Bucking for Growth
Cable One Bets on DVRs, Price Guarantees and VoIP This Year
By LINDA MOSS -- Multichannel News, 3/28/2004 7:00:00 PM
Phoenix — Cable One Inc.’s much-publicized rate freeze last year wasn’t the only factor that helped fuel basic-subscriber growth in 2003.
CEO Thomas Might promised his employees a “bonus for basics” last year.
“We only had two systems in 2002 that grew subs,” Might said. “So we said, 'OK, we need better than that.’ ”
The deal was that every employee at systems that either gained subscribers in 2003, or didn’t lose any, would get a $1,000 bonus. That kind of “electrifying” incentive “creates enormous teamwork and enthusiasm,” according to Might.
The story ended happily, because two-thirds of Cable One’s systems increased subscribers. The MSO handed out over $1.3 million to those employees last month.
That’s one reason why Cable One, the nation’s No. 10 MSO, is coming off a good year. It exceeded its goals of stabilizing basic subscribers, holding onto digital homes and adding high-speed data customers.
The MSO’s basic-subscriber count rose by 2,500 homes to 720,800, an increase of roughly four-tenths of a percent — just a hair behind top-gainers Cox Communications Inc. and Comcast Corp.
That was a far happier tale than in 2002, when Cable One lost 36,000 subscribers, a 4.8% drop, with roughly half of those losses due to non-payment disconnects.
It’s a new ballgame for Cable One in 2004, with different priorities and challenges. The maverick MSO, a unit of The Washington Post Co., raised rates March 1, but it’s come up with an offbeat strategy to dissuade potential disconnects.
The MSO plans to guarantee the prices of its two new low-cost packages —Lifeline, at $19.95, and Digital Lifeline, at $27.95 — until 2006, according to Might. Lifeline is a broadcast-basic package, while Digital Lifeline consists of broadcast basic and digital service, bypassing analog expanded basic.
Cable One’s systems have already soft-launched a digital video recorder box, Motorola’s DCT-6208 digital video recorder/HDTV receiver. The operator hopes to formally deploy them by May.
The MSO will also finally jump into telephony by testing voice-over-Internet protocol services, probably later this year. A launch is expected in 2005.
Initiatives also include guaranteeing same-day cable installation by midyear and getting an MSO-wide centralized after-hours customer-care center fully running in Phoenix, said Might, who just spent eight weeks visiting systems during the company’s annual “road show.”
BEGGING TO DIFFER
Cable One’s actions are very often contrary to the cable industry’s conventional wisdom, as the company opts not to follow the rest of the operator herd. It goes beyond the MSO’s just-expired rate freeze.
For example, Cable One has no debt. Second, it only offers a very limited expanded-basic lineup of 40-plus channels. It was also slow to roll out digital cable and then took the risk of offering service for free for one year.
And instead of joining the industry in cheerleading for video-on-demand, Cable One is rolling out DVRs instead.
Cable One, which has always been consumer-research oriented, will do more precise marketing in 2004 by carefully studying the differences and preferences among the six segments in its markets — ranging from basic-cable to digital homes, bundled subscribers, as well as direct-broadcast satellite and broadcast antenna-only homes.
“One focus is to exploit that segmentation to an enormous degree in our research and our marketing,” Might said.
As part of that thrust, Cable One hired a new ad agency and just kicked off a new image campaign that will run throughout the year.
Might, who has spent his whole career at the Post Co., was named president of Post-Newsweek Cable [now Cable One] in 1993, so he’s had a ringside seat for the industry’s consolidation.
“We were No. 25 when I got here 11 years ago, and we were quickly No. 10,” he said. “And all the theories that you couldn’t make money because you weren’t a million subs have been all proven wrong.”
Last year Cable One posted operating income of $88.4 million, an increase of 9% over in $80.9 million in 2002, on revenue of $459.4 million, a 7% rise from $428.5 million the prior year, according to The Washington Post Co.’s year-end earnings report.
As of Dec. 31 last year, the MSO had 222,900 digital cable subscribers, or 31% penetration. Cable One’s high-speed data subscribers were at 133,800, up from 79,400 in 2002.
The medium-sized MSO’s financial performance stacks up strongly against its bigger cable-operator brethren. Cable One’s annual per-subscriber free cash flow, at $169, was No. 1 in the industry last year, and its cash-flow margin stood at 40%, ahead of the biggest MSOs.
Cable One has four divisions, each with its own chief, with systems from the Southeast to the Midwest and Southwest. The biggest division is the Norwest, including Boise, Idaho; Sioux City, Iowa; and Fargo, N.D.
SMALL-MARKET ADVANTAGE
By specializing in systems in less-demanding markets — “big towns and small cities only”— Cable One is under less pressure and can cautiously bide its time in rolling out new services like digital video, high-speed data and telephony, according to Might.
So while pioneering MSOs suffered setbacks with high-speed deployment, like the collapse of cable-modem backbone provider Excite@Home Corp., Cable One remained unscathed by waiting and not using a third-party vendor.
“Given our size, one of the rules about running the place is you can’t afford to make a big mistake,” Might said. “Going early with @Home would have been a dramatic financial problem, a customer-relationship problem for us, proportionally much more so (than) compared to the bigger MSOs.”
Cable One is able to sit back and figure out the right strategy and equipment. Then — in “cookie-cutter” fashion — it was able to quickly deploy both digital and high-speed data in less than a year across all its systems, offering self-installation for both. Bundling those services has been hugely successful.
The MSO’s unique corporate culture makes it agile and quick to act when it chooses to, according to its top officials. Might has 11 executives who report directly to him, which eliminates office politics “because there’s no hierarchy to speak of,” said Tom Basinger, vice president and head of the Central division.
“There aren’t eight levels of management,” said vice president of strategic marketing Jerry McKenna. “We report to Tom [Might], and Tom reports to [Post Co. chairman and CEO] Don Graham. So it’s a very lean company that allows you to make decisions very quickly.”
They are all headquartered in Phoenix, where the company’s official workday is 7 a.m. to 4 p.m. The executive-team members, whose average tenure is 17 years each, spend a lot of time hitting the road to spend time at systems.
“I put 3,000 miles on a rental car because I visited the smaller systems last year,” Might said.
After holding prices stable for two years, Cable One claims there’s been minimal backlash from its recent rate hike. The MSO raised expanded basic by $2, to $39.50, and added on average 50 cents to its digital offerings, bringing it core package to $48.45.
“We’ve looked at most of the press that we’ve gotten, and I think, by and large, it’s been fairly balanced,” McKenna said. “It has been two years since we took our last rate increase. We’ve added a fair amount of programming during that period of time.
“I think, very importantly, satellite has raised their rates at the same time. … We introduced some lower-cost packages.”
Norwest vice president Mitch Bland said that when rates were increased, he played customer-service rep in Sioux City to gauge the reaction.
“I went out and actually answered the phones just to see how it was going,” Bland said. “I did not have one angry customer.”
Julie Laulis, vice president of the Southwest division, said her managers feel the rate hike is going well because they have lower-priced choices to offer subscribers, like Lifeline and Digital Lifeline, as well as the bundle of high-speed and digital.
“Customers in turn feel that they have some control,” she said. “They can pick and choose.”
Cable One, which already has 48 door-to-door salespeople, this year will hire 10 more, as well as a manager for them.
“We’ve had 17,000 starts from them last year, and they have a goal this year of 30,000,” Might said.
The cable operator also plans to expand its HDTV and digital-cable offerings, and increase its modem speeds.
Cable One is just starting to more aggressively promote its Hispanic tier of 10 networks. It costs $2.49, and subscribers don’t have to buy-through digital to get it.
Cable One plans to charge its digital subscribers an incremental $10 to upgrade to a DCT-6208 DVR.
CHANNEL CHALLENGES
Cable One has had its setbacks and disappointments, and still faces challenges.
Programming was 41% of its costs last year, yet McKenna said cable networks are still seeking double-digit rate hikes. The MSO was banking on TV stations in its markets to quickly offer HDTV signals, and Might said these small-town broadcasters have been dragging their feet.
And Cable One wanted to roll out DVRs two years ago, but the MSO was “captive” to Motorola’s “late rollout of them,” according to Might.
The company got “distracted” when it was launching digital, McKenna said, and outages rose. As a result, Cable One’s usually high rating from J.D. Power & Associates dipped in 2002. But the rating rebounded in 2003, and outages were at an all-time low last fall, Might said.
The MSO would like to grow, and Might believes the market is now more conducive to buying systems. He has coveted some of Adelphia Communications Corp.’s properties. In the 1990s, Cable One added about 300,000 homes, paying an average price of $1,300 per subscriber.
“We stopped doing deals when [Vulcan Inc. and Charter Communications Inc. chairman] Paul Allen entered the market,” Might said. “He went beyond not only our price, but any reasonable price. … Prices are coming back down to where we believe we can do a rational return on investment and make some bids.”
| At a Glance | |
|---|---|
| All numbers cited below are as of Dec. 31, 2003. | |
| CATEGORY | AMOUNT |
|
Source: Cable One Inc. |
|
| Homes passed: | 1,274,317 |
| Basic-cable subs: | 720,800 |
| Digital cable subs: | 222,900 |
| HSI subs: | 133,800 |
| Operating revenue: | $459,399,000 |
| Capital expenditures: | $65,948,000 |
| Operating income: | $88,392,000 |
| Subscription revenue: | $430,318,000 |
| Advertising revenue: | $29,081,000 |
| Revenue generating units: | 1,077,500 |
| Monthly revenue/basic sub: | $55.09 |
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