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Cable Operators

Smit: Charter’s Got Keller Instincts

5/05/2006 8:00 PM Eastern

With the recent launch of telephone service in the closely watched Keller, Texas, market, Charter Communications Inc. CEO Neil Smit is hoping to beat back the threat of telephone company competition for video services.

Keller is the first market where telephone giant Verizon Communications Inc. launched its FiOS video, voice and high-speed Internet product. According to Verizon’s first-quarter financial results, its penetration in Keller has risen to 30% from 20% earlier this year.

Last Monday, Charter launched telephone service in Keller, a move Smit said “for the first time allows us to compete on an equal footing with other suppliers. We’re looking forward to the results there.”

Charter by the Numbers
Key takeaways from the fiscal first quarter.
1Q ’06 1Q ’05
Basic Subscriber Additions (Losses) 12,000 (6,700)
Digital Additions (Losses) 61,800 19,900
High Speed Internet Additions (Losses) 112,800 94,000
Telephony Additions (Losses) 55,100 9,900
Source: Charter Communications

$99 BUNDLE

Smit said that the bundled offer in Keller will likely be similar to other markets where it offers the triple play. “We’re currently going with the $99 bundle, consistent with our other markets and adjust as necessary,” he said.

Charter, which is the primary cable provider in Keller, has maintained that its market-share loss in the area has been minimal. Still, Smit said the loss grew to 5.5% at the end of March from 4% earlier this year.

Smit, who joined Charter in August, questioned Verizon’s video penetration claims in Keller. “We continue to be mystified regarding the origin of the customer growth Verizon is claiming. Our market share loss in Keller has always been a small fraction of the market share gains that Verizon is claiming,” Smit said, adding it appears most of Verizon’s growth is coming from unserved markets, overbuilders and direct-broadcast satellite service providers like DirecTV Inc. and EchoStar Communications Corp.

Verizon spokesman Bill Kula had another take. He said the 30% penetration rate concerns Verizon homes served in Keller proper and is as of March 22 (the six-month sales anniversary of the service). Kula said 8,100 homes in Keller are served by Verizon. The telephone company reported a different rate (24%) in its first quarter earnings call on May 2, a figure that involves all of the homes in a five city area around Keller, including parts of Fort Worth and where Verizon serves 16,500 homes.

“We talk about penetration; Charter talks about market share,” Kula said. “I would argue that market share and penetration are different because Charter does indeed serve 100% of the city of Keller with its video service; we do not. What I would say, despite Charter’s effort to retain their customer base, we’re still experiencing a phenomenal take rate for our fiber-optic data and TV product. “In fact it is the most successful rollout of any product or service that we have rolled out in our company’s history, period,” Kula said. “It’s turned into hand-to-hand combat, guerrilla warfare, where literally you’ll see sales efforts taking place on the same street.”

Charter launched telephone in seven additional markets in the quarter. While it is too soon to tell about the impact of those launches, chief operating officer Mike Lovett said on a conference call with analysts to discuss results that in more mature markets like Madison, Wis. — which has had phone service for about 18 months — 45% of customers take either two or three products from Charter and are paying an average of about $130 per month for the triple play.

Charter’s promotional triple play pricing starts at about $99 per month.

Charter, which lost 107,000 basic-cable customers in 2005, seems to be enjoying a subscriber revival. In the first quarter 2006, it gained 12,000 basic customers.

Charter also showed healthy growth in services other than basic cable. It added 61,800 digital-video customers in the period, outpacing the 19,900 additions of a year ago, and gained a net 112,800 high-speed Internet customers, ahead of the 94,000 addition in the same period of 2005.

Charter also saw an increase in voice over Internet protocol telephony customers, adding 55,100 during the period, up from 9,900 additions a year ago.

SEEING 'CONSISTENCY’

“I think what we’re starting to see is consistency,” Smit said.

He said customer disconnect rates have fallen for the fifth consecutive quarter and average monthly revenue per unit rose to $77.64, up nearly 10% from $70.75 a year ago.

Charter increased its telephony footprint by 1 million homes in the quarter, ending the period with the service available to 3.9 million homes passed. Smit said Charter is on track to reach its goal of having telephony available to between 6 million and 8 million homes by the end of the year.

Cash flow growth was flat at $471 million, largely because of increased operating expenses. Charter said that operating expenses increased 13.4% in the period, or about $107 million, tied to its continuing investment in customer growth and retention and higher programming and marketing costs.

Also last week, Charter said it would reorganize into three geographic divisions from four, partly because of several recent sales of nonstrategic systems. Southeast Division senior vice president of operations Chuck McElroy — who joined Charter from Cox Communications Inc. in 2003 — is leaving the company, officials said.

The new geographic structure will be: East (headed by former Northeast senior vice president of operations Josh Jamison), Central (headed by former Great Lakes senior vice president of operations Mary White) and West (headed by former Western Division senior vice president of operations Eric Brown).

 

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