MediaTalk | Season 4 | Ep. 28 - How NCTC Helps Small Operators Compete in a Consolidating Market

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Mike Reynolds: Hi, I'm Mike Reynolds, senior reporter covering the media industry for S&P Global Market Intelligence's tech, media, and telecom news team. Welcome to MediaTalk, a podcast hosted by S&P Global, where our news and research staff explore issues in the ever-changing media landscape. Today we're joined by Lou Borrelli, CEO of the National Content and Technology Cooperative. NCTC is a group that collectively proffers an array of video, broadband, mobile, and administrative services to smaller and independent cable systems, as well as local and municipal providers that help them compete for and retain subscribers amid today's constantly evolving pay-TV landscape. We're going to talk about some of those today, as well as NCTC's upcoming independent show in Disney World in Orlando, come late July. Lou, it was great to see you at the Kagan Media Summit in Manhattan last month.

Lou Borrelli: It was great to see you too, Mike. You and I go back a ways. Yeah, and it was a pleasant surprise when I looked down and I thought, "How many Mike Reynolds could there be?"

Reynolds: The one and only, so it was great. Exactly. It was great to see you. Very good. All right, thanks for being with us today in the virtual MediaTalk house. Lou, when I think of the NCTC, and again, this goes back — the co-op in my mind drifts back to an organization negotiating carriage contracts collectively for your members to secure better affiliate rates for the cable networks. I know that's a simplified and outdated view. When did National Cable Television Cooperative become the National Content and Technology Cooperative? And if you could give us a scorecard about some of the things that you guys offer.

Borrelli: Sure. We changed the name when I showed up five years ago.

Reynolds: Okay.

Borrelli: And it wasn't some brilliant kind of strategy thing. You saw the Cable Center change its name, NCTA took cable out. It was happening all around us. And, when I was brought in, the mantra was, "Diversify the revenue stream, make it sustainable," "Kick the can virtually down the road." And trying to keep the same acronym, trying to figure out word games and stuff, basically we do content, which was the primary objective—if you recall.

Reynolds: Yeah.

Borrelli: Forty-two years ago, a poker game in Kansas City, a bunch of guys from the Mid-America Association said we should get together so we can get cheaper programming rates, and that was the primary focus for many years. Several decades, actually. And today — you know, we still do programming and we still are, I think by most accounts, we're either number four or number five in terms of total volume as far as the operator community. So, while we don't get the best rates, the rates are not that far off. It's not the spread that you and I grew up with when TCI had a very big advantage over everybody else. We're all in the same boat. But we've branched out; we do IP transit and transport circuits. We launched a mobile service a couple of years ago, and we're still rolling that out. We have a broadband TV product, which is an over-the-top—you could use the term skinny bundle, but it's not exactly that —

Reynolds: Really? Okay.

Borrelli: —because it's about 50, 60 channels.

Reynolds: Which is an added value for broadband customers.

Borrelli: So for our members, which are mainly small, mid-size members. We have about 650 members. We're in all 50 states and US territories.

Reynolds: Okay.

Borrelli: And we serve a third of all connected households. Our aggregate broadband and video count is north of 40 million. That's 4-0. As a player, we need to be able to create the solutions that our members need to stay competitive, to be relevant, and to be successful. And so just within the last couple of weeks, my board approved us to go forward on our AI Center of Excellence. That is a pilot that has been in the market with four members testing various business and use cases for about the past five, six months. And so we have enough data and enough results where we presented our findings and suggested we go forward. We had to prove out various use and business cases with a handful of vendors. The goal is to enable our membership to use AI in a way where it looks like a subscription service rather than having to stand up a lot of capital. So whether it's truck roll avoidance, prediction of outages, confirming appointments, all the various basic nuts and bolts—we proved out three or four cases. The goal would be, though, to be agile and to add or delete, or maybe a better word is to curate all of the various use cases that would be most applicable to our membership. Ironically, the minority of our members are cable companies. The majority of our members are either fiber broadband ISPs or former ILEC and CLECs that got into broadband and into fiber. So we need a wide range.

Reynolds: So you've gone through some testing here. Is it going to be live? Is there a start date when it becomes available to all of your members?

Borrelli: Yeah, I think that we're standing it up now, and we're adding personnel, and we're doing the next phase of our program. I would say by fall — late summer, early fall —

Reynolds: Okay.

Borrelli: —you will see members that are activating the use cases that work best for them.

Reynolds: I gotcha. All right. As you just described your membership, the cable guys are in the minority now. I was going to ask you—the cable video landscape is declining. I think it may have stabilized a little bit in the first quarter, but again, is video still important to your member subscribers, or is that in the background behind broadband at this juncture?

Borrelli: I would say this. Video content for our co-op is still very important because, as I said, we're still the number four slash five provider.

Reynolds: Okay.

Borrelli: It's a significant source of revenue to the co-op, and it's also a significant source of savings to the membership. Now, not everybody is sticking with video. The members that are leaving video are primarily the very small. I've got members that count video and broadband customers in the multiple millions, and I've got members that count them in three digits. So when you get to that point, especially if you're in a small market, it's not profitable. You and I know programming's been a loss leader probably for the last five to seven years. And that's okay because obviously broadband was growing, and that was driving the business. I think what we are doing is we are positioning ourselves for the new world of content. We have through our existing programming deals, our customers that are in the video packages that our members sell have free access to ESPN Unlimited. It's included as part of their cable package. They have free access to Fox One. They both are added value, and we have the rights. We're now negotiating how we go to market with the likes of Peacock and Paramount Plus and Disney Plus, and all that — we have those rights. Now, I will say this, and I generally say this in every interview. I give a lot of flowers to Charter and Comcast for leading the way, in terms of both of those companies are the reason why we can actually sell mobile phones. Because they made it okay for customers to get mobile phone service from providers. In terms of content, I follow Charter's lead on how they are integrating what I call the plus services…

Reynolds: We call it here, Lou, and again, I think we're talking about the same thing — it's a linear-digital hybrid model with, again, you've got the underlying, the traditional cable networks and then on top of it they offer, I think, $125 worth of streaming a month. It sounds like you guys are building toward that level perhaps.

Borrelli: We are. Exactly. Now, our economics may look a little different, but we have all the same rights, and the challenge that we have — which is why it takes us a little bit longer, as I said, 650 members, hundreds, probably thousands of individual systems. They're all different. I'm not Chris Winfrey where I own all the assets and I say, "We are going to do this and we're going to do it on this date." We create the opportunity, the same opportunities, and then the members have to decide how much they want to bite off. Where does this opportunity fit in their ecosystem and their priority list? Because some of them are still focused on building out greenfield. Some of them are focused on rolling out mobile. And when you get to new things like mobile, like broadband TV, like the AI COE, this is uncharted territory for a lot of these companies, and those that are on the small side obviously don't have a lot of overhead or outside expertise. And so we fill that gap, but the timing is really up to the member, and the cadence as to how it rolls out is really in their hands. We do the go-to-market marketing toolkits. We do a lot of legal reviews. We do all the things they need to move forward, but then again it's up to them to say go, right?

Reynolds: So talk about the broadband TV. I think you mentioned that there's 50 to 60 networks in the mix, so it's not skinny. It's in the middle, as it were.

Borrelli: So it started out a little skinnier. And it's primarily — think of it as general entertainment delivered by channels that are known entities. We're not talking about nameless fast channels here. These are channels we have the rights to through our existing agreements.

Reynolds: So these are the brand names from cable.

Borrelli: Yes.

Reynolds: The historically brand names.

Borrelli: Right. Just no sports and no news.

Reynolds: Okay.

Borrelli: Okay? So if you take those out—primarily because of the cost. What we're trying to do here is for members who have opted to wind down their linear business, it gives them a package of channels that they can afford to offer as part of a broadband service. I won't get into the details, but the content cost and the platform cost are small enough that you could add it and maybe add it to your better packages and still maintain a healthy margin.

Reynolds: Okay.

Borrelli: But the customers don't necessarily have to buy it individually. Now, we have a couple of members that are trying to sell it that way individually.

Reynolds: Right.

Borrelli: Look, to each his own. If it were me, I would just make it added value. And that's what most of them are doing. But again, we're a cooperative of many people that have different opinions and different agendas. So we have to just create the choices for them to basically then pick and move forward.

Reynolds: Your non-member friends in terms of Charter and Comcast — they have been experiencing some setbacks, or again, the broadband business is stagnating a little bit for them. What about for your members? Is still the growth opportunity there or are they experiencing the same thing?

Borrelli: Again, we have a wide range of members. I would say overall, and I know I kidded you about this when we were together in New York, when analysts talk about industry trends, they're really only talking about the two or three companies that report publicly.

Reynolds: Sure.

Borrelli: Most of our members obviously do not. A couple of them have public debt, you might be able to squeeze something. So from our standpoint, what we have seen over the last five years that I've been there is that broadband growth has really been driven by greenfield build out. And even in the smaller markets, there are sometimes two, three, even four providers, whether it's another fiber company, it could be fixed wireless. And so the reality is that you need to have something that differentiates you from just a plain old broadband provider. We think our mobile service, that bundle of broadband and mobile, is important. But the thing that's most important from our membership is that they're local. I've got members that brought telephone service to the markets they operate in 150 years ago.

Reynolds: Okay.

Borrelli: So local is their ultimate superpower. Because in all the research that we did prior to launching mobile and looking at new products, customers and non-customers alike would say, "If my local provider would provide me a competitive mobile service, we'd buy it." And it was a majority that were willing to switch. So I think brand equity is important. I think some of the micro programming that some of our members are doing, even in the broadband space with local sports and other kinds of things.

Reynolds: Okay.

Borrelli: You have to provide real value, and you have to be strategic about what you say yes to and what you say no to. And in our case, we've seen — if I were to be honest, overall, I'd say our broadband customer numbers overall are probably flat.

Reynolds: Okay.

Borrelli: We have some that are down, we have some that are up. But overall, we're flat, and I think it's because even though there are markets where we have multiple providers, there are many markets where we only have, say, another competitor. So the pressure on us, on our collective membership, is a little different than a Comcast or a Charter that has big markets. And there's a lot of spend. They've got to spend a lot of money. And they're going against the major carriers as well as satellite, as well as other things. We have the luxury of not being that way.

Reynolds: If I can ask you about, again, you just mentioned that some of your members have been the telcos forever. But what about your more recent mobile efforts? That's only in the last two or three years where you guys have really—

Borrelli: True. And it took us a little bit longer to get to market because the integration with AT&T and our MVNE partner, Reach. AT&T didn't really, a few years ago, they didn't really have a wholesale department to speak of, and they hadn't done a lot of integration. So it took us a long time just to get it to be stood up. We've got 17, 18 companies that have been in it for a while now. We've got a second partner that we announced, Telgu5, that is in the process of integrating with AT&T. That option will be available by summer's end. And there's a lot of interest in that. I, but I'm hopeful — knowing what I know about the companies that are in the pipeline, companies we are about to launch and those that have already launched—I hope we'll have anywhere from 50 to 100 members with cell service by the end of the year, or at least early into next year. And again, we offer competitive rate plans, we offer device acquisition, device protection, device financing. All the things that everybody else does, we do, but it just takes us a little bit longer 'cause I'm herding a bunch of cats here.

Reynolds: Okay. All right. I wanted to talk to you about a few — obviously it's an M&A world at the moment. Our friends at Nexstar, the biggest station group, they wanted to buy Tegna, they got approvals, it seemed to work. State AGs and DirecTV say it's anti-competitive; the thing's on hold now. Any thoughts about what that would do in terms of your business? If Nexstar got bigger in terms of having to deal with an even larger station operator.

Borrelli: We share the same concerns that DirecTV and others do. And we actually joined DirecTV in their comments because, think of it this way — and again I can give you generals, I can't really speak to specifics—but we currently have with either one of these two companies — I'll let you guess which one — where our third-year retrans cost approaches $15 a channel a month. Fifteen dollars. If you look at what retrans has done over the last however long it's been in, we've turned into bill collectors for the broadcasters to the tune of anywhere from $50 to $75 a month in some markets. And then you layer on increased sports rights costs that get passed through. I like to say this when people ask me about retrans. Think of it this way: If a gallon of milk was whatever it was back when retrans started, $2 and something, whatever it was. Today, that gallon of milk is $96. Ninety-six dollars. And yet you don't hear anybody from the commission talking about it. You don't hear anybody in the Senate or the House talking about it. If anybody else had that kind of growth — and unchallenged, by the way — you'd be pissed! And I'm pissed!

Reynolds: Yeah, no, that's crazy. All right. Let's go Paramount Skydance/Warner Brothers Discovery. It's got its own challenges. Say it happens. One of our Kagan principal analysts, Scott Robson, I think he said there's 58 or 60 cable networks. What does that do for you guys? Are you guys in a long-term with either of these parties at this point? Or are you about to come due now?

Borrelli: No, we are fortunate, and by happenstance—obviously nobody knew that Paramount or this other stuff was happening. So we have long-term deals, three to four years, with all of our biggest affiliates. In fact, we just closed—like this past year we just renewed NBCUniversal. I think we renewed Disney this year too. But we're in good stead, our deals are multi-year. I will say again, not giving away secrets, but I will tell you that in the last few rounds of renewals on the content, on the cable side last year, this year, a lot of those deals are looking good in terms of moderate to no increase.

Reynolds: Okay.

Borrelli: And then some flexibility. So when you think about it, remember back in the days when all of a sudden people were launching additional channels that they said if you want to sign this deal, you have to add these three…

Reynolds: Sure, right, or these four.

Borrelli: Exactly, yes. A lot of those channels are going away.

Reynolds: Okay.

Borrelli: Because they don't get the viewership. And so what it gives us is, we were paying a few cents maybe for those, so that gets folded in. Our net cost doesn't change, but we get to reclaim some channel capacity. I see that as being standard now because the fact is — my friends on the program side won't like me saying this — the fact is that they still need the cash flow from the linear channels. I know it's going down. I know that it's been declining anywhere from 8% to 10% a year, but there's still billions of dollars—

Reynolds: Absolutely.

Borrelli: —that we are paying, just us, to our range of networks. We've got 125, 130 programming contracts that we administer.

Reynolds: Okay.

Borrelli: So we're still paying a good buck, and that money is what's obviously still pulling the train for the Disneys and the Paramounts of the world. Because, while they're building their direct-to-consumer business, driving the car while it's being built down the road, we're funding that.

Reynolds: Exactly.

Borrelli: Now, we're getting incremental benefit. Yeah. And this is why I give flowers to Fox and to ESPN. Our members and our customers will get benefits from that. Some of the others, not as much. But at the end of the day, we're all in the same business. We're in the business of connectivity and providing choices to our customers. Content is still a big choice. Admittedly, there's a lot of content out there that our customers watch that we don't share in the monetization chain. That's the pain point, right? But overall, it's still a big part. I remember and you remember when video was the only product.

Reynolds: Absolutely.

Borrelli: Now it's a product, and it's not the leading product. Broadband is the leading product.

Reynolds: Absolutely.

Borrelli: And I would argue that mobile is probably number two for future.

Reynolds: Okay.

Borrelli: Not currently, but for future. And having meaningful content choices, whether it's through partners where you have the direct-to-consumer added value or you're still maintaining a broadcast plus linear play, I think that stuff sticks around a while. I know that our friend Evan Shapiro says that there's nobody watching TV that's under 47 or something because everybody…

Reynolds: No, man.

Borrelli: …is watching it on their phone — you know what I mean?

Reynolds: You’ve got to go where the puck's headed, right?

Borrelli: You got it. And that's what we're trying to do. You got it.

Reynolds: All right. Lou, getting to the end here, let's talk about your show at the end of the month at Disney World. Lot of business, a lot of fun, panels galore, speakers. You're going everything: AI, bundling, mobile. There's a certain FCC commissioner that's going to join you. What's going on that way?

Borrelli: Yeah, you're right. Olivia Trusty is coming on as she's an FCC commissioner. I think it'll be an interesting conversation with my brother from another mother, Grant Spellmeyer, who runs ACA. As you know, NCTC and ACA are joined at the hip. Their swim lane is policy and Washington, D.C. Our swim lane is operations and providing choices. Noelle Russell, who is the founder of the AI Leadership Institute, she's going to do a great presentation, and then she stays for a panel with members. And I think that is a formula we've figured out — that it's okay to have a keynote, but if you don't have the ability to dig deeper, it's not as great. And you and I both remember in the old days, you'd put a microphone out in the hall. Sometimes people would ask questions. Sometimes people wouldn't give the microphone up. So we do this now where we put two or three members on the panel with them, and then we have that dialogue.

Reynolds: Interesting.

Borrelli: We also have Jim Holanda, who's the CEO of Cable One, who's obviously got his hands full. This will be Jim's first interview since he took that job. And then David and Jonah Stillman, they're a father-and-son duo that will jump into the fray that Evan talks about with the gender and age gap and consumption and usage. I think it'll be very interesting. And then the kicker is Jimmy Zaworski, Jimmy Z. from ESPN. We're going to talk about where they are with Unlimited, we'll talk about that a bit. But also, where the hell is sports headed? Where are the rights? How much more can people pay, right? That is the thing. We're sitting here now, we're in the quarterfinals of the World Cup, and they're already talking about 2030 and—

Reynolds: 2034.

Borrelli: Absolutely, with three times the rates that were paid this time.

Reynolds: All right. Exactly. So business, what about fun? You're in Disney World. What's going to happen?

Borrelli: We have the one thing we did this year, which is different — we usually have dinners and do entertainment at night. We took one of the nights and said, "You know what? A lot of people bring their families for this." And so rather than have an all day and an evening at the convention center, we basically stop at 4:00 on Tuesday, and we have these very deeply discounted, cannot disclose the price, tickets that give you access to the park from 4:00 PM to close.

Reynolds: Nice.

Borrelli: And so everybody's going to hit the park Tuesday night. We hope that they don't have too much fun and come back for Wednesday morning. But we tend to try to make it light and fun. And you know the NCTC, it really is one big family. And as much as I'd like to think they like to hear from me or from Grant or from the keynotes, the number one highest rated reason they come and they keep coming back is networking with their peers. If you're in the Catskills with 7,000 customers, you see a guy who's in Iowa with 7,000. And he's talking about all the stuff he's doing. So then—that's what we need…

Reynolds: You want that exchange and you want that learning back and forth.

Borrelli:  Absolutely. We have users groups. We have a marketing innovators group. It's a very packed agenda. And Disney's always been good to us in terms of their hospitality and the facilities are fabulous. So we like going back there every so often.

Reynolds: All right. We're going to end up here, and it's—

Reynolds: Given some of your comments already, I know the answer is going to be mixed, but again, biggest challenge for your members, and I guess it depends on who they are and where they are.

Borrelli: I would say, it's hard to say for the members, but I'll tell you what the biggest challenge is for the NCTC.

Reynolds: Okay.

Borrelli: And that's consolidation. As our larger members get picked off, it does put pressure on the organization. Not so much from an economic standpoint, but more from a morale standpoint. You don't like to see the organization shrink. And we've had some acquisitions over the past couple of years. We've lost some big members. But overall, I would say we're still in a very good, resilient spot. We've kicked the can down the road. There's no issues. We've got a strong balance sheet. What we're trying to do is navigate on behalf of our members the kinds of solutions and services they need to remain competitive and remain essential to their communities.

Reynolds: That concludes this episode of MediaTalk. I wanted to thank our guest, Lou Borrelli, who heads up the NCTC for bringing us up to speed on some of the aspects of the organization. Lou, thanks so much for being with us.

Borrelli: My pleasure, Mike. Anytime for you.

Reynolds: All right. And this is Mike Reynolds. Thanks to all of you for listening. We will all catch up soon on the next installment of MediaTalk. Goodbye, everybody.