Happy mergerversary to Spectrum, the $100 billion cable-TV operator formed from the combination of Charter Communications Inc. and Time Warner Cable. It was on this day in 2016 that the two officially joined, so it seems like as good a time as any to check in.
The merger instantly quadrupled Charter's number of cable subscribers by adding Time Warner Cable's customers in markets such as New York, Los Angeles and Dallas. The $89 billion transaction also included buying smaller operator Bright House Networks, which handed Charter a base in Florida.
It's been generally well-received, with Charter's stock up about 40 percent since it closed. But where the future of cable-TV was abuzz back when Charter was pursuing the deal, now talk of super-fast next-generation wireless networks is what's grabbing attention — and Charter knows that's where it needs to go next. Just look at the recent spike in news articles discussing 5G wireless relative to cable:
There's also the fact that traditional pay-TV is in decline. Even with Charter's added heft, it continues to shed cable customers at a rapid pace — or rather Spectrum does. That's the name it slapped on its services because the legacy brands were so broadly disliked and starting to sound old-timey (hence Comcast Corp.'s Xfinity brand, too).
The company attributes much of its recent subscriber losses to winding down temporary discounts that Time Warner Cable used to offer and transitioning to Charter's pricing. But while that specific challenge may not be permanent, the situation is still likely get worse as on-demand services such as Netflix and TV-streaming apps such as AT&T Inc.'s DirecTV Now and Dish Network Corp.'s SlingTV become more popular for their cheaper prices and simplicity.
Charter knows that if it doesn't want its new slogan to be "Come Back!" it needs to start working toward its next transformation.
There were reports in January that Verizon Communications Inc., the largest U.S. wireless carrier, had approached Greg Maffei about a Charter deal. Maffei runs billionaire John Malone's Liberty businesses, and one of them — Liberty Broadband Corp. — controls about 25 percent of the voting power at Charter. Beyond the insiders, nobody else seemed to like the idea, though. Massive amounts of debt would have been involved and the transaction would have significantly diluted earnings.
So they scrapped that plan and instead Charter struck an agreement with rival Comcast in which the two cable providers will collaborate on their efforts to become wireless carriers. How they'll do that isn't totally clear, though both have accords with Verizon that allow them to make use of the carrier's network. Comcast is soon introducing a wireless service that will use its own Wi-Fi hotspots, with Verizon's cellular network as backup.
As part of the joint venture, Charter and Comcast agreed that neither one can purchase a wireless company within the next year without involving the other. Some say this renders moot the idea that Charter or Comcast could play interlopers in merger negotiations between T-Mobile US Inc. and Sprint Corp., which are expected to start soon. But I'm in the camp that Charter and Comcast could team up to bid for T-Mobile or perhaps even for Charlie Ergen's Dish Network Corp., which has a boatload of spectrum that none of these industry players want to admit they really could use.
Until there's activity on that front, Charter's growing internet business is offsetting the cable concerns. And any threat that 5G wireless connections will become suitable alternatives for most home broadband users is probably years away.
While a necessary next step, expanding into wireless won't be a cure-all for Charter. After an explosion in data demand, U.S. mobile data services revenue growth in the first quarter was negative for the first time ever, according to Chetan Sharma Consulting. Competition is intensifying as T-Mobile's attractive plans forced the rest of the industry to offer unlimited data and cut prices, which means margins are narrowing. Not to mention, it's incredibly expensive and difficult to build out a network.
Charter's acquisition of Time Warner Cable helped it get bigger at a time when it needed to, but the transaction could only take the company so far. Charter needs to plan its next move, and fast — 5G fast.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.