Finance

Cable One’s Growth Plan: Cut the Cord

Citing Declining business, Midsized MSO Scales Back on Video 3/16/2015 8:00 AM Eastern

While the rest of the cable industry waits with bated breath for the wave of consolidation expected in the wake of the approval or disapproval of the Comcast-Time Warner Cable merger, one small cable company is taking an opposite approach.

 

Instead of increasing scale to offset rising programming costs, midsized Cable One is almost giving up on video and phone service. Instead, the Phoenix-based MSO is focusing its energies on higher margin high-speed data and business services.

 

The jury is still out on which strategy will be more successful, but Cable One recently offered a detailed look into its operations through a prospectus filed with the Securities and Exchange Commission in anticipation of this summer’s planned spinoff from parent Graham Holdings. The spin will make Cable One an independent, publicly traded company.

 

Cable One made headlines last year when it decided not to renew 15 Viacom networks, including MTV, Comedy Central, Nickelodeon and Spike, replacing them with such lower-cost alternatives as Revolt, Sprout and TheBlaze.

 

While that decision has led to a sharp decline in residential video customers — Cable One finished 2014 with about 451,000 basic-video subscribers, a 16.9% decline from 2013 — revenue from residential data and business services increased. And Cable One is banking that those products will take up most of the slack in the future.

 

“For us, success in winning and retaining residential data and business services customers are far more important metrics than the number of triple play customers we have,” Cable One said in its preliminary prospectus.

 

That flies directly in the face of most operator strategies — Comcast and Time Warner Cable, for instance, have embarked on efforts to boost triple-play penetration and ended 2014 with 44% and 40% of video customers, respectively, in triple-play packages.

 

“I think that making such a drastic move as de-emphasizing your core, bread-and-butter video business, and turning yourself into a dumb pipe, highlights how much pressure the smaller cable operators in particular are under,” Pivotal Research Group principal and senior media & communications analyst Jeff Wlodarczak said, adding that smaller operators are under increasing stress to sell out to larger players.

 

That strategy could work for a time, at least until a deep-pocketed overbuilder encroaches on the market or regulators decide it is time to set pricing on broadband.

 

“In the end, I think you want to have as many hooks — video, voice, data and wireless — into the consumer as possible,” Wlodarczak said.

 

For the forseeable future, though, Cable One thinks it can survive and thrive with two rather meaty hooks into the consumer — broadband and business services.

 

For Cable One, residential data and business services made up about 41.5% of total revenue in 2014, compared to 38% the year before. Its percentage of Internet-only customers grew by 50% between 2013 and 2014, and in 2014, 52% of Cable One’s new connects were Internet-only.

 

Telsey Advisory Group media analyst Tom Eagan said Cable One’s relatively low data penetration rates — 33% of homes passed — could present some upside for the company even as it de-emphasizes video. “Given their size, they don’t have the leverage to really negotiate with the programmers to keep the rates down,” Eagan said. “It makes sense they would go toward the heavy broadband strategy, especially given the low penetration rate.”

 

That has had the obvious dramatic impact on programming costs. Cable One estimated its costs will plunge 64.4% from $171.4 million in 2015 to $61 million by 2019.

 

That could mean that Cable One is either planning on dropping more networks or losing a lot more video customers, Wlodarczak said.

 

Cable One seems to be pumping those savings into more data speeds. In April, the company plans to boost the minimum speed for its Ultra high-speed data package to 100 Megabits per second from 70 Mbps for no additional charge. By the end of 2016, it plans to complete an all-digital transition, freeing up three-fourths of its plant for data speeds up to and exceeding 1 Gigabit per second.

 

The company has also been deploying HD TiVo boxes that allow customers to watch Internet video on their TVs, which could also drive the need for a faster pipe.

 

Despite the timing, Wlodarczak doesn’t see other operators following Cable One’s lead.

 

“There is still too much margin on video and too much of an opportunity to claw back subscribers from satellite TV,” Wlodarczak said.

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