Company interests vs customer interests: a lesson from cable

Last quarter a long-standing debate was settled in the cable and telecom industry[1]. The event was a reminder of a fundamental business principle: companies exist to serve those who sustain them – their customers. A company focused on serving its shareholders (at the expense of its customers) is no more than borrowing from the future. To the surprise of an astute businessperson, our statement is a controversial one in the public markets. 

After almost four years of struggling to fend off new entrants in their broadband business, Comcast finally admitted an important part of their problem:

“However, and this is a big, however, in this intensely competitive environment, we are not winning in the marketplace in a way that is commensurate with the strength of the network and connectivity products that I just described. Dave and his team have worked hard to understand the reasons for this disconnect and have identified two primary causes. One is price transparency and predictability and the other is the level of ease of doing business with us. The good news is that both are fixable, and we are already underway with execution plans to address these challenges.” Michael Cavanagh, Comcast 1Q2025 earnings call

We have closely followed the cable and telecom industry for many years and have investments in both T-Mobile (“TMUS”) and Charter Communications (“CHTR”). This industry has an aggregate Enterprise Value of over $1.4 trillion in the US alone. It is one of the best covered industries by the investment community, and executives at the different companies have very lucrative compensation packages. All this to say that there are very competent individuals participating in and analyzing this industry.

Ever since we have been involved in the industry, there has been a debate related to promotional pricing. As an industry, the legacy cable providers have been infamous for the way they price their services. For decades they have used aggressive promotional discounts, with large price step ups, and a retention strategy that makes it difficult for customers to disconnect. This practice has repeatedly landed cable as one of America's most hated industries. Clearly not the best way to treat customers. Yet, until recently, most players have continued using such tactics.

It also happened that many legacy cable companies in the US performed extremely well for decades. Operating in an industry that lends itself to local monopolies/duopolies allowed the companies to capture tremendous value. So much for prioritizing the customer!

In reality, most of these companies care a lot about this pricing question, they are not oblivious to the negative attention that their practices generate. As a result, they have employed teams of well-paid data scientists analyzing this question for a living. We have spoken to a few of them, and they would always say something along the lines of:

“I understand that the industry’s pricing tactics are not popular [or palatable], but our data shows that that’s how we maximize revenue and overall value.”

Their data would suggest that (1) the promotional pricing translates to higher near-term subscriber gross additions, (2) the price step ups increase ARPUs[2], and (3) while churn ticks up with the price step ups, it only increases by a tiny bit. The minor rise in churn is due to the inherently 'sticky' nature of the product and the obstacles clients face when trying to disconnect. In essence, the companies took the view that these unpopular practices translate into more customers paying higher prices.

We believe that the flaw in the data scientists’ analysis is time horizon. Over a long enough timeframe customers start reacting. This means the companies’ potential pool of new customers shrinks, and as soon as a semblance of an alternative shows up, customers will run away. Reciprocation is a powerful driver of human behavior. New entrants, encouraged by commercial success, are emboldened to continue targeting new geographic markets.

In a typical cable market a few years ago, cable used to compete largely with DSL. In these markets, cable often trends towards a monopoly position given that DSL is largely uncompetitive. However, starting in late 2020, overbuilders started coming in with a similar product [3] and comparable pricing. As these new entrants emerged, they quickly achieved penetration rates in the 35%-40% range. We find that astounding. Ask any knowledgeable Venture Capitalists, and they would tell you that for a new entrant to be successful, their product must be orders of magnitude better or cheaper than the incumbent’s. Yet wired broadband entrants can capture almost half of the market with a comparable value proposition as the legacy provider. A company can’t treat its customers poorly and expect them to remain loyal.

Data scientists can be valuable, but when data science and common-sense clash in business, common-sense usually wins. In business the ‘customer is king’. As someone with a healthy dose of common-sense once said:

“In the long term, there is never any misalignment between customer interests and shareholder interests.” Jeff Bezos, CNBC interview – 1999

As investors focused on long-term compounding, we would tweak Bezos’ quote to the following: in the long-term, customer alignment doesn’t guarantee a good outcome for shareholders, but it ought to be viewed as a pre-requisite. Particularly in today’s world.

The fact that it has taken a few decades for some legacy cable providers to figure this out is a testament to the quality of the market structure for broadband in the US.

The share prices of all the legacy cable providers have taken a beating in the last few years. Furthermore, we find it interesting that the two cable companies with the highest legacy ARPUs – Altice and Cable One – have experienced the most substantial sell-offs since the industry correction began. Both companies' shares have dropped ~95% since their 2020/2021 peaks. The challenges faced by these companies are not solely due to promotional pricing and high ARPUs. Other factors, such as financial leverage, insufficient infrastructure investment, and the absence of a strong mobile complement, have affected each company to varying extents. Many such factors were within the companies’ control. We would argue, though, that the high ARPUs and client acquisition strategies were an indication that those companies forgot who they are working for.

As far as our investments in this industry. TMUS, the Uncarrier, is an example of the opposite behavior that helps prove our point. When John Legere became TMUS’ CEO in September 2012, the company was a struggling, subscale wireless provider. The company had serious structural disadvantages. When Legere came in, he and his team took a step back, listened to their customers, and acted on that feedback. A process that led them to launch their Uncarrier strategy. They began focusing on solving customer pain points, giving them good customer service, and lowering prices. That journey, along with some shrewd M&A, transformed the company into a spectacular success story. Today the company has the best 5G network in the US, the lowest prices[4], and has a brand that is the envy of the industry. This has translated into tremendous growth in customers, revenues, and profitability. Back in September 2012, when Legere became CEO, TMUS shares traded around $23, today (under his successor Mike Sievert) they trade around $230. A 10x over almost 13 years (translating to a 20% CAGR).

CHTR is a smaller investment for us. Unlike TMUS, they do have a history of promotional pricing, high step ups, and making it difficult to disconnect. However, the company has been a much more moderate user of these techniques, and for years has been weaning off of them. They have also made some customer service level commitments that in due time should be recognized in the market. We believe that these changes, along with their low ARPUs, and a decrease in the pace of new competition will allow the company to restart growing organically. CHTR’s management understands this, and now it’s up to them to execute.

The story repeats itself

When analyzing companies we often encounter the type of value destructive behavior described in this letter. Examples can be seen in media (remember the TV bundle!), car dealerships, pharmacies, remittances, and areas of healthcare, amongst others.

It is our perception that, outside of some areas in technology, most large companies that have been around for a few generations of leaders forget that the company exists to add value to the customer. In many companies, the wiring required for a leader to rise through the ranks is different from the wiring required to have good business sense. This circumstance is not aided by an investment community that is glued to its spreadsheets and is (on average) less business savvy than the career managers themselves.

Interestingly, we have found that the better the underlying business and industry, the more that companies forget about their customers. The more competitive, the more the participants have their priorities straight. That is why, we think, that more technology companies – with their perpetual risk of obsolescence – as well as astute Venture Capitalists get it. In those fields, the ones that don’t, find themselves in the graveyard of capitalism rather quickly.

From our perspective at Zorea, we view this as further evidence suggesting that the market has pockets of inefficiency. It helps increase our conviction that there is room for us to add value.

To our investors, we know why we exist – to add value to you. Thank you for your trust.

Simon Bennaim

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Footnotes

[1] Calling it a single industry as opposed to two separate industries since we are in the age of convergence.

[2] Average Revenue per User.

[3] Overbuilders usually enter with a Fiber-to-the-home infrastructure, which is technically better than cable’s Hybrid Fiber Coax. From a product perspective though, the differences in technology are undistinguishable to most US consumers.

[4] In the age of wire and wireless broadband convergence, it is no easy task to compare legacy cable with legacy wireless converged plans.

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