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Talking cable and media with Alex Morris from TSOH (episode #158)
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Transcript begins below
Andrew Walker: Hello, and welcome to Yet Another Value Podcast. I'm your host, Andrew Walker. If you like this podcast, it would mean a lot if you could follow, rate, subscribe, and review it wherever you're watching and listening to it. I don't know how else you'd consume it but with me today, I'm happy to have, I believe for the third time, my friend Alex Morris. Alex is the founder of the Science of Hitting Substack. I'll include a link to in the show notes. Everyone should go check that out. But Alex, how's it going?
Alex Morris: Good. Thanks for having me. In prep for this podcast, I was on Spotify just searching for Charter and Comcast and seeing if there were things I hadn't listened to recently. And one of the top searches that came up was you on my now-defunct podcast talking about cable. So we had this conversation before.
Andrew: There we go. You and Scuttle Blurb, both you said the podcast, and both are gone and those were in my listening feed and it's always nice to kill a competitor. I'm the full Monopoly now. But Erick[?], before we get started, let me just start the podcast. Every podcast do a quick disclaimer. Just remind everyone nothing on this podcast is investing advice. I think we're going to bounce through the cable sector, maybe the media sector in general. I mean people can question if you're even in your right mind, if you're investing in the cable or media sector these days but we're going to bounce through several stocks so please remember, not investing advice. Do your homework, do your own diligence. That out the way, Alex, want to have you on again just bounced through all the cable space and media space. I forgot almost two years ago, we did that cable space. I think the last time you were on the podcast, we were talking media about a year ago but media cable, all of it has really changed over the past year. The main thing that's changed is the shareholders have a lot less money these days but everything's changing really rapidly. I just want to talk, as we're talking end of March 2023, what are your overall thoughts particularly on the cable space? What's happening in it?
Alex: Yeah, it's really fascinating. I mean, I think you have to have kind of a historic perspective here for any of it to make sense. If you pick Comcast as an example, we went through a 12 or 13-year period where they ticked off 1 million-plus net ads, and Broadband every single year that the story was pretty clear on both volume and [unintelligible]. And then you get to covid and you see this massive growth spurt relative to what they normally expected. I think one of the quarters peaked out at right around two million trailing 12-month net ads which is far above kind of what normal was and now, in some ways, it feels like we're on the backside of that but nobody knows really how to quantify it. You take management at their word, it seems like it's more than just that given impacts remover churn or impact some FWA, there's a winner in question of fiber. And then on top of all of that, you have the wireless strategies that cable which were Nielsen efforts two, three, or four years ago and now are really a lot more front and center in terms of how they communicate to customers, in terms of what they're talking about the shareholders, in terms of where the connectivity industries is a whole or kind of moving. The stories are changing fairly quickly and it makes for a very interesting environment for longer-term investors like ourselves.
Andrew: Yeah, and I guess I should just note to everyone, earlier this week, I posted a podcast with the CEO of Cable One. We might reference that a little bit. I thought that was just an absolutely fantastic conversation. So if anybody wants to go check out kind of another podcast that might work well as a companion with this one, you can work through that. But let's just start, if I rewound a year ago, I think that's when the story, fixed Wireless had been coming. I think you and I first started talking about Fixed Wireless, the whole industry in 2017 or 2018, right? Verizon had this fixed Wireless, we'll probably call it FWA, Fixed Wireless Access. That's a competitive Broadband product where you use wireless instead of fiber or cable to the home to deliver. But it started coming in 2018. There have been attempts before but the Verizon product failed. Then in 2021-ish, T-Mobile had just closed on their Sprint deal. And T-Mobile said, "Hey, we're really going to get into Fixed Wireless game." And all through 2021, you saw the cable company saying, "We've dealt with fixed Wireless before. This is not a big deal." And T-Mobile started putting up some pretty nice numbers and then in 2022, about a year ago, it's roughly, when it shifted from "fixed wireless is not a big deal" to "hey, you know, maybe fixed Wireless is taking something at the margins" and "hey, our churn is super low, but we're going to start not reporting as many Broadband ads because the cable companies were saying because of move churn," and then over the year, it kind of shifted from it's not just move turn, it's not just low move turn, it's also that we're not winning our share bags because the DSL lever, instead of going to Cable, maybe they're going to Fixed Wireless and then they'll come to cable later.
I guess when you look at this, the biggest change has probably been the competitive concerns have really amplified because of Fixed Wireless. And I think the cable companies have done them. They have not helped themselves with how they dismissed it and then their story evolved over time. I just want to ask, that's probably the biggest concern for cable investment. How are you thinking about Fixed Wireless these days?
Alex: Yeah, I honestly think about it mostly from the way the wireless companies talk about it more so than the cable companies. You had kind of changing commentary over time. I think, in T-Mobile's first press release when they spoke about home Internet, they explicitly said something along the lines of doing this in a capacity of where way and it speaks to the nature of what this product is and how it's basically competing for prioritization on the network to the extent that there are capacity constraints between home internet and the wireless product, which on a unit basis is obviously significantly more attractive for a wireless customer, given the usage relative to the home internet product. So I think there's been this overhang of, is it a good product for a certain type of customer? Yes, what percentage of the market is that? That's a little bit more of a squishy question to answer. And then, where does this kind of get tapped out at? I think another important part of that is, this is my understanding of the kind of technology of it all, it's very hyper-localized. It's not just the network. It's very geographic-specific in terms of where you would or would not have capacity constraints. And I think you see this in terms of the way these products are marketed and your ability to actually sign up for them. I saw one of the T-Mobile commercials when I was watching a [inaudible], the World Series, and looked in my area, South Florida, which obviously has a lot of people who live there and the product is simply not available which makes sense given, again, the nature of what they're dealing with on the network side. So it's been interesting to watch.
I think, where we stand today, my sense is T-Mobile is probably more in the middle of AT&T and Verizon saying, we think this is a suitable product for a certain type of customer. I think they really see it as a way for them to bundle primarily with their high-tier Magenta Max wireless customers. Verizon sounds a little bit more optimistic than they do in terms of this being a longer-term solution and AT&T is by far the most aligned with the cable sort of worldview where this is just a temporary stopgap that is not an effective use of the network over the long term. So it's all a bit muddled but in the short term, I think as an investor, you have to ask yourself even if we're talking about something that's cap two, three, or four years down the road, if they're taking half a million or a million net ads collectively, that would have gone to cable. Otherwise, that is problematic for two, three, or four years, and two, three, or four years of real life is a lot longer than two, three, or four years on a spreadsheet. I don't know if it's actually capped once you get to that point either. Maybe the mass starts to change if you have 5, 7, or 10 million subs. So it's a bit of an open question. I still feel pretty comfortable about where it shakes out over time but certainly not positive.
Andrew: You mentioned the divergence in the three carriers, right? So there are obviously three big mobile carriers in the United States. There's T-Mobile, there's AT&T, and there's Verizon. What strikes me is AT&T continues to say, hey, there is a place for Fixed Wireless but it is a niche case, is kind of how I described it, right? They say Fixed Wireless is going to work where you've got really rural customers that are really far away from our network and then we can just drop them a Fixed Wireless or something like that. That's really where you're going to use that but you say, it's not the core. Obviously, if you're charging Fixed Wireless, you're going to consume 10 or 20x more data at your home than you will at mobile. They're saying, look, if we're selling somebody a $50 a month all-in broadband plan versus a $75 per month all-in wireless plan, and they're consuming 20 times the data on that all-in broadband plan like the economics just don't make sense. The usage doesn't make sense. We don't really see it. AT&T saying one thing. T-Mobile who does not have any fixed network capabilities is saying, hey, it makes sense but there's a limit to how much we can take all this. Then Verizon, it's interesting because they've got, they built out Verizon Fios in a lot of the country.
They're kind of going more aggressive as you said. They're saying, hey, we think this can be a lot more people. We don't think there are any network capacity constraints. Those are kind of some of the stuff they're starting to say. How do you read into the difference in how each of the mobile operators is talking? Because look, obviously, I've only been following the industry for 10 years, I've read some issue but I've never seen mobile carriers approach a product with this much divergence in terms of one person thinking it could take everyone and one person saying there's nothing here.
Alex: I feel like T-Mobile's going back and having read a decent number of transcripts going back called three, four, five years. I feel like T-Mobile's messaging around what the product is and what it could become from a business standpoint has been probably the most consistent and the most logical to me. Even in terms of how they sell the products, if we go look up at the home internet kind of consumer product page, it's clear that the typical speeds are as they explicitly state. The typical speeds are certainly inferior to what you expect for kind of a baseline broadband internet offering. They also make it clear on their consumer product page that there can be times where prioritization issues mean that you're kind of pushed further down the stack in terms of the quality of the product that you're receiving. But that could all work in the context of a potentially 30-dollar offering if you're a Magenta Max customer. If you're in a part of the country where your alternatives are not particularly attractive. I think it has a place but I think even T-Mobile's language, they make it very clear, again, that they're writing follow capacity and the math on the economics is largely based on this being a sunk cost. And the question obviously becomes at some point, if it's incremental investment to justify this, does the math work? And they've been asked that pretty directly and their answer is so far from everything I've seen is, we're just not sure at this point. I think they probably lean towards no if they had to truly be honest about it. I just feel like their wording around it all and their conversations around it all have been the most direct to me.
Andrew: That's perfect. Right now, in the cable space, again, I follow the signs of [inaudible], right now, you're invested in to cable companies, right? You're invested in Charter, you're invested in Comcast. I think Charter, are you in Liberty Broadband, or are you in Charter?
Alex: Liberty Broadband.
Andrew: Liberty Broadband, okay. I know, recently, you took down your Comcast stay, right? You decrease it. Obviously, you run pretty concentrated so it's a pretty big position but you recently reduce their position. I just want to walk through like the world is large. You can invest in anything, you can invest in micro-cap, Italian real estate companies or we could invest in Apple, we can invest in absolutely anything. But when I look at this, you've got the Charter and Comcast exposure. Why Charter and Comcast specifically? Why are you invested in these two?
Alex: Well, I think, generally, one, you go back to the results historically and think about how the industry was playing out and obviously, that influences some of the decision-making, and then as we look forward and particularly, as I look at something like Spectrum one and compare it to alternatives in the marketplace and think about the cost dynamics of their network and kind of what the economists will look like as they serve these different products in a bundle, and obviously, the MVNO has a massive impact on how I think about all this. For Charter specifically, I just think it's clear that they have a view on what the right strategy is here going forward. I think, if you look at the numbers in terms of what it will cost consumers, they also have a pretty compelling point in terms of this being an attractive offering. So I think it can make sense in that regard. Obviously, a very big market. In terms of Comcast, the Comcast gets a little bit messier because of the things happening at NBCU. And I think they did dare to bet in terms of what their D2C strategy is and what the path is to actually being successful long term, whatever successful even means by their definition. And again, I don't think it's not just an NBCU issue and I kind of wrote about this recently. I think it leads over in terms of just the kind of effectiveness of the organization, the clear strategic vision of the broader Comcast organization.
I think the Spectrum One, it's been a very clear customer value proposition, how they've laid it out. From what I've seen when I've been in the markets that they operate in, they've been advertising this pretty aggressively and it just feels like Comcast has been a bit slower to get to that same place. I think you see it in the Q4 results, especially where Charter had a massive quarter on wireless net ads and Comcast, a very good quarter still but not to the same level. And again, I think it might speak to strategic focus and really the core business and what they're going after.
Andrew: Comcast, it's really tough because I don't think there's anybody who would look at these businesses, put together and be like, hey, the stock as you and I are talking to is about $35 per share. I don't think there's really anyone who would look and say, oh, yeah, like that's a fair price like it's clear it's getting hit, to me, at least, it's clear it's getting hit with a massive [inaudible]. When I run my sum of the parts, I think you could argue that the current stock price, the cable side covers all of the current stock price may be more than all of the current stock price depending on how you value cable. And then you're getting MBC and that just disastrous guy acquisition for free. But then I think the pushback people would have is, yeah, but they conglomerate discount like Brian Roberts controls that company. He did this guy acquisition like NBC has been, I think the NBC acquisition was good but in the past few years, the execution probably hasn't been fantastic. There are lots of questions about it going forward. So the conglomerate discount is kind of worth it and just overarching that one of the things I used to say, I'm not sure if it applies anymore, but when I would talk to people at Comcast, I know I emailed you about this one time. I was like, hey, if you want Comcast, if you like that exposure, why not just go by Charter and Disney and create your own conglomerate, your own Comcast? Disney is probably a better asset than NBC. Charter might not be as good as Comcast cable but it's very focused. They go aggressively at mobile, they're going to do share buybacks pretty aggressively like why not create that own conglomerate? I guess I'll just pause there like how are you thinking about specifically, Comcast with that conglomerate discount?
Alex: Yeah, I think the NBCU/streaming side of the house has had impending change for a longer period of time than I would have assumed it would last. You have a very clear catalyst in terms of the Hulu inclusion finally coming here next year. It doesn't mean something big is going to happen. But there is an important transaction and it would presumably cause executives to step back and reassess what their strategy is and what they're trying to do. Again, I don't think they've come to that moment as quickly as I kind of hope they would originally. From where we stand today, it's unclear that they even are uncomfortable with the position that they find themselves in, which is for me, I just don't think it aligns with kind of the facts on the ground in terms of sub-base, revenue base. Look at Nielsen data and see engagement in Peacock, I think it just got broken out recently but it's 1% of engagement in the US where Netflix is six or seven times that amount and also this is Comcast/Peacock's best market in terms of their ability to compete. Internationally, it's a very different picture. So I think they've been slow to really position that business for the future and I don't know even where we stand today if they have the clear strategy for doing so. As you pointed out, you can make the argument that it's still quite attractive even if that asset isn't worth very much. But just for me, the kind of investor I am, those aren't really the ideas I'm drawn to as much as the companies that are actually executing and going out and building bigger and better businesses.
Andrew: Again, everything is opportunity cost, right? And you circle the wagons with Comcast and Charter through Liberty Broadband. I've kind of circled the wagons with Charter through Liberty Broadband. Actually, I'm a little bit of both at this point but I think the biggest, Altice, I got absolutely burned on Altice. You're really [inaudible] having there, it's really lovely. That's a huge turnaround. I think that to that most people would say, hey, you're invested in Charter. Why are you invested in Charter versus Cable One on one side which I had the CEO on. She was absolutely fantastic. I got a lot of emails. They're like, hey, the Cable One CEO was awesome. Why are you not in Cable One right now? I think that would be one. Why are you in Charter versus Cable One? The other would be, hey, you're in Charter. Why are you in Charter instead of T-Mobile. It would be the other choice, right? Like T-Mobile, this Pure Play Wireless company. They're taking share. They've got the best network. They've got great Spectrum access and they're just gobbling up not just Wireless but also Fixed Wireless customers, and they've committed to kind of the Charter. We're going to be delivered by backstory, we're generating huge amounts of free cash flow. We're just going to eat or sugar count going forward. I guess just why Charter instead of those two? We can talk about either one.
Alex: Yeah. First of all, as you already said, that Cabo interview was fantastic. Anybody who hasn't gone to listen to should definitely go listen to it.
Andrew: Yeah, I can't pitch it many more times but it was really good. It was really good and it's a CEO in the industry who is like experiencing the things we're discussing every day and I thought she had fantastic answers on it.
Alex: Yeah, I'll pitch it instead then, it was fantastic. I think part of it for me as that discussion got around to, I think the wireless strategy at Charter and Comcast is incredibly important to how I think about where the businesses are going long term. I think for the smaller players, I don't know what everybody's strategy is in that space, but it's less clear to me how they are going to play that same game long-term. I feel like Charter and Comcast has a very well-established position for how they plan on attacking the broader connectivity opportunity long term. Maybe there are smaller companies that have a similar strategy that I'm just not as familiar with but I'm very comfortable with the approach they're taking and I could see this industry, connectivity broadly restructuring around, the customer count at a Comcast or Charter may not change as significantly as they used to, but it could be a number of customers who are getting both home internet and wireless for this company. And I think that could work for them very well both in terms of the size of that business but also in terms of profitability, etc. In terms of T-Mobile, I still feel like I like tables hand as they come to this game, that will continue to play out in the years ahead. I like their hand better than what the wireless companies have. What I spoke about on the ad that I saw during the World Series speaks to it. They're selling home internet but the pricing for someone who's a Magenta Max customer, which is the highest tier is significantly lower than just your average T-Mobile customer. They have to think about things like that as they market the product and the difference is, I think, it's 60 or 70% more expensive. Thirty dollars versus fifty dollars.
Again, there's a difference there and how they market it and Magenta Max is only 15% of their base, something like that. Their geographic considerations I spoke to, they can't just go out there and say, hey, get this product today, you go onto the page and try to get it, and, hey, it's not offered in your area. I just think the Wireless companies still have certain limitations. And as [inaudible] has done a good job laying out. There's kind of a difference between true connectivity and just bundling. Cable in my mind has a very clear connectivity strategy. T-Mobile does this well with FWA but there's the question of whether or not that's actually going to be something that can be used by potentially tens of millions of customers over time. I just like cables hand in terms of again, the cost of their asset base, their ability to sell broadly to their customers, and the math on it all working out.
Andrew: No, look, I agree with everything you said on the T-Mobile point. I get pinged quite a bit on T-Mobile. The numbers make sense to me. I definitely see what people are saying, they're taking great share, but I'm with you. I just keep looking at them say, hey, you know, I think history, we've got a couple of decades of history in Telecom, right? Like we don't have forever but I think history is just suggesting the way my model suggests. Whoever got the most deepest fiber is ultimately going to have the best product. I continue to think that's cable and the majority of the country or they're tied with fibers to form in the places they overlap. I just keep looking at that and say, look, I think, as you said, the cable, wireless business is going to take a heck of a lot of share. It's a lot cheaper for cable to go and attack Wireless than just for wireless to go into tech cable. Because with wireless cables already handling 90% of the data, they just need to get that last 10%. They can do it over the MVNO wherever the MVNO is the hottest. They can go and build out cable to kind of offload it to themselves versus if you're T-Mobile, you're saying, hey, we're going to take on 90% of the data and we're going to have to do it selling it cheaper than our wireless plans. Cable just makes more sense to me. On the Cabo thing, I agree with everything you said, like, look, I thought it was great. Could I own Cabo at some point in the future? Yeah, I definitely could see it like the capital allocation has been outstanding. The executions have been great.
The thing that kind of holds me back is Cable One and Charter kind of trade it about the same multiple which is crazy. If you went back a year ago, Cable One was at like $2,000 per share and Charter was at like 500. Cable One was trading for double the multiple of Charter and everybody would look at them and be like, why. There were lots of thoughts on why they did it. But nobody knew why there were a lot of people who are really bullish[?] on rural was one thought because they're a lot more rural. But you know, today I look at them trading the same multiple and Charters got that wireless growth where I think that it will deliver real value for them. That's one kicker I get and then the second kicker I get, like a year ago, people live rural, two years ago, people live rural. Today, I'm a little bit more nervous about rural and Cable One has a lot of rural whereas Charter has much more suburban and urban, and I do feel a lot better about that as it goes to Fixed Wireless. I threw a lot out. Actually, I'll kind of pause there if you wanted to add anything to that.
Alex: I had one thing that's a bit of a tangent that I think T-Mobile deserves. I don't know if this is just an accident that it happened this way. But I think they deserve some credit for it. As I think about cable and you think about the Pay TV universe and what's happening there with [inaudible] rising pretty aggressively every single year. Obviously, very significant Pay TV losses. I think cable, in a lot of ways, their brand is, they're perceived as the person who's kind of doing that in some ways and I think it negatively impacts their brand. And as people cut Pay TV, there is also the question that comes up whether or not they want to continue operating with that cable provider, especially if your bill is 250 a month which is very well maybe, depending on the pay TV package you were taking. I think T-Mobile did a smart thing where they were trying to build out their own Pay TV offering. I don't know how it's going to be branded, I can't remember the specifics of it all, but I think they eventually just threw in the towel and said, we're just going to use YouTube TV as our kind of the MVPD and we'll offer per month discounts, whatever it may be. But I think that was a very smart way for them to offer that capability without them being perceived as a person who's pushing, and even YouTube TV if a price is right. So, I just think they do have kind of a leg up there where Comcast and Charter may be perceived as the company that's layering on this 10, 15, $20 incremental every year for Pay TV costs when really, they're just passing it through. But the pissed-off customers are pissed off at them and not pissed off at Disney or Paramount or whoever.
Andrew: When the fiber is at home over builder comms and builds out in the cable companies, they get in the first year, this is rough math, but in the first year, they're going to get, if they pass 100 homes, 15 of the homes are going to switch over to the fiber home player[?] and then in the second year, another five to ten are going to switch over, right? So it's about, you get 15% of your one and you get up to 25% of your two. Rough math. Don't hold me to that exactly. But that's rough math. It would seem that you should get more in your two versus your one because you've been there for a year, you had more time for that advertising. But the reason you get more in your one is exactly what you're saying, right? You've got 10% of the customers. I mean everybody hates the cable company but 10% of the customers hate the cable company. And the moment someone comes to switch, they say, they've been overbilling me for years on TV, I'm out of here. It doesn't matter and I'm sure some people have other service issues but a lot of it is just they hate the TV and they're just going to switch instantly, right? It all speaks to what you're saying there.
Let me ask another question here. We talked a little bit about the headwinds and cable, and we talked a little bit about the opportunity costs of buying Charter versus Cabo, buying the cable companies versus the Wireless company. There's another question, right? You and I are in this game, your hope is A, to enjoy it, and B, to generate risk-adjusted alpha in the long term. Probably B over A, but both of them are helpful. Everything, again, is opportunity cost. I think both you and I look at the cable companies and say, hey, I think I can generate risk-adjusted alpha in the cable companies today. We said this last year and we were very, very wrong from last year. I'm not gonna have you put words in my mouth but what are you seeing today in, let's just focus on Charter, because again, Comcast got the other stuff, but Charters is trading for about 340, 350 per share. What are you seeing today in Charter that makes you think you can generate risk-adjusted alpha going forward despite all the headwinds we've talked about?
Alex: Yeah, again, I think it's this combination of a cost-effective network, of very clear strategic vision, of path to communicate that to customers in a way that is attractive and can lead to again, what was last quarter? 650,000 that adds on wireless lines, I believe. Somewhere around there.
Andrew: I can pull them up on a second but something like that. Yeah.
Alex: They're proving out the logic of the offering coming from a consumer perspective and I think the logics there as well from my business and network perspective and it's still early obviously, on CBRS offload, and things like that. But I think they have a very clear understanding of why this works. I think it's a compelling package for someone who is interested in doing all of their connectivity business with the single company, and you're looking at spitballing numbers off the top of my head. But obviously, the first year, promotional pricing on Spectrum One is very attractive, but I think after you get past year one, you're paying roughly $140 a month for Home Internet with two lines. I think it's two lines. The comparable offering on T-Mobile was about 170 or 175. I just think the math works there and that goes for trying to onboard new customers but it also goes for the sustainability of the base and I think people are very reticent to switch these services just for the sake of switching them. There needs to be a clear reason for doing so. Saving $10 probably doesn't do it. Slightly faster speeds where it's not very perceptible probably doesn't do it either. I just think there's a path forward where they can slide into a place where, again, maybe the customer base overall doesn't grow as significant as it once used to but they can start to have higher penetration within that customer base with people who are taking a bundle that has obviously significantly higher offers.
Andrew: If I could just end you on that, I agree with everything you said and then you also get on top of that, the charters trading for seven times EV to EBITDA. The EV to unlevered[?] free cash flow is going to look a little funky in the near term because they're doing the rural Investments which we'll talk about in a second. But treating around 12, 13 times EV time that they have a free cash flow, my numbers are like, you're getting a pretty juicy cash flow yield and all that cash flow is going to go what I personally think are going to be attractive investments and see their growth through the rural buildouts, or it's going to get returns cash flow. So, you get this really bond, to me, it's a bond growing with inflation protection plus some growth plus it's all just kicking back to you. I do want to ask a question on the Charter host Investor day in December. They come out in the Investor day. They say, "We are going to spend a lot more in cutbacks than anyone thought." We're going to upgrade our network. Docsis 4.0, make it future-proof. We're going to spend a lot of money going after these rural networks. The market doesn't like it initially. Stock goes from about 400 to 330 the next day and over the next month or two, stock recovers back to about 400. And then in the past, you know, a couple of weeks with SIVB failing, everything is back down to 340 but I guess we can ignore the volatility. I do just want to ask you, Charters' cutback story and Comcast is kind of the same cutback story as well though not quite as much through. Charters cutback story, what do you think about the rural buildout, the upgrade, and all of that?
Alex: I'm not as well-versed on the world build outside of, you know, a lot of things have obviously set and some of the numbers they've shared, it all strikes me as very logical and again, when you're investing in a company and partnering with the management team, you usually do so from the perspective of actually trusting them and proven track record obviously helps. Everything there seems logical to me. In terms of the broader and a network investments, I think there's this question of whether or not it's maintenance first growth and do you just constantly have these every five or so years where you need to put a significant amount of dollars or percentage of CapEx intensity. We want to measure it but at the same time, you look at the numbers they're talking about in terms of what the network can do and when you look at competitive offerings from Google Fiber, AT&T fiber, in terms of two by one or five by one, and you look at the prices that they're charging the customers, I just think it's logical to the extent that this doesn't devolve into this complete price where people fighting for customers, which I don't know if that would, it would probably be worse for the competitors and it would be for the cable companies if that happened in terms of just purely the financials. But outside of that happening, I think there's a pretty clear opportunity for this to be an ARPU driver over time. If people, as Cabo CEO did a good job of laying out, if people are electing to take higher tiers versus a base product at a very reasonable price, that is not bad ARPU. That's okay to have that happen and I guess there's potential for this to potentially flow through in the years ahead.
So I feel pretty comfortable in terms of those investments doing a good job of protecting them from a volume side of the equation and also protecting them on the ARPU side of the equation.
Andrew: Yeah, look, I completely agree. Just the last thing I wanted to ask and this is something that's just been diving around in my mind, like one of the things when I first started buying cable is cable was trading for, a lot of people look at these on, you can do it on an EBT, but a number, you can do it on EV to homes past number, right? I think at the time cable was trading for ten times EV[?], I don't know, 10, 12, whatever, traded for about $3500 per home past. I think one of the things I looked at and start to say, hey, we have seen tons of fiber transactions. And most of the fiber transactions happened at 20 times EV[?]. Most of the fiber transactions happen at 4.5 Cable homes past. I'll say, look, I don't think there are huge differences between cable as an asset and fiber as an asset, right? And I would say, cable is probably a better, buying Charters is probably better than these fiber assets that people are building because the fiber assets are generally, and I'm talking fiber-to-the-home, right? But the fiber assets are generally duopoly-type things. They're competing with cable and cables got a lot of assets were a lot of places where their Monopoly, there's more scale of this and I just look at this and say, we haven't seen, to my knowledge, we haven't seen a cable or fiber transaction in quite some time and I do wonder like with interest rates having come up quite a bit and the market kind of frozen and this applies to all telecom investments, are we stuck in like... Yes, cable is probably trading for under three cable home pass but are we stuck in a, hey, you and I were looking at our 2021 blinders on. When interest rates were 0 and everything was to the moon and all this other stuff. Are we stuck just married to that old assumption and today, it's like hey, there is more competition, right?
Fixed Wireless is a real competition. Fiber home is probably more aggressive than people thought about. Interest rates are up, multiples are down. Has the world just shifted and we're the last people to acknowledge it?
Alex: I hope not. Again, I think it kind of speaks to the overarching discussion. Another example is, you spoke about interest rates, also just inflation, generally, right? In terms of buildout cost or labor, whatever it may be. I think about DG, which I wrote up this week. Obviously, a very different business, but their 2022 CapEx was 60% higher than kind of the 19 to 21 average. They're looking for another 20% jump and in 23. Some of that is just the volume of projects that they're doing but another important chunk of it is cost inflation in terms of obviously, materials, labor, etc. As I was digging yesterday and looking through the fiber companies kind of public comments on what the cost is to build out, it seems a bit not totally clear at times how significantly the cost may have potentially changed and whether or not that really fundamentally alters some of the math around some of these. I mean both on cost of the capital and also the build-out costs. So I don't know. When I was listening to our old pod, you were saying something about Verizon making an announcement, and then like one week after, they made all these huge splashy announcements that kind of just went silent. And it was the dream kind of differing from the story in some ways. And I still think in from where we stand today, on both FWA and fiber, there's a certain amount of, we have an idea of what the story is and there is obviously some kind of demonstrated outcomes.
But in terms of everything making sense as we truly think about the long-term, for me, some of it is just still up in the air.
Andrew: I wanted to switch to media in a second because I threw an hour on your calendar and I'm going to take all of it. Gosh, darn it. Before we switch over there, anything else you want to talk about on cable? I mean, I think we did a pretty good job covering the risks opportunities, and the balance but anything else you think people should be thinking about?
Alex: I will throw them back to you because it's something I think about. So again, the premise I laid out earlier, hey, 12, 13 years of a million net ads every year. Crazy covid thing. Who knows how much the overhang is impacting versus contended[?] dynamics, etc. How do you think about these names in terms of what a value trap looks like on that kind of core KPIs of broadband net ads?
Andrew: I don't think, I'm not worried about whether Broadband net ads are three hundred thousand to a million per year. And I think I messaged you. Where I get concerned, I think, a cable company you're looking at as a bond like thing with growth and inflation power, where I get concerned is when the cable company started reporting net losses last year, right? I kind of didn't think net losses were really possible. I say that a little facetiously but these guys, you always get a little bit of growth just from new homes getting built out, new household formation, everything. You always had that little bit of growth. There was still like a little bit of DSL to Cable Tailwinds. I just didn't think they could start reporting nets up losses. And what I worry about is a Cable business, any type of Telecom business, at its heart, there's a lot of operational leverage and once they started reporting that, I sort of worry like, hey, it seems like the competition's kind of getting to them and if you start going, I mean, one of the reasons fixed wireless is so scary is because I think when you and I started underwriting cable, we were underwriting Monopoly in a lot of markets, duopoly against fiber-to-the-home in a lot of markets. If Fixed Wireless really works, you go from duopoly in a lot of markets to all duopoly of four, five players, right? You've got a cable player, a fiber-to-the-home player and then maybe three national skilled Wireless players who can offer that looks a lot different. So, yeah, I'm rambling a little bit. I don't even know where I was going with that. But what I really worry about, it's not necessarily the net ads picture because you were never going to add, actually, you probably could just on household formation, add, you know, 1% of your base every year. But to me, it was always a pricing power and a sustainability in a cash flow story, and when I started seeing those net ads go negative and then I see the continued, it like really calls into question, hey, was this a one-time thing? Because fixed Wireless, right now, all fixed Wireless is net ads but they got no one to turn because everyone is a new.
Is it just, right now, Fixed Wireless is gross ads and in a year, when they start churning a little bit, you're really going to see this normalized or is this a new thing? I still lean that Fixed Wireless, once you see the churn, the Broadband business is going back to stable to slightly growing like they should be, but if you're wrong, there is a lot of downside as you start seeing operational deleveraging there.
Andrew: We've got a few minutes left. Let's quickly turn to media, right? So we started talking about media with Comcast. Obviously, the UMPC[?]. I know that you have invested, two of your largest positions are Walt Disney and Netflix. You want to talk about diametric, maybe not diametrically opposed, but if you want to talk about three companies with a lot different operating headwinds, tailwinds, everything, we can talk Disney versus Netflix versus NBC but I just noticed, you've got, if I include Comcast, you probably got 25% of your portfolio invested in the media space. What are you seeing in the media space that is so attractive to you and then we can maybe dive into some of these specific names.
Alex: Yeah, they had a kind of core level, I think, particularly for entertainment programming, I think streaming and video on demand and D2C obviously has proven itself to be, just speaking from a US perspective, a vastly superior offering to what was offered through linear pay TV, in terms of obviously, choice on whether or not to have ads, date and time for programming, breadth of programming, type, everything. And I think I was very much in the value investor mindset when I first started looking at something like Netflix a decade ago now, probably five to ten years ago. Learn more and more over time. My involvement in the space started with 21st Century Fox and then taking equity on the Disney deal. So I own Disney, at that point, did not own Netflix. And my perspective for a long time was it's easier for Disney to replicate what Netflix has built than it is for Netflix to replicate what Disney has built. Kind of simplistic idea but obviously, you understand what I mean by that. The subsequent 12 to 24 months, especially, may put that conclusion into question in my mind, particularly in terms of, I really think the biggest headwind to getting there potentially over time is simply the ability and willingness to actually want to go after that prize and you believe that it's worth going after and to the extent that you do believe that they are in the inevitable costs associated with getting there. I mean, Netflix has clearly shown that what they went after required years of very significant investment both in terms of cashflows, etc. Disney, in my mind, the 21 CF deal was somewhat of an indication that they did want to follow a similar play but given some of the assets they got, most notably, Star, Hulu, [inaudible] stake, etc., I think that's less clear now and I think there's a very realistic outcome where they decide to revert to something that's kind of a more traditional Disney's best IP strategy which may very well be the right strategy for them to pursue. But in terms of what that means for Netflix as a kind of very broad all-you-can-eat truly Global brand, it kind of puts them in something of a league of their own outside of Apple and Amazon to have somewhat different strategies, very different engagement trends, etc.
It's been a very interesting space to watch. Again, as I was saying with Comcast and NBCU, think it's still up in the air where I would have expected a little more activity in the past year or two than what we've seen in terms of changes in strategy or maybe as far as MNA. It still feels like that's probably on the horizon especially with the tone in the past six months, especially has just kind of completely shifted from the perspective that was being shared by the CEOs and CFOs of these companies not too long ago. It feels like we're nearing the point of kind of fundamental change and I'll be very interested to see how that all plays out.
Andrew: Disney obviously flips their CEO almost six months ago now, right? Iger returns, but does Disney, I understand, Iger comes in and it's not like the day to all the IP gets way better in the movies. It go from 50% to 70 like it takes a while, right? Iger probably hasn't even started green-lighting real movies and everything, but does Disney has an IP problem? And I mean this in, if you look at Marvel phase 4, I think has been kind of a disaster. Look, I see every Marvel movie, you and I've talked about our love of Marvel movies before. I see everyone pretty quickly when it comes out. The only one I really enjoyed was the new Spider-Man, which was unbelievable, but I don't think I enjoyed anything else in Phase 4. When I think about Disney Plus, I don't have kids and I understand if you have kids, you're always turning on Disney Plus. But I haven't watched the Mandalorian yet. I know that gets great reviews but if there's nothing really driving me to turn on Disney. So if there's nothing driving you like, yeah, it's great content, like a place to stick your kids, but Netflix is releasing tons. So I look at Phase 4 bungling. I look at Star Wars, the movies, and Iger release all the new batch of Star Wars movie, and that 9th one was horrible. No new. It doesn't seem like they've gotten great new shows coming out. The movies aren't great. Are they in trouble?
Alex: I think it would be foolish to say that they don't have at least cracks in terms of the core IP. I don't think they've done, it hasn't been connecting at least from what I hear. I'm not a big Marvel or Star Wars person but it hasn't been hitting with the audience in the way that certain, the previous kind of iterations as we look back three, four, or five years were. I think more broadly, I think it's, maybe problem is not the right word. I just think it's a strategy question. And again, it gets back to what I was saying, is this company going to be selling Disney Plus to a very large but more Niche base in terms of major Star Wars fans, major Marvel fans. Families that have young children in the home. Is that who they're going after? Or is it a broader General Entertainment strategy? You kind of all-you-can-eat bundle that has a mix of very high-end Marvel movies, Pixar movies, but also, I think it's funny, people say general entertainment. I assumed the office[?] was General entertainment before it became a massively popular show, same with friends, same with you, same with Bridget. I think the split between these things is a little bit less clear but it gets back to the strategy that you want to pursue. An interesting example is watching, I was watching the golf tournament. It's going on right now. The match played Del, whatever it's called. It's on ESPN plus and during the Telecast, they mentioned full swing, which is the Golf Show on Netflix and it's just kind of funny. Disney and ESPN could play in that space potentially, but you're not going to play in that space successfully if your strategy is, is not, in my opinion, you're not going to play in that space successfully relative to Netflix if your strategy is much more Niche and targeted at a smaller audience where you have less contents but you can still have a very attractive business. You know stored HBO.
But the f1s of the world and the PGA Tours of the world are going to clearly favor Netflix in that equation, if that's the strategy they'll go after, which is fine, but long story short, I think they need to make a clear choice about where they want to go and then they have to rework the asset base and the operational focus to align with that.
Andrew: Just looking at Netflix, so it's crazy how quickly a narrative and I do think stock price somewhat drives narrative here but six or nine months ago, you were talking about Netflix dying and everything, all their competitors lean way back on investments span. Netflix has a few hits. You, Wednesday, and all of a sudden, it's like Netflix is back. I get that, I think you're right. I hear the subtracting numbers are really good. All this, but I do still wonder, you look at Netflix and I say, okay, maybe they're in a law right now where their big competitors are retrenching because the advertising rates on their linear things that were funding everything have gone down thanks to mini recession, or whatever. They're retrenching. Disney seems to be a little bit of max. Hopefully, Iger fixes it. Peacock, who knows what's going on? But I do look at Netflix. I was like, hey, like, Apple's been releasing some really good TV shows. Apple's taking a lot of time. Amazon still got a big commitment, maybe it's still up in flux but if you started to see some consolidation, like a Peacock Plus Pick Your Poison, or Peacock Plus, Warner Brothers, Disney. HBO's had a lot of success recently. I do wonder if Netflix like there is still the question. Hey, longer-term, yeah, they built a real big business but they still don't have great IP like do they need a merger partner or to buy something?
Alex: Again, it depends on the willingness of the sellers obviously, right? NBCU and Paramount are the two most obvious kind of players that should, or would need to do something over time. And they're also the two that have kind of the most wonky ownership structures and are at the whims of the companies or the people that run them. So it's a little bit unclear. I have started one or more recently, instead of an outright acquisition, if somebody would want to pursue something closer to what Box did with the 21 CF assets and with Disney, where they effectively are signing long-term/perpetual kind of output agreement with the streaming service like Netflix or Amazon, whoever it may be while continuing to own and operate whether it's the content production engines, a linear networks, those types of pieces. I think that thought process, I think, kind of goes both ways. I think Netflix in particular, has been clear that they're not particularly interested in doing any deals that are not kind of perfectly aligned with their strategic vision. I just don't know if they'd have any interest in buying a business that economics are basically entirely tied to linear and then the minute you buy them, I guess, in theory, you could shut off the linear networks. The math gets pretty difficult as you start thinking about it that way.
Andrew: It's always tough to turn down a three or so billion dollars of free cash flow every year even if it's declining. On Netflix, so again, everything is opportunity cost for looking to do risk-adjusted alpha. I'm just pulling up a [inaudible] number. I haven't dusted off my model in a while. But Netflix as we speak is probably trading for 150 billion dollar Enterprise Value, I think not 2023, but 2024, EBITDA is projected to come in at about 9 billion dollars, right? So we're starting to brush up on the 20 times EV to EBITDA number. Obviously, Netflix still has nice growth. It's probably a 10% growth but just look at that in this market. You say, hey, rushing up on the high teens. 20 times EV to EBITDA. They're growing but I do still see some competitive threats lingering from Apple, Disney... How do you look at that and say, yeah, this is a risk-adjusted alpha generator here?
Alex: Yeah, I think it, one, obviously, speaks to the industry at [inaudible] talking about and whether or not, as the chess pieces are moved around, whether or not they have an opportunity to further their position in the industry, which I think they pretty clearly will, doesn't mean they'll be the person that capitalizes on it, but I certainly think they'd be in the running to do so. One of the other major considerations over long term is the ARPU that they generate per account and you think about the quality of the product that they're providing. I think the most recent number I have from Comcast from the cable division in terms of programming costs was brushing up on $90 a month. If I have that 80 or $90 a month for what people are paying for, again, just the cost, not in terms of what Comcast is charged in the customer, just their programming. And you think about that in the context of a Netflix offering that maybe 15 or 20 dollars a month in the US depending on what tier you're on. I think the long-term pricing power for these services is probably very significantly underappreciated in terms of, especially if there's a remix in terms of what assets and what content is available through these different services. We'll see. That gets back to Disney by the way, in terms of thinking about their Sports rights and as ESPN, you know, eventually makes a transition, how do they think about the volume and pricing next to there? And what's the content that's offered there relative to what was available in ESPN Linear historically.
Andrew: I'm always down to talk sports race, but one of the thing I kind of didn't drive there because it's just such a long conversation to have and like the ESPN future is, it's really tough to know. I don't think, if I remember, you're not in any of the sports rights companies that... You are a Disney which buy sports right, but you're not in like the New York Knicks or anything that sells sports rights. And one thing that I've really struggled with is, hey, it seems great for these guys, right? Like sports rights double every time they come up. But at some point, if ESPN is losing 10% of their subs every year, they can't keep doubling the price they pay for sports rights as well. And yes, there's going to be streaming, but I think we've seen streaming as much more difficult to monetize these sports where you're not paying for a huge bundle. It's just a real question. I don't know how that develops but I didn't go there because we're out of time. So it was going to be too late. But Alex, any last thoughts you want to leave anyone with or anything?
Alex: Well, just to throw a wrench in there real quick. With Disney, they were building the mechanism for you to buy a bundle again. It was Hulu and Disney Plus and ESPN Plus, but if you don't want to own Hulu, then that becomes a little bit problematic in terms of not only the people you've already onboarded but in terms of what you're selling and what you're bundling.
Andrew: If you're going to do ESPN Plus with Monday night Football, and the NBA, then Disney Plus is going to cost you $14 a month and ESPN Plus is going to cost you $60 per month or something. So it's like, yeah, you're building a bundle but the Disney part of it is, it might be very valuable but it's nothing compared to once you start throwing live sports rights in it so I think that's one of the things the Legacy bundle managed to bundle A, it had a monopoly on TV viewership before streaming and B, it bundled all sports throughout the year. Also, it was where you went to get your live news until about eight years ago when Twitter got big. It's just really tough to recreate that bundle with this portion, right? But I know Marquel is a 5% position for you. Are you going to join Bill and I and Marquel Investor Day in May?
Alex: I can't, unfortunately, because I'm getting married like the week before.
Andrew: Well, this mustache was disappointed. But that's a pretty good reason.
Alex: It's a good excuse.
Andrew: Did you plan on going on a honeymoon?
Alex: We're not totally set yet but I think maybe California.
Alex: I love to drive the coast. It's so nice.
Andrew: Drive the coast, go to California and if you want to do a trip through Disneyland, you can expense that since you're a Disney shareholder.
Alex: There we go.
Andrew: Well, Alex, I am very happy for you getting married. Congratulations, man. That's awesome. I appreciate you coming on for the third time. Alex Morris from the Science of Hitting. The link to the Substack will be in the show notes for anyone who wants to check it out. Yeah, Alex, we'll chat soon.
Alex: Awesome. Thank you.