growing. But there is an overall cost issue of video. But we are growing the richer video package with a more fully featured service proposition. And we've combined that with other products and a total value proposition that's working in the marketplace. Chris?

[Christopher L. Winfrey:]

Vijay, for GreatLand Connections, the Comcast spend will be a spin of GreatLand Connections directly to all of its shareholders. At which point in time, Charter will have a subsidiary that merges together with GreatLand Connections. And the GreatLand Connections shareholders, which includes Comcast and former TWC shareholders at that point in time, will also receive shares in Charter. So if you're a Comcast shareholder today, you'll have some number of GreatLand Connections shares. You actually become a Charter shareholder, if you weren't already, through that spin merge that takes place subsequently. We'll end up owning 33% of the shares of GreatLand Connections, and we're looking forward to that closing taking place.

[Operator:]

Your next question comes from the line of Ben Swinburne with Morgan Stanley.

[Benjamin Swinburne:]

Tom, I don't know if you had a lot of time to digest it or you've been thinking about it, but on this sort of hybrid Title II approach, what would be the practical implications, if any, of the FCC moving to classify what they discern as the back-end or the edge connection as Title II common carrier? Does it change how you think about your product or your business or your capital spending? And then totally unrelated, either for you or Chris, I think we're now in year 2 of the first vintage of promotional -- new pricing and packaging customers. I think it started in the third quarter of '12 maybe -- I could wrong. But I'm just wondering if you've -- what you've seen in the second year of step-ups as the promotional pricing has rolled off on that original cohort. How that behaved versus expectations?

[Thomas M. Rutledge:]

So Ben, without seeing a specific proposal, which we haven't from anyone with regard to what you're saying, it's hard to say. But we don't think there's any need for any Title II anywhere in the current process and that there's actually not a net neutrality problem. And that there are other regulatory avenues in which to solve the issue.

[Christopher L. Winfrey:]

The new pricing and packaging, which actually it was implemented, as you pointed out 2 years ago, we continue to see better retention at the step-up than what we've historically seen, so we're achieving the results we expected. Some of that, as I mentioned in my prepared remarks, have been offset by the fact that we do have a promotional one-play Internet that's been sold as well at roughly $40 price point. So the real impact, you're not fully seeing the overall customer relationship ARPU. But keep in mind, we're growing customer relationships by 4.9% year-over-year, which is -- it's strong. So the impact is everything that we expected, we're retaining customers, we're stepping up, we're providing real value into the product offering and that improves our ability to retain the customer and to retain the step-up through the price increase.

[Benjamin Swinburne:]

And then Chris, if I could just ask one quick follow-up on commercial. You mentioned that there was a revenue bucket that was dragging down the growth, I think you talked about hotels, motels. Any sizing of that business we could understand sort of how big of a drag that's going to be going forward?

[Christopher L. Winfrey:]

Well, if you take a look at -- I don't want to get into the individual products, but the -- it's the video hospitality business that's in there. We've, over the past couple of quarters, provided an outlook of what our adjusted growth rate is, excluding that. I think you can back into using those numbers. Some [indiscernible] have asked me what that is, but it's sizable. And it's an important sector, too. And it's not that it's not growing. It's simply that it's not growing at the same rate as the regular commercial telecom space.

[Operator:]

Your next question will come from the line of Amy Yong with Macquarie.

[Amy Yong:]

Two questions. One on churn. I was wondering if you can comment on what's the impact of Spectrum brand does to the churn profile of your customers? I think Comcast at one point said that X1 or X2 [ph]. They actually see a double-digit improvement in churn. I was just wondering if you can comment on what that looks like for your customer profile? And then my second question is, can you just lay out what the right way to think about the top line growth is pro forma for SpinCo and the $1.4 million subs. I know it's going to be somewhat dilutive to the top line, but if you take a look at what Bresnan did, I think you've accelerated growth within Bresnan by -- from anywhere between 5%, 7%, 8%. So just any way you can frame that for us would be helpful.

[Thomas M. Rutledge:]

Well, Amy, this is Tom. I'll take the front part of that. The Spectrum brand is a representation of all the products that we sell and the quality of those services. And it's a way to differentiate what we're doing now as opposed to what we did in the past. As a general proposition, our belief is that we can reduce churn by having better products that have more valuable -- more value as it's perceived by customers and have a better service infrastructure and to have less transactions in general as a result of the way we market and service our customers. Now all of those things reduce transactions in the business, which are costs. Churn is also a cost and longer subscriber life reduces churn with the same amount of cash flow and the same amount of customers -- same amount of cash flow per customers. So we think that the product strategy we have is a churn reducer.

[Christopher L. Winfrey:]

Amy, on the forward revenue growth, I mean, we're not going to provide guidance. But we did spend a little bit time on last quarter talking at length about the different buckets of subscribers and how we would expect that they would perform. I'll go through quickly some of that again. You have Charter today, which is growing very well. I don't think it's done. Our growth continues to accelerate. And then -- and right at the point as somebody mentioned earlier on the call, is all-digital spend is going to start to drop off. We'll get a quick preview into the free cash flow, significant free cash flow growth coming out of the back-end at the same time that revenue and EBITDA continue to do well. We're going to take from that 4.2 million subscribers and we're going to divest 1.5 million of those that growing at or a similar rate to Comcast because they're in markets where there is not a long-term path to be an efficient marketer or operator because we didn't have the long-term path to pulling the DMA. And we're going to incorporate about 3 million TWC subs, that look a lot like Charter you said, from 2 years ago. And we're going to apply the Charter operating strategy, new pricing and packaging, take those systems all-digital. And we expect to be able to drive the same type of results that we've been able to do on Charter as a whole on the TWC assets. We're going to replicate the ROI that we're demonstrating on another 3 million subs. We expect that we'll actually be able to have better ROI in doing it because we think they're good systems, they're good networks. They don't have some of the issues that Charter had that needed to be addressed. We're able to buy set-top boxes under dramatically lower cost than what we've been doing at Charter over the past 2 years. And that means we have a proven operating model, we have a way to go all-digital, we're going to do it on a larger set of assets at a lower cost, and we think the returns could be higher as a result. The final piece that you mentioned was GreatLand Connections. We will not consolidate GreatLand Connections' results. We're a minority shareholder. We own 33%. We'll have a seat on the board. We will have several seats on the board. And we'll provide operating services to them, but they'll be an independent publicly traded company and they'll have their own results. And we'll help them in terms of an operating service provider to implement that strategy. They will be marketing under the Spectrum brand with the Spectrum product set and have similar operating strategies that's already been decided by GreatLand's management team as we look forward to working with them. But you won't see, other than the management fee that we received from them, you won't see their consolidated results inside of the new Charter.

[Operator:]

Your next question comes from the line of Matthew Harrigan with Wunderlich.

[Matthew J. Harrigan:]

Two years or so ago, your big dichotomy between large market and small market cable in terms of taxes, your attitude, et cetera, I mean, you've got a lot of traction for your strategy, I mean, WiFi in home has been a big deal. It's working outside the home or X1 Spectrum are getting pretty good traction. But do you feel differently about M&A now in terms of looking at a broader brush on opportunities? I know it's too soon out-of-the-box with the current transaction not even closed. And how do you reconcile -- I think a lot of improvement in the industry, maybe too much hype over OTT if the valuation is still doing is stuck in the mud as they are relative to the long-term cash generation?

[Christopher L. Winfrey:]

I think the crux of your question is how do we feel about broader M&A opportunities for cable or cable-related space. Is that fair? And how does rural versus urban play into that?

[Matthew J. Harrigan:]

In other words, your product for cable looks so strong and the valuations haven't really moved yet. Do you feel more confident going into some other areas than you necessarily were before given the success that you're having? I'm sorry, I'm afraid I've framed everything pretty awkwardly.

[Thomas M. Rutledge:]

Yes, as a general proposition, the answer is yes. We think that cable is a good business, that it's a good product. And that it's pretty, and I've said this many times that if you have over 1 million customers, you pretty much have the average American mix of rural and urban. And it's the rare -- it's hard to put a bigger company in the lab together. It isn't pretty average in terms of the demographics that you serve. And that's kind of business can grow and it can grow in both low income, high income, rural and urban areas successfully if properly managed and the right investments and the right products are stood up.

[Operator:]

Your next question will come from the line of Kannan Venkateshwar with Barclays.

[Kannan Venkateshwar:]

Just a couple of questions, Chris, first on the pricing issue. Was wondering if you could break down the underlying fibers a little bit more to help us understand what that RAM could look like if you were to strip out the impact of the lower priced broadband-only versions? And secondly, Tom, from your perspective, when you look at the video contribution margins for the expanded product that you have now versus the relatively skinnier products that you have had earlier, is there a value in sticking with the skinnier bundle versus the more expanded bundle from that perspective? And just given the acceleration expiration of programming cost, the double-digit growth, is there a point at which you're at a breakeven point from a video perspective? In other words, offering video versus not offering video kind of a question, do you think that, say, 4, 5 years down the line?

[Thomas M. Rutledge:]

Well, I guess the simplest way of answering you is to say I don't really look at the margins by product. I look at the margins by customer relationship that are created and look at the things that are necessary to create a customer relationship. And so to some extent the margins across the various businesses are legacy notions from my point of view. I think that video is a very compelling product that people love. And as I said, earlier, I think the biggest problem with video is that it's very expensive. But people want it and love it. And almost everyone in the country wants it and has it already. And I think that an operator, like us, with the capabilities we have can stand up great video products in a lot of different regulatory and commercial environments, and we're prepared to do that, I think we'll continue to do that no matter how the marketplace evolves. And that video will be a compelling piece of our business. We do not have any strategies or never considered abandoning the video marketplace.

[Christopher L. Winfrey:]

And your question on the pricing breakdown, I mean, you've asked a complicated question as to the -- relative to the moving parts. A lot of people think of that as simply as what's your gross connects in the different products and how does that target ARPU, but we're really underestimating the complexity of cable business in terms of migrations, upgrades, downgrades, what's the ARPU of people who are just connecting, what are your step-ups taking place. So it's a pretty complicated model, model. We work through it. And at the end of the day, I think you have to take confidence in the fact that we're saying we are acquiring customers in triple-play at a higher rate than we've ever done before. And we're retaining them and we're stepping them up on rate. And in addition to that, we're acquiring new customers in low-priced, high-value Internet packages that are posed to -- that are sitting very well situated, particularly where we have things like Spectrum Guide on the boxes to the future video customers as Charter served back and service reputations. So I think the customer base is growing. ARPU is growing. Triple-play is growing, and so is single-play Internet, all of which is good, and we expect to continue to move from that direction.

[Operator:]

The final question will come from the line of Tom Eagan with Telsey Advisors.

[Thomas William Eagan:]

With the Comcast and DIRECTV deals next year, there's going to be unprecedented nationwide subscriber swapping and all sorts of new marketing campaigns. How does Charter cut through all the clutter without overspending? And do you think that you'll end up spending more as a percentage of revenue next year than this year?

[Thomas M. Rutledge:]

Well, it's a good question. The beauty of the new footprint that Charter is that we go from an environment where, today, we can use mass media in 48% of our footprint effectively. And that's at the margin, meaning we have many properties where Charter is a minor player, I mean large DMA. And our ability to buy marketing is negatively impacted by that strategic situation. That said, we're growing nicely because we are using tactical marketing to reach those potential customers, and you can do that just fine. And we've proven that you can do it just fine. But when you look at the new footprint, more than 95% and probably more than 98% of the combined footprint of Charter and GreatLand using the Spectrum brand commonly, will be reachable by mass media and in very concentrated marketplaces, DMAs. So the efficiency of our ability to spend marketing dollars goes up. And will we spend more with the opportunity? Maybe, but the efficiency of the spend relative to the opportunity should improve.

[Operator:]

Ladies and gentlemen, this does conclude our conference call for today. Thank you all for participating and you may now disconnect.

[Thomas M. Rutledge:]

Thank you.