➤ Cable companies are not making a "wholesale exit" from video.
➤ Broadband is now "the springboard to basically everything else that a consumer needs."
➤ Additional spectrum will open up opportunities to roll out 5G.
S&P Global Market Intelligence recently spoke with Matthew Polka, president and CEO of ACA Connects, a group that represents small and midsize cable and telecom companies in the U.S. about the industry's increased focus on broadband, member companies' plans for 5G, and more. Below is an edited transcript of the interview.
S&P Global Market Intelligence: More and more cable companies are focusing on broadband as they continue to lose traditional video subscribers. Cable One Inc. going broadband only is one big example of that. Do you see more ACA Connects member companies following Cable One's footsteps?
ACA Connects President and CEO Matthew Polka
Source: ACA Connects
Matthew Polka: There is no doubt that the cost of traditional cable programming today, whether cable programming, retransmission consent, regional sports, sports programming is higher than ever and our members will tell you that their margins, if any, are minuscule. In some cases, our members are subsidizing video simply to make sure that they're offering a platform. And they all are in some varying degrees of where they are with video, but none of them are making a lot of money on it for sure. Others are following suit [from Cable One], but it's not a wholesale exit from video and while cord cutting, cord shaving has definitely been a reality and our industry as a whole has seen a lot of it, there are segments of our consumer population that are not going to be heavily transitioning into over the top or receiving video through means other than cable.
So, I think the role of our members is to continue to provide that service to those customers that want it, and to pass along those costs that were charged by various content companies and making our customers well aware of that — that it's not us that's raising the rates, it's the content companies themselves that our customers tell us they want. But then, also facilitating as much broadband use as possible by our customers. So, we're trying to basically be broadband focused, but also give consumers at least an opportunity to purchase video if they see it as something that they want as an add on.
How has demand for higher broadband speeds impacted the cable business?
It has certainly had a positive impact on the business because I think broadband is where we want to be. It's the platform, it's the springboard to basically everything else that a consumer needs, whether from a residential or commercial perspective, so while video has been really an anchor, by way of its nature as a business, broadband has been something that's really put a lot of wind in the sails of our members' businesses. And, it's really helped them economically. But also, because quite frankly, we were able to successfully fend back what was heavily regulatory attempts on regulation of internet service. That's promoted a lot of investment.
Private equity firm GTCR LLC acquired Vyve Broadband LLC earlier this year, following its acquisitions of Eagle Communications Inc. and Northland Cable Television. Has there been more private equity interest in your member companies?
It has always been a constant in our industry. And it certainly is cyclical, but I do think that broadband is a driver for it, because it's now what is the best business for our members to be in. There are good margins in it, it's a product that customers want, both residential and commercial. But at the end of the day, even though there's always been a lot of activity, our membership in general in terms of the companies and the subscribers that our members have served hasn't changed a lot, or as much as you would think, simply because our markets are unique in their location, geography, size, and population density. Consequently, because of that, the larger companies, the larger MSOs really aren't interested. In fact, in many cases, many of our members exist today because they bought portions of systems owned by the largest providers that they didn't want because they thought they were too small, too rural, too far to reach and serve, etc. So, ironically, our members are succeeding today because they're operating successfully in systems that the bigger companies didn't think were worth it. So even though there's been a lot of activity within our sector, it pretty much stays within the sector.
Do you expect more private equity activities in the small and midsize cable space?
It's certainly possible. I don't see it anymore than any previous years, but I don't see it any less either. So, I think it's just par for the course where there's an opportunity, then there will be such activity. I think the opportunity that we've seen more recently with some of the more recent transactions have occurred because of what I said before regarding the regulation of internet service providers and the elimination and repeal of heavier-handed Title II regulations. Which, from an equity perspective, or a financial and investment perspective, really kind of created some greater certainty to say, "Hey, if we invest these dollars, we'll be able to recover our costs, because now we know that internet service isn't regulated." I think for the foreseeable future, for the rest of this year for sure and next year, that's going to be the case. But, you know, then again, you have to look ahead and say what happens after the next presidential election and if the pendulum swings again to something that's more regulatory, will that tend to dry up capital as it did before when there was the threat of heavy-handed internet regulation? And I think the answer to that is yes.
What are your member companies' plans on 5G?
It varies. We have some companies that are traditional, telephone-based companies wherein their marketplaces 5G could be something that they consider. Most of our members where they live and work are probably more smaller markets in rural areas where 5G maybe is not as sensible an alternative because of just the cost and complexity of what it takes to deploy 5G, which seems to be more urban and suburban. But what our members are considering — whether 5G or use of spectrum in other ways — [is] how they can better incorporate wireless broadband into their broadband systems, their wired broadband systems. As we talk about more spectrum usage for wireless broadband, I think it's going to open up some opportunities, in some cases where there's maybe a more densely populated area of our member systems, you could see 5G perhaps to some degree, maybe as an extension or an add on.