News

MSOs Differ on Strategies to Drive Cash-Flow

12/09/2001 7:00 PM Eastern

Cable operators stuck to their guns at UBS Warburg LLC's Media Week conference last week, with most of the major MSOs painting a relatively rosy picture for the coming year.

To a man, the six operators that presented at the annual conference held here touted increases in cash-flow growth and revenue-generating units and the expansion of new services.

The only difference: the methods by which the various operators will deliver that growth.

SVOD TO DRIVE ADELPHIA

For Adelphia Communications Inc., subscription video-on-demand will be the prime driver for the coming year. The Coudersport, Pa.-based MSO launched SVOD service in Cleveland in September.

Adelphia vice president of finance Jim Brown said that his company was the first MSO to offer SVOD across all the major premium service providers — Home Box Office Inc., Showtime Inc. and Starz Encore. He added that preliminary results are encouraging.

Adelphia chose an SVOD product, rather than a more traditional VOD service geared toward pay-per-view movies, primarily because of the dearth of available new releases. While Hollywood studios are beginning to warm up to VOD service — to date five studios have agreed to offer product to varying degrees, including on a title-by-title basis — Brown said that Adelphia decided it was better off sticking to a premium-based service and using the product as a customer-retention tool.

"We positioned the product as a core element of our premium service," Brown said. "We're focused much more on competition with the satellite companies. Ultimately, that's going to be more important competitively than pay-per-view."

Adelphia also isn't charging for the SVOD service, it comes automatically with a premium subscription.

Brown said the decision to offer the SVOD service for free was to eliminate customer confusion. "People are so conditioned that VOD is synonymous with pay-per-view, that they think if they watch HBO [with SVOD] they will be charged," he said.

Brown also reiterated that Adelphia plans to reduce its leverage significantly with the spin-off of its Adelphia Business Solutions business telephony unit by March and the planned sale of non-strategic cable operations — with about 700,000 subscribers — in the next several months.

Although Brown would offer no details on the systems sales, he said combined with the removal of ABIZ debt from Adelphia's books, leverage should be lowered from its current seven times cash flow to about six times.

He also restated the commitment of Adelphia's largest shareholders, the Rigas family.

Brown said that investors became concerned after Texas billionaire brothers Sid and Lee Bass were forced to reduce their holdings in Walt Disney Co. Inc. to pay off margin debt on other investments. Although the Bass sale of about 135 million shares of Disney stock caused Disney shares to plummet, Brown assured investors that the Rigas holdings in Adelphia are in no such danger.

"The Rigas family has used margin debt in the past, but the amount is quite small, about $200 million," Brown said. "They have some forward commitments to purchase Adelphia stock which probably will mean some additional margin debt. But the family owns almost 70 million shares [of Adelphia]. It will be quite a way before they have a liquidity crisis."

COMCAST FOCUS: VOD MOVIES

While Adelphia has focused on SVOD, Comcast Corp. said its plans are more centered on VOD movies.

Comcast expects to have its VOD service in front of 2 million homes next year.

"One-hundred percent of our subscriber base should be interested in VOD," said Comcast Cable president Steve Burke. "I don't think that is the case with [interactive television] or some of the other products."

Burke said that because Comcast has made the investment in upgrading its plant and deploying digital set-top boxes, the MSO can deploy VOD with relatively little incremental investment. The same is not true for more capital-intensive businesses like ITV or telephony.

Still, Burke said Comcast's plan is to roll out a new service every 12 to 18 months, and the next most likely new product will be IP telephony.

That could change, though. "Should we win AT&T Broadband, that would accelerate our entry into the phone business," Burke said.

But at Cox Communications Inc., the only other MSO — besides AT&T Broadband — that has a significant cable telephony presence, president Jim Robbins said emphasis on the bundle has been extremely successful.

COX BELIEVES IN BUNDLING

Cox signed on its 1 millionth bundled customer in November. The company defines a bundled customer as one who takes at least two of three services — analog or digital cable, high-speed data or digital telephone service.

Robbins said that by offering the voice, video and data triple play, Cox has been able to drive penetration in these new services. He added that Cox has been able to rack up 3 percentage points of penetration in bundled services per quarter as a result of being able to offer the combination. For example, in its Orange County, Calif. market, bundled services penetration was 15 percent in the third quarter.

"Even though some colleagues have said that bundling creates an allergic reaction among customers, these numbers are nothing to sneeze at," Robbins said.

A MORE EFFICIENT MEDIACOM

Mediacom Communications Corp. CEO Rocco Commisso said he expects to begin rolling out more new services next year — a VOD trial is already under way in Mobile, Ala. — but stressed Mediacom's knack for operating efficiency as the main driver of its growth.

Commisso pointed out that Mediacom was able to raise system cash flow operating margins on the 800,000 subscribers it acquired from AT&T Broadband in June from 31 percent to 40.2 percent in September. He said that Mediacom was able to do so by significantly reducing overhead.

"There will be more improvement as we move forward," he said.

According to Commisso, the addition of the AT&T systems reduced the percentage of Mediacom's upgraded plant from about 82 percent to 69 percent. And though the company expects to spend about $170 million on upgrades this year, down from an estimated $200 million, capital expenditures are slated to double to about $400 million next year.

Commisso said the additional investment is needed to boost total upgraded plant to about 94 percent. He estimated that Mediacom will be free cash-flow positive in 2003.

Even with the additional capital expenditures, he said that total investment per subscriber is less than $2,500, significantly less than the industry average.

"We're generating significant cash for our stockholders," he added.

Still, Mediacom's stock price rankles its CEO — the stock trades at about $2,900 per subscriber, compared with the industry average of $3,800 per customer.

"I control 76 percent of the [voting] stock, I make $100,000 a year, I haven't had a raise in five years," Commisso said. "But we've produced in the worst market in memory. Our stock is down 10 percent; the rest of the industry is down 34 percent. We've done better than the rest of the industry."

AT&T EYES BETTER SERVICE

AT&T Broadband chief operating officer Ron Cooper said that the company has made strides in telephony, but was less sanguine about its customer-service record.

"Both Bill [Schleyer, AT&T Broadband's new CEO] and I were disappointed to learn that customer service levels were not where we would like them to be," he said.

Cooper joined AT&T Broadband in October along with other former MediaOne and Continental Cablevision Inc. executives Schleyer and chief technology officer David Fellows.

Cooper added that customer service will be improved with revised training programs, bringing outsourced functions in-house and expanding its online customer care function, currently used solely for high-speed data customers, to include video and telephony subscribers.

"Picking up customer calls in 30 seconds is important, but not if you can't achieve first-call resolution," Cooper said.

Another neglected aspect of the business — plant rebuilds — will be accelerated in 2002, Cooper said.

"Upgraded homes drive RGU growth," Cooper said. "We had taken our eye off the ball."

Other Broadband initiatives, like bringing cash flow margins up to industry levels by 2003, are on track.

"We will exit 2003 in much better shape," he said.

CHARTER CHAMPIONS ADVANCED SERVICES

Another new cable CEO, Charter Communications Inc.'s Carl Vogel, stressed advanced services like ITV, high-speed data and VOD as weapons against direct broadcast satellite competition.

Vogel, who was named Charter CEO in October, replacing Jerald Kent, was the former president of DBS service provider EchoStar Communications Corp.

Vogel said that while DBS is an excellent provider of digital video, it can't provide VOD and interactive services efficiently. That, he said, is where cable has the advantage.

While Charter's digital cable growth has been among the highest in the industry — he expects digital penetration to be about 30 percent by year-end — Vogel said that is likely to change.

"We will see slower net adds in 2002," Vogel said. "We will continue to grow, but it will take a little longer to get from 30 percent [penetration] to 60 percent."

September