Cable Operators

Weathering The Storms

10/28/2005 8:00 PM Eastern

Julie Laulis already had a perfectly acceptable job offer in hand when she boarded an airplane destined for Phoenix, Ariz. A “D.C. girl” who grew up in Maryland and Virginia, Laulis was merely following through as a courtesy on a job interview arranged weeks earlier.

The cable operator she was visiting was as unfamiliar to Laulis as the Arizona desert, and the idea of moving with her husband and two young children to a strange Western city seemed unfathomable — particularly when she’d have to accept a lower salary to do it. But by the end of a 12-hour day, Laulis was on the phone from a hotel room with her husband in Maryland.

“It makes no sense whatsoever,” she told him. “But I think I should work for Cable One.”

Cable One at a Glance
Headquarters: Phoenix, Ariz.
States with Cable One operations: 19
Systems: 50
Largest clusters: Gulf Coast, Miss.; Boise, Idaho
Basic subscribers: 702,800
Digital subscribers: 219,900
High-speed data subscribers: 209,600
Revenues, first-half 2005: $255.5 M
Operating income, first-half 2005: $ 47.0 M
Key initiatives: VoIP rollout early 2006; New pricing strategy launches Nov. 2005 (major products offered at $29.95/month)
Source: Cable One Inc.

That was six years ago. Today, Laulis is vice president of Cable One’s Southwestern region and one of 13 senior executives who run a company that, like Laulis herself in 1999, routinely defies the conventional wisdom of the modern cable business.

Cable One hasn’t delivered a single stream of video-on-demand programming. It ranks last among publicly held MSOs in capital spending per customer. It’s reducing product prices and freezing them through the end of 2007. It’s finally taking the plunge into the IP-telephone business, even as its CEO openly worries that there’s little money to be made there.

Its most successful pricing offer demands a 12-month commitment backed by a credit-card guarantee — a ploy more common to telephone and satellite TV companies than cable providers.

Yet the cable division of The Washington Post Co. has produced free cash flow for each of the last three years, and consistently ranks among the top three cable companies in terms of overall customer satisfaction, according to the research firm J.D. Power and Associates.

“We break the rules in a lot of ways,” says CEO Tom Might. “It’s not intentional, but when you’re the 10th-largest company in the industry, you have to.”

From its Phoenix headquarters, Might and his executive team run a company that mirrors the small-town values prevailing among Cable One markets like Joplin, Mo., and Fargo, N.D. Executives including Might answer their own phones and make a point of being accessible. “There’s not a lot of red tape,” says vice president of advertising sales Mike Bowker. “Things seem to get done when they need to get done.”

An unusually collegial atmosphere was a big part of what attracted Laulis to Cable One six years ago. She remembers being impressed that Might insisted on spending time with her during her initial visit. “I’m just a marketing director,” Laulis says. “He’s the president. But he sat down and talked to me.”

Fitting in at Cable One is less about highly polished resumes and more about believing in a particular way of doing business, says Might. Those who do tend to stay.

The average tenure for Might’s executive team is 17 years with Cable One and its predecessor company, Post-Newsweek Cable Co. “We all have a clear view of how to run a business, and a clear view of a culture,” Might says.

That culture demands teamwork, a principle Cable One has backed up with more than just talk. In late August, when Hurricane Katrina struck the Mississippi coastal terrain where Cable One operates three of its systems, Might was on the scene within days, manning a makeshift relief center in an office lobby and sleeping on an air mattress each night for two weeks as he and local managers worked to ensure the safety of each of Cable One’s 177 area employees.

In early October, Might handed to each of 58 displaced employees $2,000 checks drawn from a relief fund started by Cable One and funded in part by company suppliers. Cable One also bought trailers for about half of the employees who lost their homes. (Others are living in trailers provided by the Federal Emergency Management Agency.)

Several weeks later, Might talks with a sense of astonishment both about the physical fury of the storm and the grit demonstrated by his employees — or “associates,” as Cable One calls them.

As of mid-October, Cable One’s systems in Pascagoula, Biloxi and Gulfport had restored service to 90% of remaining homes, including new temporary housing. Helping the rebuild effort were temporary contractors and crews imported for two-week stints from other Cable One operations.

VALUING THEIR PEOPLE

“I don’t think I’ve seen more spirited, hard-working people anywhere than I’ve seen down there,” Might says. “They’re that kind of people, and we took extraordinarily good care of them.”

But Might expects the sentiment to be mutual as Cable One repairs systems representing $68 million in annual revenue and nearly one-fourth of Cable One’s customers.

“I told them it’s a two-way street,” he says. “We take care of them and they take care of us.”

For a relatively small cable MSO, Cable One has produced some impressive results. It carries no long-term debt on its books, and it’s “highly profitable,” says Post Co. chairman Donald Graham. Over the first six months of 2005, its high-speed Internet penetration growth rate was tops among its industry peers.

In part, that’s because Cable One launched its Internet service later than most MSOs — an approach typical for a company leery of early exposure to new technologies. But it also reflects an aggressive pricing and promotional effort.

Most customers can add Cable One’s 1.5 Mbps high-speed Internet service for $29.95 a month, well below the cable industry’s typical average of $45 per month.

In other respects, Cable One is in exactly the same strategic place as its larger industry colleagues. It faces increasing competitive pressure, not just from rivals like local phone companies and satellite-TV providers, but from “Wi-Fi overbuilders” and a growing range of mobile-video devices like Apple Computer Inc.’s new video- capable iPod, says vice president, strategic marketing Jerry McKenna.

As a result, Cable One is changing with the times. Its strategy is to stabilize its customer base and to entice fresh spending for newer products like high-speed Internet and voice-over-Internet protocol telephony.

There’s urgency to the plan: Cable One’s basic-video customer count shrank to 709,000 at the end of last year from 752,000 in 2001 — a 6% decline, blamed on competition from cheaper satellite-TV services. To stem the losses, Cable One froze its rates for basic service in 2004.

Even so, the company has managed to produce revenue and cash-flow growth, thanks largely to its Internet business. High-speed data units soared to 178,000 from 33,000 from 2002 through 2004, and have risen to 209,000 through the first half of 2005.

Might is relying on Internet growth to take the pressure off video, and so far it’s working. Internet revenues for 2004 were $87 million — outstripping digital-cable revenue for the first time. And through the first six months of 2005, Cable One’s 3% revenue growth — to $255 million from $247 million in 2004 — was attributed solely to Internet-sales gains.

The bottom line is that Cable One is a net cash producer. Since 2002, it has generated more than $300 million of free cash flow (cash flow after capital expenses) for its parent company.

But not everything is rosy. For the first half of this year, operating income declined 2%, to $47 million, because of higher depreciation, programming and customer-service costs. And basic subscribers slipped to 702,800 from 709,000 at the end of 2004.

To combat the spiraling programming costs, Cable One in 2006 will impose its first basic-cable rate increase in two years, possibly risking more defections to satellite. At the same time, a signal-retransmission dispute with broadcaster Nexstar Broadcasting Group Inc. has led to modest subscriber losses in two markets.

Cable One’s bid to battle increasing competition, grow revenues and limit churn revolves around introducing a new product — digital telephone service — and around making big changes in the way all of its products are priced. The challenge is to make the transition to a holistic voice, video and data bundle while preserving a historically high level of customer service.

“It may sound trite,” says Laulis, “but when you become an associate at Cable One, you’re given a Cable One pin, a T-shirt, and a card from Tom that says it is our goal to provide the best customer service in the industry.”

On that front, one advantage Cable One possesses is a strong local presence. Across its three regions, the operator has resisted a money-saving industry practice of consolidating management of nearby systems under one general manager. Instead, it employs dedicated GMs, even in its smallest markets.

It’s also upgrading a centralized call-center facility in Phoenix that’s built to handle after-hours and overflow calls, and to gird for the introduction of telephone service early next year.

THE TELEPHONE CHALLENGE

Even with stronger customer-care resources, however, introducing telephony is complicated, because it demands extensive upgrades to all of Cable One’s back-office systems. More than six months before a trial launch, “it’s wreaking havoc in every department,” says vice president of technology Steve Fox.

To keep capital costs low, Cable One is buying one Nortel Networks Internet-protocol soft switch to route phone calls for the entire company. That’s important to Might, who worries that a new cadre of cheap calling options from the likes of Vonage Holdings Corp., Skype Technologies S.A. and others will erode telephony’s already-thin margins.

“I’m not that optimistic that the price of all telephony products won’t be beaten down substantially,” he says. “So we want to have a very, very low cost structure.”

The pending telephony launch illustrates Cable One’s resolve to make sure the digital communications revolution doesn’t skip over places like Bisbee, Ariz., a small hillside town 20 minutes north of the Mexico border. There, real-estate broker Wayne Lockridge marvels at the speed of his Cable One high-speed Internet service.

“We used to start to download stuff and then just go home for the night. Now it happens in minutes,” he says.

“The phone company has a high-speed service,” Lockridge says. “But they don’t even offer it in this part of town.”

September