We get started with an illustrative article from Bloomberg entitled “The Days of Getting a Cheaper Cable Bill by Threatening to Leave May Be Over” which adroitly explains why “Big Cable” companies are thriving even in the era of cord-cutting.
Most people would probably agree that high speed internet connectivity has become a necessary utility product like water and electricity. Unfortunately, most people also only have one (or at most two) high speed internet providers available to them. High speed broadband providers like Charter, Comcast and Cox (privately owned) are de facto monopoly utility providers in most markets they serve.
ESPN, Fox News, CNN, CBS and all the other must-have channels in any bundle are increasingly expensive to carry which makes television distribution less profitable to cable companies every year. But cable companies don’t share your internet payments with anybody. And the profit margins on internet service are far higher than TV distribution. So even if a traditional cable bundle bill is 50% internet, 50% TV from the consumer perspective, the internet portion is usually the vast majority of the profit to the cable company.
But unlike TV distribution, the costs to run an internet delivery business are actually falling at the largest cable companies. Once you lay cables and cover your fixed costs, every additional customer who signs up is almost pure profit. Most homes are already wired for cable, so when a new customer subscribes, the local cable monopoly usually flips a switch and starts billing.
This doesn’t even consider the exploding growth in internet demand which is growing by most estimates around 20% per annum. People who only use streaming services like Netflix, Hulu, or YouTubeTV use far more bandwidth than they do when watching a combination of streaming and linear cable TV. When consumers use a lot of data, cable companies charge them more. And with video game streaming services like Google’s Stadia (like Netflix for video games) launching this fall, internet consumption will likely continue its rapid growth rate.
For our economic check-in, we turn to KKR’s Henry McVey who has a new piece entitled “Hot Spots.” He also discusses his and KKR’s view of the global economy and trade war in this recent Bloomberg interview. His research shows that companies reducing capital expenditures by only 10% due to political uncertainty is a far bigger drag on GDP than the tariffs themselves.
We finish with an article from late Thursday afternoon highlighting Uber’s biggest quarterly loss ever.
While one-off IPO expenses weighed on the results, it’s possible that ride-sharing may not be the “winner take all” business that investors thought it would be. Revenue growth has slowed (albeit from a high rate) every quarter since the beginning of last year. While the end market for ride-sharing really is gargantuan, it’s not at all clear that the big players (Uber and Lyft) will ever reach "escape velocity" and produce meaningful profits. At the time of Uber’s IPO many people said it was another Netflix or Google. But once Netflix pays for a show, there’s no incremental cost for another person watching it. Ditto for a Google search or YouTube view. Uber and Lyft have to pay drivers a piece of every ride which is a very different, less profitable business model. Ride-Sharing is certainly here to stay, but who knows if and when anybody will actually make money doing it?