The Capital Call

David Stevenson is an experienced investment commentator and writer, with a passion for media and technology. David writes for a number of leading publications including The Financial Times, where he is a columnist, the Investors Chronicle, Money Management and trade newspaper Investment Week, where he’s the contrarian columnist.

Are Investors Suddenly Rediscovering the Virtues of the Physical Layer? A Tale of Two Issues: Comcast and Meta

February 22, 2022

Sometimes a chart can tell a story better than words. The chart below shows returns since the beginning of 2020 in black for Facebook, renamed as Meta Platforms, while the line in red shows returns for Charter Communications.

Charter was and is regarded as something of a legacy, classic telco/cableco utility stock overly interested in the hardware layer of the emergent communications stack while Meta, a FAANG, is seen as one of the vanguard cloud based businesses focused primarily on the software of that emergent, integrated stack.

Look down many analysts’ buy lists, and you’ll see more and more mentions of Charter. By contrast Meta is one of those few stocks where sell side analysts are now desperately scrambling to unwind their overly bullish forecasts. In simple terms, Meta is in freefall while Charter is in the ascendant. Over the last three months Meta’s stock price is down 32% while Charter has suffered an almost insignificant 5% fall. Over a one-month period, Meta is down 33% while Charter is up 0.8%.

What’s going on? While there are stock specific issues related to both, I think there is also a deeper story playing out in the markets about how that emergent internet-based communications stack is emerging. Suddenly investors are rediscovering the virtues of a physical layer player that has lots of billable, bundled end customers on a regulated basis.

Of course, there are stock-specific factors at work. Charter’s relatively new mobile business is getting attention, along with rival Comcast’s operation. Both just reported their best-ever quarterly wireless customer additions, netting a collective total of 692,000 subscribers. Charter’s Spectrum brand now boasts 3.5 million customers, all since 2018.

And Charter’s core cable business is also performing much better than many analysts (predicting the demise of cable) had expected. Sure, Charter is suffering a outflow of residential voice and video customers – 423,000 fewer video, 594,000 fewer voice in FY21 – but pure play internet connections (and mobile and SMB customers) are more than making up for those much predicted losses from legacy cable. Looking at Q4 results Charter’s cable division still registered a 4.8% year on year increase in revenues, most of it I imagine because of increased charges to domestic customers.

And Meta’s idiosyncratic problems don’t need much repeating. It is losing the core youth demographic, in part courtesy of TikTok; and even Apple and its iMessage business is making real headway against Meta. Finally, there is the massive new investment in the meta verse.

But that’s not the entire story. Collectively most public markets investors have been drinking from cloud-based Kool Aid regarding anything legacy (as in mobile plans or cable deals or domestic internet broadband) as soon to be out competed by the cloud based stack. That cloud based IP stack is a threat to Charter (and Comcast, and BT and Deutsche Telekom in Europe).

Just last week my son mentioned that many of his friends had signed up to receive (no doubt illegal) IPTV services (over fibre of course) that delivered an exact mirror image to the traditional legacy cable/satellite operators, even including TV guide functions that look like they’ve been copied wholesale from the legacy operators. But then he also admitted that his fibre costs had gone up as a result of all that heavy data usage.

And this I think brings us to an important point: who owns that last few miles of fibre? I’ve been banging on about this issue for a few columns now. Google, and to a lesser degree Facebook/Meta, has placed a big bet on rolling out a unique cloud based infrastructure which it has then started to push out into the transatlantic cables. That last 1 to 50 miles from the data centre to the end user has been terra incognita for the FAANGs although Facebook in earlier iterations had been playing around with wireless broadband delivery mechanisms, especially in the developing world.

But the owners of those 1 to 50 miles to the data centre are fighting back. Some of them, like Charter have decided to stay away from the content led approach and instead focus on owning the customer’s physical relationship; that is, own the internet and phone billing account. Others, such as BT and to a lesser degree Vodafone in Europe have, I think unsuccessfully, tried to push up the content chain and are now having second thoughts.

But if owning the end client through bundled services of mobile and fibre is the way forward, we’ll see more of the telcos retreat from all their multi channel content masterplans. The name of the game is to have a super fast 5G mobile/fibre bundled network at the right price with acceptable customer service systems.

If, as a legacy telco, you are not willing to invest, you can be sure the private equity backed players will offer that service. The key though even for these smaller, nimble PE backed players is to bundle up all the key accounts, mobile AND fibre.

All of which prompts the inevitable question: If the visionaries at the FAANGs truly think that some hyped- up version of a more augmented or even more virtual metaverse is the future of their business, then they need to invest aggressively in the last physical layer closest to the customer to make it happen.

I note with interest that in the past players like Google and Meta have been reluctant to build a huge customer-facing infrastructure that would be needed to back up this last mile layer. But times may be changing and Google/Alphabet in particular looks to be building more and more touchpoints with the end customer and their billing relationship. And of course, both Apple and Microsoft are already there.

Perhaps Meta’s share price decline is in fact a reflection of that deeper challenge. Meta needs to properly own and interact with customers for bundled services and that will force a huge increased in what would be regulated service provision. Luckily Charter is already there.

It may turn out that all of those boring call centers may have value after-all.

Previous Columns from David Stevenson