Charter Communications, Inc. (NASDAQ:CHTR) Deutsche Bank's DbAccess 21st Annual Media and Telecom Conference March 6, 2013 9:30 AM ET
Executives
Thomas M. Rutledge - Chief Executive Officer, President and Director
Analysts
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
Good morning. Thanks for coming to the next session. I'm very pleased to have Tom Rutledge, President and Chief Executive Officer of Charter, here with us this morning. Thanks for coming, Tom.
Thomas M. Rutledge
Thank you, Doug. Glad to be here.
Question-and-Answer Session
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
So as you know, I wanted to start out big picture. You've been onboard for almost 1 year now as CEO of Charter. Both -- how are you feeling about the progress that -- or we'll start with how you feel about the progress the company and the management team are making.
Thomas M. Rutledge
Good. Charter was a mess. There's no other way to describe it. It went through a terrible process as it managed its money, and then went through a restructuring. And I always had looked at the business of Charter as a greenfield opportunity or a diamond in the rough. And it is in the rough and we spent the last year trying to straighten it out and get it ready to grow. And I think we've made a lot of progress. We've essentially reorganized the whole company. Every reporting relationship has changed. We've centralized the business and put it in a managerial structure that will allow us to make good customer-facing decisions. We've changed our pricing and product strategy to create a real value proposition for consumers. And we are going through the physical assets and -- which were -- they were built correctly, but they need to be examined and maintained and there's some capital that we're spending as a result of that. And there's capital we're spending -- as we changed the mix of our workforce, Charter got into a position where it was buying contractor labor which brings trucks and tools and test equipment with it. And we want to make the quality of our service integral to our product. And so we're hiring people in-house, which means that we have to buy trucks and tools and test equipment. So we're spending capital to do that, we're spending capital to make sure that the plant is properly in place so that we can run the business quickly and take advantage of the opportunity that we have with a, really, a superior 2-way interactive platform, high-capacity network. We've gone to an all-digital product set, and I think now we have a superior video product to our satellite competitors. We have a data speed -- the slowest data speed we're selling is 30 megabits. So I think we're better than DSL can hope to be and better than U-verse is, faster than they can go on their current architecture. And we've got a fully featured, low-priced voice product that's available to the 70% of people who are still paying for telephone service from their wireline provider. So I think we're in good shape. They -- the sell-in rates now are coming up. The service improvements are being realized in the metrics that we're looking at. We've got a lot of work to do. We've got 18,000 people. We need to have more people because of the mix of employees to contractor. So it's a logistically complex process we're in, managerially intensive, but we're getting good results. I've got a great team of people working with me.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
One of the things I enjoy is the perspective that you bring, having been at Time Warner Cable, Cablevision revamp, Bresnan revamping, Charter. And I'm just interested in your perspective as to whether the industry, the cable industry, today feels -- obviously, a lot more products, a lot more competition. The cable industry today good, better, worse than it was over time?
Thomas M. Rutledge
Well, yes. It's a great business. At some levels, it's the same business it's always been, with continuous improvement in the product set. And the opportunity in the cable business, as I see it today, is to take advantage of its inherent strategic strength. And we have a better network than our competitors almost everywhere we operate. And -- but we need to unburden the network from our legacy. And our legacy was in analog service. And as you go to an all-digital platform and unburden the network, you've got a lot of capacity to improve the data service. You've got a lot of capacity to improve the video product and telephony, while bandwidth, it's not very bandwidth-intensive, customers are still paying for that connectivity and we can take advantage of that in the marketplace and use that as a fuel, in essence, for converting customers into our other products. But at the core, cable TV is the hard business to operate and it's been a great business, in some ways so great that it hasn't been operated that well. And -- but it's hard to operate as well. It's very transaction-intensive. You've got this big physical network. And as time has passed, because of the systemic nature of the new products, data and voice, you needed to reorganize the business and centralize it. And it was a historically decentralized business. So the opportunity in managing the business well, because it's inherently superior, is the big opportunity, as I see it at Charter, and it's true, generally, throughout the industry. To take advantage of your network capability, you've got to manage a lot of moving parts effectively. Finding a way to do that and being successful at that is the challenge. But if it's overcome, you create enormous amounts of value.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
Why don't we sort of dig into some of those themes? Maybe we should start with product innovation because you sort of mention that a number of times. And as you know, one of my questions was going to be, is video, voice and data commodity and you, I think, already argue that your products are superior, so I assume you're sort of -- you're going to disagree with that. But I'd like to take that question sort of one step further, and where do you think the product is going to go for Charter?
Thomas M. Rutledge
Well, I think that -- we're fundamentally moving to a server-based architecture. And our Video On Demand product or our OnDemand capability is what differentiates us from the one-way broadcast satellite services. And at some level, you can argue that cable TV is the commodity better than another level. Our network is inherently superior. So what we need to do is take advantage of the network superiority and create products that use the network. So we've done content deals with most of the programmers that we deal with this year. As part of those deals, we have the primetime lineups available to our customers, OnDemand, as part of their service. We can serve all the devices in the home, whether it's a tablet, a smartphone, a TV. We can take all of our products and have them display on any device in the home or out of the home with the server-based architecture. So we can -- what our task, from a product development point of view, is to make all that work seamlessly to create a user interface and search and discovery process, cloud-based, in my view, that brings it all together for the customer and uses our network in a smart way to take advantage of our network capacity, from a server-based perspective, to feed the devices with the right format of product for the device. So a TV device gets an MPEG -- if you have a 70-inch screen, you need a really high bit rate and a bandwidth-intensive PC or network so that, that screen gets the full visual effect of the data that you're sending through. If you're on a small smartphone, you can format the bit rate to the device. So less bits are necessary to light up the screen of a smartphone. And by managing all that in the network efficiently, we can take advantage of the high-capacity network we have. And I think we've got an environment where it's hard to imagine we need to upgrade our networks again. So I think capital intensity comes out of the business, cost comes out of the business as a result of our architecture. And I like that from a competitive point of view.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
So specifically on user interface, this an area where the cable industry hasn't historically done a great job and everybody's pursuing cloud-based guide [ph], and you sort of mentioned that. Can you tell us what the path is for Charter along those lines?
Thomas M. Rutledge
Yes, we actually -- Charter didn't have much of an advanced engineering group through the process it went through. So we're beefing up that area. And Charter's fundamental opportunity today is just to be a good cable operator. A good cable operator is an inherently superior product to -- without changing the product mix today, it -- we're inherently superior to our competitors if we just run well. So that's our biggest opportunity. But in terms of future development, the one area where we are spending money and trying to move quickly is to build this cloud-based infrastructure over top of, of our existing business. And what it allows you to do and we were successful at doing this at Cablevision, you can build a user interface on a smartphone or a tablet. And that tablet or smartphone can talk to the network and change the channels on the TV. So if you want to find VOD, what's on tonight, a TV guide displayed on a TV using a remote control, is an inherently inferior way to search for content than using a touch screen or a mouse. And if you think about what a TV can be, you can never have -- you're not going to get up and touch your living room screen, probably, not most. Not your 7 year -- yes, your kids will do it, but obviously, it leaves some residue. And so you've got to find a way to deal with a big screen and search on another device, in my view, and not using the remote control because a remote control has inherent limitations. So you use the cloud to talk to other devices. Although you can display it on the TV, and you can display fancy grid guides on television. Doing real search and discovery is probably going to be on another device. And so integrating all of that so that when you use your smartphone as a search device, it can also be a remote control device and can also be a -- your shopping cart for the television. So you look through some movies you want to see, you click on those that you want to save, they then display on the TV, you use your remote control to pick, to watch the movie you actually want to watch. And we can do that this year. So we're going to launch those products this year at Charter. And what that allows you to do and think about is all these legacy boxes that you've put out there, you don't have to build a new big box in the house that has a lot of processing power in it to create a new guide in the house. You can use cloud technology converted into MPEG to display on the box, and you can use search and discovery on other devices to talk to the box and all your legacy boxes can stay in place. Essentially, we move to a thin client world. And we don't have to buy fat boxes. And if you think about what's happening with TVs too, if you think about an iPad, iPad acting as a cable television server in the house, the iPad itself is a TV. It's also a set top box. It's -- another way of thinking about, it's a cable-ready TV. And so we're moving to a world where I don't think we're going to have to buy CPE. I think we'll be able to make our products work on the devices that people have. And I -- so I think ultimately, even though Charter's spending capital today to put itself in a position to go forward, get its employee base in place, make sure its plant can run fast, we're actually moving to a less capital-intensive world.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
Why don't we move over to high-speed data product differentiation, cables had faster speeds. Are consumers using these faster speeds? Do the faster speeds matter? How important is it for you to keep ahead in the arm's race?
Thomas M. Rutledge
Well, that is the issue. If people don't perceive the need for speed, then having it -- it may be a good marketing stint, but it may not necessarily work in the real world until you -- I find or I believe that it's inherently good for us to have people using our network. And so bandwidth-rich application on our high-speed data network are a good thing. If you have a better network, you want people to use it and you want people to think about DSL like they think about dial up. And so the more, the merrier. At CES this year, people started displaying richer video products, super high -- Super HD or whatever, Ultra HD, 4x or whatever it's called. But the notion, from my point of view is, "Hey, that's more bandwidth-intensive." I have a high-bandwidth network. If people want that and use that, they're going to want my network. And I think we should encourage people to use all the bits they can. And they are, and they do seem to be doing it.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
The more online video services, the better?
Thomas M. Rutledge
Exactly.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
Any concerns about newer competition be it, say, Google Fiber or Wireless doing a broadband data?
Thomas M. Rutledge
Well, Wireless is doing broadband data. So I worry about what -- Wireless can do and I worry about wireline substitution. I haven't seen any evidence that that's the thing that's happening. And obviously, the argument we just made, to the extent that wireline is inherently a higher-speed capacity than broadband -- than wireless, you want your broadband network used. Otherwise, wireless would be a substitution. And so there is an obligation to encourage that the network be used. Do I worry about Google? Yes, although overbuilding doesn't seem to make much economic sense. FiOS just did it, AT&T just did it. The Kansas City thing is pretty small. It is resonating in the political world. You see people calling for 1 gigabit services, so maybe that's the objective.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
When do you think the consumer could use a 1 gigabit service?
Thomas M. Rutledge
Well, I think with today's applications, it's hard to envision. But the interesting thing about our network is that it is capable of going for those kind of speeds, and we actually have a pathway to get there. And we do sell it. We sell it to business customers all the time. We have a high-capacity network product set. And our business services group is growing it. If you take out the video piece that we have in our numbers, it's mid-20s compound annual growth rate. And it's a huge opportunity for us. It's a $9.4 billion spin currently in our footprint, and we've got $700 million of that. So it's a big going-forward opportunity. But we're selling those kind of product in businesses. Whether that becomes a residential service or not, I don't know. It's hard to see with -- it's hard to imagine anybody who's not running a business needing that kind of speed today. Now whether some kind of residential or consumer product will come along, I don't know. But our networks can do it when they come along.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
So why don't we keep going with small and mid-sized business because you brought it up. You gave the size of the market and your market share. Is the pace of growth that you outline sustainable? And how do you keep taking market share?
Thomas M. Rutledge
Well, we have an inherently better product than most small businesses have available to them. Most small businesses, they're on twisted pair networks, and most medium-sized businesses are on twisted pair networks. There's very little fiber in most of the markets for business services. And we have fiber capability deep in our marketplace relative to most of the twisted pair infrastructure out there. And the coaxial plant, at a shorter distance, acts like fiber. So you can go to very high-capacity services to these small and medium businesses. And it appears to me that businesses are using more and more data and less phone in their relationship with their own customer. And so we can make product that are inherently superior to what the old bell [ph] companies can do. And so it's ours for the taking. Now there's inertia in that business. Small businesses, medium-sized businesses, they're focused on their revenue and growing their customer base and their telcom spend isn't necessarily a top-of-mind issue. And it's a big issue for them to convert. Nobody wants to lose their telcom. So it's not one of those decisions that you make lightly. But that said, we're growing rapidly, mid-20s percent growth and it's logistically complex because we're coming off a low base. We have to grow that functionality inside our own business. And we're going, I think, about as fast as we can go at the moment. So in terms of what the marketplace likes, you've got historically high-priced services that were priced higher for businesses because businesses were an easier constituency in a regulated world to put pricing against than resident were. And from an architectural perspective, it's not that competitive. So I think we can go in and take that market.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
Yes, it's interesting because your market shares aren't that much different than other cable companies. The commercial, as a percentage of your company is higher, but really, that's because of residential challenges, right? So you don't have less growth out of commercial than other cable companies.
Thomas M. Rutledge
That's right.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
So let's shift over to the residential side, and let's start with marketing. The -- it seems like a lot of cable companies have different strategies. There's a lot of bundling and segmentation, a lot of marketing channel strategies. You've been a thought leader in marketing, historically, for the cable industry. How has marketing been evolving for Charter?
Thomas M. Rutledge
Yes, I've always thought that in cable marketing, people didn't really get what we were trying to do. And it isn't that we have -- that the products I've been involved with in the past necessarily had the best branding or the best looking advertising. When I think of marketing, that isn't really -- that's an attribute and I'd like to have that better than not better. But we are really about creating value for the customer. And you create that through having a good service organization, you create that through having superior products to your competitors and getting those products in front of your customers and getting your customers to use them. So it's one thing to have a superior network, but it's -- back to the bandwidth question, if people don't use it, it's not an advantage. And so you need to put products in the home that are differentiated and superior to your competitors and then have your customers use them. And that's the core of our strategy, it's having a better video product than our competitors, having a better data product, a better voice product and a better service organization and having all that work in concert so that the life of the customer extends, the amount of transactions that we do for customers go down, the satisfaction goes up, the costs come down, the revenues go up. I mean that's the goal of our strategy. But it's really an operating strategy tied to a marketing strategy.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
But what is the go-to-market strategy?
Thomas M. Rutledge
Well, the go-to-market strategy is to have a -- one, to make our network superior. So we unburdened our network by taking the analog signals off and putting on a fully 2-way interactive HD product and a digital product in every house. And so when somebody buys a triple-play from us, they're getting a really good video product. It's better than what they can get from a satellite company. It's a better data product that they can buy from a telephone company, whether it's an upgraded telephone company or not. And the voice product is cheaper and more fully featured than any voice product that they've ever had. And together, it's a better product and a better value than they could if they bought those individually as component products from satellite phones -- satellite phone, really.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
And what I intended to ask was, so how do you convince customers to come over and try these products?
Thomas M. Rutledge
Well, that's the hard part, especially if you have reputational damage. And the first way you do it is you market -- you upgrade your existing customer base. And you do that in a way that's least disruptive as possible. But it is disruptive. And you get your existing customers fully featured. So now they understand what your product is. Now you have, at least, some reputational advantage as you go-to market. And then, you have to -- you have to go out and get your competitor's customer to switch over to you. And that's the hard part of the business, and it's also the beauty of the business. And thinking about satellite over the last 18 years, as a digital product, it was superior to a lot of analog cable customers -- product. And yet it's, what, 35% penetrated in the country. How did that -- how could a superior product not just take everything out over night? Well, there's a lot of inertia. And the reason there's a lot of inertia, people don't -- they're inert. They're satisfied with the products they have, they're used to them, they don't want necessarily to schedule an appointment and have someone come to their house and rip out their wiring, change their remote control and change their life. So to dig out customers, is a slow, painful process. But if each time you do it, you've extended the life of the customer and the transaction is a favorable one, you're ultimately building one value proposition after another. It's just -- it's really a trench warfare kind of profit.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
Do you think about triple-play versus double play? You've got -- you want to get voice customers, you want to get data customer. Sometimes, you can't necessarily get both. Is the marketing strategy, we're going to stick with the triple-play and the data-only guys will come in when they come in? Or do you have -- set up for sort of targeted strategies for each type of customer?
Thomas M. Rutledge
Yes, we were able to hold 2 ideas in our head at the same time, actually, and we do, do both. One of the things that Charter has done really well and did prior to my arrival really well was create an online portal for order taking. Customers can order through Charter and actually schedule their own appointment and get -- and never talk to a human being. And...
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
Which some people like.
Thomas M. Rutledge
And we're taking almost -- more than 1/4 of our orders that way now. So, it's -- and we're getting better at it. And one of the opportunities that we have at Charter is Internet marketing. And if you think about the historic cable TV architecture, people wanted to own DMAs so that they could take advantage of broadcast newspaper and radio to sell cable. And so -- and people -- it was called the cluster strategy and people tried to put their assets around the DMA. Charter is probably the least DMA-centric kind of company you could imagine. We don't own very many DMAs. We're spread out all over the place and are not dominant. But we have this new marketing tool, which is the Internet, that didn't exist in the historic architecture. So I look at that, at some level, it's a challenge but in another level, we've got this portal that's working for us. So in the online portal, people are buying data services as standalone products at higher rates. Although we are managing to steadily grow our triple-play sell-in rate through the portal. So all said and done, we're using conventional marketing tactics, we're using new marketing tactics. So we have different offers in different places. We're trying to improve the triple-play sell-in, but we're taking standalone orders as well in significant numbers. And Charter, uniquely, has more data subs than it has video subs already. And 1 million data-only sub in homes where there is the satellite service, probably, in most of them. Anyways, I view that as a marketing opportunity.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
Anything in that satellite story that interests you? I mean, they use retail more aggressively. I guess, national TV advertising, you already talked to the advertisers inside, using the Internet more, mobile. Is there anything your competitors are doing that you look at and think Charter should be adopting?
Thomas M. Rutledge
The retail side interests me a little bit, and I would say we're undeveloped there. But I think that there -- some of the advantages that satellite has, like national advertising, don't work for us. Although the Internet opportunity I just explained does. So there's nothing that I can think of that I am not doing now as a result of what they're doing, that I ought to do. But what I would say is that what we're doing could be done better, and that's our opportunity.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
So everybody in the pay TV industry loves to talk about programming costs. I think we've gotten to the point where I think it looks a lot like Democrats versus Republicans trying to solve entitlements, right?
Thomas M. Rutledge
Yes.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
So everyone knows Social Security can't stay like it is in another 10 or 20 years, but each has their constituencies. And content guys have their shareholder groups and you have your shareholder groups. And how do you think this plays out over time? And then, if you can talk about sort of Charter's position in terms of the cost that you see coming in and relative to how much growth that might inspire in programming costs?
Thomas M. Rutledge
Well, dealing with programmers is the -- an ongoing part of our life as cable operators and even as satellite operators. And it's kind of like that scene in the Deer Hunter where you're in that cage in the river with the rats crawling all over you, and every once in a while you get pulled up and play Russian roulette. And that's what it's like. And we're sort of all trapped in this cage with the rats. The...
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
So you like them?
Thomas M. Rutledge
It's where we are. It's like we all live together. And we're in this ecosystem, and they're fully distributed, and they want rates and it's a great business model for them. And costs are going up and it's difficult to manage. And we struggle with it. And consumers are hurting. And so it's all -- there's a lot of tension. We've renewed most of our agreements this year with the major companies. And Charter, historically, I think, paid more than other companies for the same content. And I've always thought that was inherently unfair. And I think to some extent, we've had a little bit of success reducing our rate of growth relative to some other providers. But it doesn't mean we're necessarily paying less than anyone else.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
The -- your old home, Cablevision, is suing Viacom for antitrust violations alleging you illegally tie in channels together in a bundle. Any thoughts around that?
Thomas M. Rutledge
Well, look, people do, do tying -- I testified at Senator Kerry's hearing on retransmission consent after being involved in a big dispute with Fox when I was at Cablevision, the World Series were taken off and it's got some attention. And there is a -- as a result of that hearing, there is a proposed rule-making at the FCC. And our position there is that programmers should not be allowed to tie. And this is with regard to retransmission consent, but retrans is part of the bigger programming environment, not that much different. And we believe the FCC actually has some authority over retransmission consent. And so the rule-making doesn't seem to be going anywhere at the moment. But our position was that there should be no tying and that there should be transparency in rates and that there ought to be uniformity. There's no cost difference between providing Charter a service and providing Comcast a service, if you're Viacom or anyone else. And so that's our recommendation to the FCC. But we haven't joined any litigation at this moment in time.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
The only other -- the other programming cost question I have, something that is interesting relative to you, is just sort of the concept around RSNs. I mean, other than L.A. where there is some new dynamics, you're not in a lot of other markets that have sort of these multiple RSN launches, I think. Is that right?
Thomas M. Rutledge
Well, we're in L.A. We -- there are some markets where we haven't launched the RSNs. And it's a mixed bag, so I can't -- I don't know how to describe it on a relative basis to other companies. But yes, we -- it's an issue for us. It's not the biggest driver in our programming cost structure, though, but it's a factor and particularly in L.A.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
Some of your peers and competitors are launching sort of RSN surcharges. Is that something that interests you?
Thomas M. Rutledge
I understand the desire to do it, but it's a rate increase. And this goes back to the Russian roulette thing. I'm not sure taking yourself hostage is always a good idea. The -- it's our bill, and if you make the bill confusing and unfriendly, that has its own disadvantages. So as a general proposition, I like consumer-friendly bills. In our phone business, I've taken all the taxes and fees off the bill and included them in the price so I don't look like a phone company. And to me, it's kind of a regulated-environment approach to billing. And -- but I understand why people do it and why they want to do it, and why they want to tell their customers in that way what's happening. But if you do that long enough and have enough of them, then you get -- you have certain disadvantages.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
Start to look like you're nickel and dime-ing.
Thomas M. Rutledge
You look like you're nickel and dime-ing. You look like you're trying to confuse people and that you're not being straightforward with your pricing. And that's the disadvantage of it.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
So why don't we hit into the products real quick. We all like to ask you, okay, you've come in, you've had a complete renovation at Charter. We all look at your video penetrations, and peers like Time Warner Cable and Comcast -- and so the favorite question, any reason why over time you can't get your video penetrations up to their level?
Thomas M. Rutledge
No. There is no reason as I see it today. My view of Charter and the reason I wanted to go and manage it was that was my thesis, that Charter was producing $225 of cash flow -- operating cash flow per home passed. Cablevision was producing $450. Most of the other cable companies are in the high 2s, $200s. The big opportunity is to grow revenue per sub and to grow customer relationships. There's 12 million passings at Charter, 4 million video customers. And we have an inherently superior product, if we can operate. And it will take time, but yes, I think we can have a -- we can close that value gap between being the worst and the best.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
How much growth is left in high-speed data penetrations?
Thomas M. Rutledge
At Charter, significant. I think high-speed data penetration, in aggregate, isn't growing that fast. But again, we have this superior product. So we ought to be able to grow our own share.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
Voice penetration?
Thomas M. Rutledge
That's a huge opportunity for us. And we've come up rapidly and are coming up rapidly because of the way we're marketing it. And I think that there's no reason why we shouldn't be the dominant voice provider in our market at some point in the future.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
CapEx, we always like to ask you if you can get CapEx at Charter. Obviously, investing for growth right now. And I think you're over 20% for -- of revenue for the second straight year, the sector's averaging about 15%. Folks hope that you could get back down to the 10% or so that Cablevision was trending towards. Any sort of thoughts around that?
Thomas M. Rutledge
Well, yes. It all depends on where you are in the cycle. So we're spending some money now. But as I said earlier on CPE, I think the long-run trend in the business are less capital intensive. And that, as a general proposition over an extended period of time, we should reduce our capital as a percentage of revenue, or EBITDA or however you want to measure it. That said, the faster you grow, the more capital it takes in any 1 year. It's only when your growth begins to flow that you see the benefit of that spread between capital expenditures and revenue begin to get bigger. So a high growth company should have a higher capital spend.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
The -- I think if you -- I sort of enjoy the goal, the simplicity of, "let's get more customer paying more." A pretty simple philosophy. You were pretty positive in your commentary in the fourth quarter call. Chris was similarly positive last week about the underlying momentum that you guys feel are building in the business. When does it become fully evident sort of in the headline numbers? When do investors see more customers paying more money?
Thomas M. Rutledge
Well you -- I'm not going to give you a forward-looking statement about that or new guidance other than what we've already done. But look, as we said in our fourth quarter earnings, we had the Bresnan acquisition, we actually showed what happened with Bresnan and we showed a business model that was very similar to what we're doing at Charter. Now Charter's different. It's bigger, it's more complex, it's more damaged initially than Bresnan. Bresnan wasn't damaged at all. But it was -- I was not -- it was an analog product, it was not interconnected. We spent capital there. We changed the marketing philosophy, we changed the organizational structure and organized the field management, just like we do at Charter. And we got very good results. I have high expectations for Charter, and I'm confident that we will get onto a faster growth rate. The challenges of when that inflection point comes obvious to everyone in financial terms, I don't want to say that. But I'm already seeing much higher triple-play sell-in rates and I'm seeing lower service call rates, lower repeat service call rates. So customer service is improving, which means the value proposition is improving. Transactions are coming out of the business, costs are coming out of the business and revenues, they're increasing.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
So I've got 1 more question. We're happy to take questions from the audience. And this might be a little unfair because you walked through your operating strategy in detail, but you made a comment about if you just run the business well, it's going to do great. What could you run really well in the business? So rather than just run the business well, where do you think Charter has an opportunity to be exceptional?
Thomas M. Rutledge
Well, I think, when I say we're the best video service, to be exceptional, I mean, you have to think about creating products that actually work and that gives utility to customers. And I think we can be creative in the way we move bits around in our network and differentiate ourselves from our competitors. But the one nice thing about Bill Bresnan that I learned is that if you're a really good service organization, you can cover a lot of things with regard to development. And so oftentimes, if the company is really focused on growth or strategy or a product development, it loses its perspective with regard to the underlying fundamentals of running a service organization, which is hard and industrial in nature. We have 200,000 miles of plant. We have 10,000 people in trucks and people answering millions of phone calls in call centers around the United States. And the business is highly transactional and it's physically intensive and you have to make appointments with people to do your work, all of which -- if you think about all the businesses that make appointments and think about all the businesses that have a difficult perception in the minds of customers: plumbers, contractors, cable TV companies, the core of it is you have to meet people and do work that has an undetermined amount of time to do it when you show up. That inherently creates conflict. And if you can take that out the business effectively, which is a hard thing to do and it involves a lot of management, you can really separate yourself from your competitors. And because of the inertia in the business, it has a lot more value than being necessarily a great product innovator. And if you do the both together, then you're unique. And that's what we're going to do at Charter.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
Any questions from the audience? We've got 1 in the back. We'll come up to the front, too.
Unknown Analyst
You're a midsized cable company. Do you see opportunities for consolidation in that space between you and other similar companies, companies of similar sizing?
Thomas M. Rutledge
Well, we're not going to discuss our M&A strategy. But I don't think we have to do anything with anyone to be successful. There are some advantages to scale. But what I was just talking about the service organization, the bigger your scale, the harder that is to do in some respect. So there are pluses and minuses to scale. And so we don't have a need to do anything. Bresnan was an asset we knew well. And we thought it was a good indicator of what we can do with our business. And because we knew where it is in the cycle, we thought it was free cash-flow accretive and a good value for us. And we'll look at all assets like that. But we don't need to do anything.
Unknown Analyst
I have 2 questions. Firstly, on competition with U-verse and FiOS, what portion of your homes passed today are addressable by each of those 2 providers? And each of them is building out their network a bit more. Where do you expect that your overlap will settle with each of them, on percentage terms, of your total?
Thomas M. Rutledge
Yes, I -- FiOS is about 4% of our network, and AT&T is less than 30%. And I haven't seen any evidence that either is expanding actually in those -- as the way we measure it. I did see the AT&T announcement. It was a little unclear to me what they were actually doing. And I've seen no evidence that the size of the footprint has expanded. Some of what they said was MDU development and other things like that, which I'm already counting in those numbers.
Unknown Analyst
And then, secondly, your -- unlike the company that you most recently worked for, Charter's footprint is very fragmented. And I'm curious regarding the demographics or any other factors that would differ materially from, say, U.S. averages i.e., if your demographics of your territory are below average or significantly below average the average of the U.S., then it would probably have applications for penetration and ARPU, where those would ultimately go. Can you speak to that?
Thomas M. Rutledge
Yes. Well, I actually don't think Charter's materially different than the average in the United States. And once you get to a certain size in enough communities -- so I think we pretty much mirror America, and that our opportunity in terms of demographics is similar. And that -- my view, and I've said it earlier today, is everybody wants cable TV. There's no demographic that doesn't, and no demographic -- that's not true, necessarily, broadband because of the literacy rate. But everybody wants TV and everybody wants phone. And we -- and part of the process of selling across the whole universe is figuring out how to relate to your customers and also relate to their economics and how to manage your processes, billing and collection processes so that you don't turn off customers inadvertently because you've created a situation where they can't afford to pay you, yes.
Unknown Analyst
I'm trying to understand the different -- when you talk about the opportunity at Charter, part of it is, it's pure network and part of it is -- that you gave with the Bresnan example, just a service opportunity. If you were not the CEO of Charter but instead, the CEO of an RLEC right now, do you think that there's the same service opportunity when you look at, let's say, your competition, where you could see a significant change just in doing what you're doing from the services spectrum? I'm trying to understand how big that service opportunity really is in asking the question.
Thomas M. Rutledge
Yes, it's an opportunity for them as well. They have disadvantages from a network perspective. And there is a relationship between your technical capability and your perception of service. So ultimately, it's a question of what does your customer think of you. And it's a mix between the way you deal with them and what their expectations are around the way you deal with them and what your technology is and how it works. So if you have a really inherently unreliable technology and you're really good at managing it, you're still disadvantaged. So it's a combination of things and how they work together. Yes, John, last one.
Unknown Analyst
You talked about how you're trying to differentiate in phone and high speed and video. How can you differentiate in advertising versus the competition, which is basically local TV stations?
Thomas M. Rutledge
Right. Well, that's a -- how can we differentiate in advertising? We -- what we historically have sold is spot advertising on avails, meaning open pieces of space that programmers give us as part of our programming contract relationship. And that's what broadcasters have as well. They have more inventory than we do. And so if you look at our business, what we have the capability of doing is creating new inventory through technology. And we have the ability to segment what commercials are seen by which group of people and we have the ability to take databases, however they're configured, however advertisers might want to reach consumers by whatever criteria they choose and actually run specific commercials in specific houses. And we're building that infrastructure right now at Charter. We're a little behind the rest of the industry, but we'll catch up, I think, over the next 24 months and have a fully-functioning interactive advertising platform. With that -- now the upside there is that we have to create new relationships with people who didn't traditionally advertise on television, direct mail, people that want to get directly to customers, people who use direct mail and other form -- or including Internet advertising targeted. So there's challenges into creating more inventory if you don't create new customer relationships in the ad space. But I think we can do that, and I think we can begin to accelerate our advertising share through time. And so that's part of our strategy, and I didn't talk about it, but we -- another part of our product strategy that we're implementing today that I think of as a sort of non-fundamental. But most of our energy at Charter is in just making sure our operations make sense and that we can deliver a good product to our customers in a uniform way across our entire platform.
Douglas D. Mitchelson - Deutsche Bank AG, Research Division
Tom, thank you so much.
Thomas M. Rutledge
Thank you, Doug.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!
