Cable Operators

The Age of the Supercluster

1/20/2006 7:00 PM Eastern

Taking a picture of this country’s largest cable systems is like trying to snap a series of high-resolution photos from the window of a moving train. The following report sharply details the most powerful cable operations in the United States today, which are constantly undergoing change. Even so, there are indications within the data that speak to large, ongoing trends that will continue to develop.

Chief among them is a renewed period of consolidation that surfaced in 2005 and will become more of a force this year.

Several pending deals promise to produce significant changes in the ownership and the business strategies of the largest cable systems. Most notable among them are plans by Comcast Corp. and Time Warner Cable to acquire assets of Adelphia Communications Corp.

“Historically cable has been a crazy quilt of [franchises] where you might have several operators serving a major city like Los Angeles,” says Janco Partners managing director Matthew Harrigan. The Adelphia deal and system swaps between Comcast and Time Warner Cable will create some larger clusters “that will really rationalize the footprint of their systems and make it much easier and efficient to market their services.”

If that deal passes regulatory muster, Time Warner will beef up its already large operations in several states, including New York, Texas, California, Ohio and the Carolinas. Comcast, in turn, will unwind its stake in Time Warner Cable and add subscribers to its regional clusters in Washington D.C., Massachusetts, Pennsylvania and Florida.

Separately, Cebridge Connections’ pending acquisition of Cox Communications Inc. systems serving about 940,000 customers will transform Cebridge into the eighth largest MSO, with about 1.3 million subscribers.

The biggest impact of these deals is likely to be in marketing. Larger clusters will allow the operators to craft more efficient and coherent marketing campaigns and media buys. Overtime, that will strengthen their competitive position against telecommunications and satellite companies that have long been able to peddle their offerings over wide regional or national footprints.

The deals will also increase the clout these operators have with programmers and equipment vendors. Time Warner, which will end up with systems covering most of Los Angeles and New York, will be in a much stronger negotiating position with programmers desperate to have access to the country’s two largest designated market areas.

For programmers, the impact of this current wave of consolidation is likely to be more evolutionary than revolutionary. Large cable operators have been using their distribution clout to limit programming price increases for some time. And the creation of larger clusters in certain areas won’t have a direct impact on programming deals, which have been negotiated at a corporate, not system level, for many years.

Some of these pending ownership changes are already affecting this year’s list. Time Warner, for example, has reorganized its Ohio divisions from four to three operating units. And it already has shifted some top executives from division to division.

But most of the changes to the Top 100 Cable Systems ranking simply reflect changes in the way some operators manage and report data for their local systems. Charter, for example, now reports only what it calls “key market areas” — a move that has increased the number of their systems on this list from 13 in 2005 to 20 this year. What’s more, Comcast has for the first time agreed to break down some of its larger systems and provide more detailed information for some specific cities.

Because of those changes, only 66 of the systems listed last year have returned with the same divisional names and managerial control over the same franchise areas.

The resulting increase in systems with fairly large sub counts bumped off several systems that have been on the list since its inception and raised the cutoff point to 150,000 subscribers, up from 116,000 last year.

In this list, some systems manage operations in a specific city or metropolitan area, while others include a number of systems that may cover a whole state, or several states.

Major cable operators don’t apply a consistent rule to the way they define a system or division.

And they don’t release data for specific franchises or markets that would allow this ranking to be based on a more traditional definition of a local cable system.

As a result, the 100 largest cable systems should be seen as a listing of America’s largest local cable operations, their top executives and a breakdown of how the major MSOs manage their local operations, rather than a ranking of cable franchises.

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