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Mediacom Sees Bundle Bolstering Retention

2/29/2004 7:00 PM Eastern

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Mediacom Communications Corp. continues to suffer from direct-broadcast satellite competition, losing basic customers and also enduring a net loss of digital-video subscribers in the fourth quarter of 2003.

Revenue, though, rose 8.3% on a year-to-year basis, to $258.8 million, which also was a 3% gain over the third-quarter figure, as the 1.543-million-subscriber cable operator eliminated some subscriber-attracting price discounts in an effort to boost profitability.

"We're here to have a profitable business in the long run" chairman and CEO Rocco Commisso said, explaining the decision to cut back on discounts to lure new customers.

Mediacom, which operates in many rural areas, had about a 3% year-over-year loss of basic subscribers, a net loss of about 9,000 in the quarter.

The digital-customer count declined by about 10,000 — the first quarter without digital gains since the second quarter of 2002, when Mediacom raised the price of the digital packages previously offered by AT&T Broadband, Merrill Lynch & Co. observed in a research note.

Overall, Mediacom had a net subtraction of 47,000 basic customers in 2003, a 3% drain.

Analysts pored over the report, and some felt subscriber losses should moderate in 2004 as Mediacom introduces such new services as digital video recording set-tops, an HDTV tier and, late in the year, Internet-based phone services.

Still, Commisso said the early forecast calls for a net subscriber loss of 2% to 2.5% this year.

At the end of last year, 63% of Mediacom's turf was exposed to DBS operators that retransmit local broadcast signals into the market, up from only 15% at the end of 2002 — and below the expected level of 90% coverage late this year.

When a DBS operator introduces local-into-local signals, an intensive marketing campaign with targeted price discounts usually follows.

Executives, including Commisso, said in discussing the quarter's results with analysts on a conference call Tuesday that Mediacom is working on enhancing its product mix instead of aggressively matching DBS discounts.

Upcoming innovations will include a launch of Motorola Inc.-made digital video recording set-tops in March; heavier marketing of a recently introduced HDTV tier featuring HD services from ESPN, HDNet and Bravo; and a fourth-quarter launch of Internet-based phone services.

John Pascarelli, Mediacom's executive vice president of operations, said the MSO learned much from last year's DBS onslaught. "We've been focusing on those local to local launch areas, making sure we've got the products and we're promoting them," he said.

Mediacom's also been working on developing local content, featuring high-school games and local political events.

"That's something [DBS] can't do," he said, and "that's of significant value to our customers."

The biggest plus of 2003 was the high-speed Internet business, where revenue rose 58% year over year, versus a 3.5% gain from video revenue in a year when basic rates were raised by more than 5%.

Average revenue per unit in the high-speed Internet business rose 4% year over year — to $41.49 per month — and the service generates profit margins of more than 50%, Merrill Lynch said. Mediacom recently doubled customers' download and upload capacity, and executives said commercial sales to business customers look promising.

Citigroup Smith Barney estimated commercial high-speed Internet sales could add $4 million to $5 million in revenue this year, and noted that Mediacom's penetration of homes passed with data stands only at about 10%, below MSO peers.

Mediacom could introduce a lower-priced "Lite" service in the second half of the year to capture more home customers, Citigroup said.

Mediacom did generate positive free cash flow, totaling $11 million (9 cents per share) in the second half of 2003.

For the full year, 7-year-old Mediacom also nosed above the $1 billion revenue mark for the first time. Commisso called that a record-setting pace to a billion in cable history.

Last Tuesday, when the results were release, Mediacom enjoyed early gains on the stock market but the stock closed at $8, unchanged.

September