Cable Operators

After Adelphia: Clusters Everywhere

7/28/2006 8:06 PM Eastern

Comcast and Adelphia service trucks zoom into an automatic car wash. Seconds later, they emerge spotlessly clean, festooned with Time Warner Cable logos.

That scene is from rebranding spots Time Warner will begin airing in Los Angeles in August to explain the impact of the $17 billion Adelphia Communications Corp. deal to local customers.

The deal is set to close today, July 31. If it does, Time Warner’s subscribers in the area will grow from about 355,000 to over 1.9 million. The employee count will jump from 1,000 to 5,600. Time Warner systems will cover about 75% of the L.A. market, up from 15%.

“In Los Angeles, we’ll be growing by a factor of five,” said Roger Keating, the executive vice president of Time Warner’s Los Angeles region.

Overall, Time Warner will boost its subscriber base by about 3.5 million, to 14.5 million customers. Comcast Corp., which will get about 1.7 million customers through the deal, will expand to 23.3 million cable homes.

That will give the two cable companies control of roughly 58% of total U.S. television households. More importantly, both companies will control a combined 17 of the 20 largest markets in the United States.

“It’s a parallel evolution to what’s happening on the phone side — Bell Atlantic has gone away, BellSouth is going away,” said Janco Partners cable analyst Matt Harrigan. “It makes sense, especially when you look at the complexity of the product bouquet.”

Fragrance aside, increased scale will allow both Time Warner and Comcast to deliver advanced services more efficiently. But Harrigan said he doesn’t expect to see a new wave of consolidation in the industry for one simple reason — a scarcity of available properties.

“There aren’t a lot of elephants left on the savannah,” Harrigan said.

Instead, there may be more system swaps, particularly among smaller players. Miller Tabak & Co. media analyst David Joyce said. Mediacom Communications Corp. could pare down some non-core systems, and relatively new cable companies such as Suddenlink Communications, Bright House Networks and Bresnan Communications all could be involved in swaps to better cluster their operations.

“They [Suddenlink, Bright House and Bresnan] are all entrepreneurs looking to expand again,” Joyce said.

Creating large concentrations of customers in major markets is a fundamental strategy for cable operators such as Time Warner or Comcast. The ability to serve the vast majority of households in a given region allows them to more effectively market advanced services, as well as compete against satellite operators, who can reach every home, and telcos, which have lines into almost every one.

As part of the Adelphia aftermath, Comcast and Time Warner Cable will not only divvy up Adelphia subscribers, but also swap some systems. That will strengthen Comcast clusters in such markets as Washington D.C. and Pittsburgh while adding to Time Warner’s footprint in Southern California, New York and other states. (U.S. Cable Map, pages 10 and 11, shows who will own what in the 20 largest metropolitan areas.)

The deal concentrates Time Warner’s systems in five key markets: Southern California, Texas, Ohio, the Carolinas and New York.

HITTING THE GROUND

In a conference call with analysts last week, Comcast chief operating officer Steve Burke estimated the Adelphia transaction will generate about $600 million in additional operating cash flow and add between $300 million and $350 million to Comcast’s capital spending in 2006.

And there’s room for more revenue and cash flow.

Adelphia has yet to deploy phone services, which have been driving not just new monthly “units” of revenue — but in Time Warner’s case, signups for basic television services, as well.

In Adelphia systems, average revenue per basic subscriber stood at $77.79 at the end of the first quarter of 2006. That compares to $91.33 at Time Warner and $86.75 at Comcast.

Adelphia’s digital-cable penetration is about 41% of households, which also trails Comcast (49%) and Time Warner (51%). Adelphia’s 17% high-speed data penetration rate compares to 22% at Comcast and 26% at Time Warner.

Despite a decade of consolidation, the L.A. cable market still was split between six operators: Comcast, Adelphia, Time Warner Cable, Cox Communications Inc., Charter Communications Inc. and Mediacom Communications Corp.

So divided, L.A. has one of the nation’s highest customer-penetration rates for satellite-TV service. Nearly 30% of households subscribe to either DirecTV (which is based in El Segundo, just south of LAX) or Dish Network. And about 30% of potential customers use telephone companies’ digital subscriber lines to hook in to the Internet. Cable? Only 20%.

“Before the transaction, it was a very fragmented market, making it difficult to effectively market new services,” Keating said.

The deal will give Time Warner a major foothold in the top two media markets, New York and Los Angeles, Keating notes.

The cable operator hopes that will make it easier to get advertisers and entertainment executives on both coasts involved in creating new types of content or products, such as the “Start Over” network digital-recording feature, which allows viewers to restart a program in the middle of the telecast.

“It is one thing to go into a conference room and show people a feature like Start Over or some of the interactive applications,” Keating said. “It’s much better if a producer can go home and see the possibilities every time they turn on their television set.”

TOUGH CIRCUMSTANCES

Time Warner executives said Adelphia has maintained its systems well, even as the Denver-based operator has moved through bankruptcy and breakup.

“The Adelphia employees have done a marvelous job under the tough circumstances of bankruptcy to upgrade the plant,” Keating said, adding that most of the plant has two-way communications and bandwidth of 750 MHz or better. “We won’t be out there ripping up streets doing a lot of wholesale upgrade.”

In fact, Adelphia had installed two all-digital headends in Los Angeles. That will allow its successor to accelerate the rollout of digital simulcast, a process Keating hopes to complete by the end of the year.

Digital simulcast will help Time Warner standardize digital channel lineups. The company will also increase its highest Internet-access speed from 4 Megabits per second to 6 Mbps and get ready to roll out Internet Protocol telephone service. Some Adelphia areas will begin to see phone service by the end of the year.

About 32% of all TV households in the market are Hispanic, making Los Angeles the nation’s largest Spanish-speaking market.

Time Warner will beef up Hispanic programming throughout the system and better market additional services to the Hispanic community, Keating said. He also expects Hispanic advertising dollars will provide a needed boost to local cable ad sales.

ELSEWHERE

Changes in the Northeast are less dramatic. But similar opportunities for marketing efficiencies and advanced-services rollouts open up, said Time Warner Cable executive vice president of Northeast/New York Barry Rosenblum.

Time Warner will add about half a million subscribers in New York and Maine, where it will serve most of the state.

The first priority will be to convert customers to Time Warner’s billing system, a process Rosenblum expects to take about four to six months.

“Once we do that, then we can really start to launch our own digital packages and digital phones,” Rosenblum said.

Time Warner has already rolled out interactive TV services in upstate New York and is expanding them in New York City. By the end of the summer, the Start Over feature will debut in Rochester, New York, with other upstate systems to follow.

Mike Farrell contributed to this report.

September