Wide Open West Inc., a.k.a. WOW! Internet, recently filed for an IPO with the US Security Exchange Commission. In this blog post, Micah Sachs analyzes its S-1 and draws out key insights into the US cable industry.
By Micah Sachs
The country’s sixth largest cable company, WOW! Internet, plans to go public soon, and its recent filing with the SEC[i], called an S-1, provides a useful window into the state of the cable industry, especially among mid-sized operators.
Some key industry-level trends illustrated by their S-1 include:
Broadband is the driver of profits. While WOW!’s broadband revenue is only worth 68% of its video revenue, broadband’s much lower cost base means it is nearly twice as profitable. According to WOW!’s calculations, the incremental margin of broadband was 96.1% in 2016 vs. 34.5% for video. Driving the lower margins of video are the high costs associated with programming fees for pay-TV and broadcast networks. These costs are variable by subscriber, whereas broadband costs are largely fixed, leading to increased profitability every time a new subscriber is added. In addition, WOW!, like its peers, has seen increased revenue per user (ARPU) from its broadband subscribers. More than 90% of (non-acquisition-related) growth in broadband revenues was due to growth in ARPUs rather than growth in subscriber numbers.
Business services is the driver of growth. While broadband is the engine of profits, it is still not driving top-line (revenue) growth. WOW!’s modest growth over the last few years—under 1% a year since 2014, net of acquisitions and divestitures--is wholly due to the growth in its business services revenue, from $120 million in 2014 to $141 million in 2016. As with other cable operators, WOW! sees business services as a way to increase the monetization of its existing network and capture share from telcos, especially among small businesses. WOW! believes the annual business services revenue opportunity in its footprint is $1.9 billion. Some back-of-the-envelope math suggests they therefore see the opportunity as more than just small businesses. Enterprise and wholesale customers historically have been more of a challenge for cable operators to win, although they are making progress in these markets. For its part, WOW! recently built out a 1,200-mile fiber network in Chicago to support more than 500 cell sites.
Video profitability is improving marginally due to higher ARPUs. While video profitability is poor compared to broadband, it has actually increased each year for the last three years, from 29.8% in 2014 to 34.5% in 2016. WOW! attributes the improvement to increased ARPUs. In 2016, video subscriber losses led to $74.7 million in video revenue decline from 2015, but ARPU gains were responsible for $72 million in video revenue improvement—meaning they nearly canceled each other out. The implied ARPU of WOW!’s video subscribers grew from $70 per video sub in 2014 to $87 in 2016, a 24% improvement.
Overbuilders retain focus on video. Smaller cable providers have been expressing ambivalence about video for most of the past decade, due to the accelerating cost of programming. Some, like WOW!’s similarly-sized peer Cable One, have de-emphasized video[ii] to focus on broadband and business services. But WOW!, like its fellow overbuilders RCN, Grande Communications and a number of smaller companies, continues to emphasize video as a way to differentiate and compete with the incumbent cable companies, mainly Comcast and Charter, in its territories. WOW! notes that its “Ultra” video product, which includes a set-top box with whole-home DVR and OTT integration, is available to more than three quarters of its footprint.
An improved economy and appetite for growth is leading to investment in new areas. After doing little expansion from 2011-2015—which is more or less in line with industry trends—WOW! expanded its footprint by a bit over 1% in 2016, or 38,000 homes, with plans to expand to another 72,000 homes in 2017. An interesting nugget is WOW! has reached 23% penetration in the homes built in 2016 in less than half a year. WOW! says that their “average capital expenditures per acquired customer [in new areas] represent a mid-single digit multiple of our average customer’s annual adjusted EBITDA contribution.” Translation? The paybacks for these projects are between four and seven years. And like other providers looking to enter new areas, WOW! has encountered delays in getting access to poles and rights of way, something the FCC is looking to address with its recent Notice of Proposed Rulemaking[iii].