Cable Operators

Knology Ready to Hit Triples

12/12/2004 7:00 PM Eastern

New York— About one year after acquiring about 64,000 subscribers from Verizon Media Ventures, overbuilder Knology Inc. said the integration of those systems is complete and the company is focused on aggressive growth of its triple-play bundle.

Knology purchased the systems — in Pinellas County, Fla. and Cerritos, Calif. — in December 2003 for $17 million in cash. Knology said in May it would sell the Cerritos system, with about 7,000 subscribers, to Orange Broadband for about $14.8 million. That deal is expected to close in the first quarter of 2005.

Knology Penetration Rates
How one Florida system stacks up against the rest:
Pinellas County Rest of Knology
Video 13.1% 28.8%
Voice 0.1% 22.4%
Data 3.7% 15.6%
Source: Company information

ONE COVERS OTHER

The sale of the Cerritos system basically covers the cost of the Pinellas County acquisition — a deal that increased Knology’s cable footprint by about 60%.

The Verizon deal closed in December 2003 and though Knology CEO Rodger Johnson said there were some glitches — it had to remove more customers than expected from the rolls because of credit problems — those issues have been resolved.

Speaking at the UBS Warburg Media Week conference in New York last Wednesday, Johnson said it had originally expected about 5,000 former Verizon customers would be removed. Instead, Knology had to remove between 8,000 and 10,000 customers.

“We had to clean up more stuff than we thought,” Johnson said.

With those problems behind it, Johnson said the focus now is to concentrate on the triple play.

Knology operates in about nine markets in the Southeast, including Knoxville, Tenn.; Montgomery Ala.; and Columbus, Ga.

It competes with another cable operator in all of its markets except one, a small territory with about 25,000 passings.

Knology believes it has an advantage in that it’s the only provider in its service territories that offers a triple-play bundle. While video-subscriber growth has slowed, Knology believes its future is in convincing its existing customers to buy more services.

It appears to be working. While video growth has slowed — cable penetration grew from 26.8% in 2000 to 29.9% in 2003 — telephone and high-speed data penetration has grown significantly.

Telephone penetration rose from 8.7% in 2000 to 21.6% in 2003.

High-speed data — its fastest growing service — increased penetration from 3.9% in 2000 to 14.5% in 2003.

Knology has added about 9,000 new revenue-generating units (a combination of video voice and data subscribers) in the third quarter, with the ultimate goal of achieving 90% penetration of all three products combined, meaning that out of 100 homes in a market, 35 would take video, 35 would take voice and 20 would take high-speed data.

Currently, its RGU penetration is about 66%.

Reaching 90% isn’t as imposing a goal as it might seem, said Johnson. Although Knology faces fierce competition from incumbent cable companies, phone companies and satellite providers in virtually all of its markets, the overbuilder is the only company offering the full triple-play bundle in those locales.

Currently, about 70% of Knology’s customers take two or more products from the company, nearly double the 37% average of the rest of the cable industry.

Knology is also holding its own against satellite competition, which has proven to be a formidable threat in secondary markets. Johnson said that while satellite penetration is about 23% nationwide, it is less than 10% in Knology markets, even though satellite companies offer local channels in many of its regions.

WIRELINE EDGE

“We think the reason for that is all the customer is saying is 'If I have a choice of another wireline competitive product in my marketplace, I don’t have a motivation to go to the satellite side of the equation,’ ” Johnson said.

As an example, Johnson pointed to Knology’s Montgomery, Ala., market. When that system was first acquired, it had just 8,000 network connections. Today it has 52,000.

Johnson also pointed to strong RGU growth in Huntsville, Ala., Knology’s last acquisition before Pinellas County. In Huntsville, voice penetration rose from zero to 25%, while data went up from nothing to 23%. Average revenue per customer rose from just $36 per month to $98 per month in about three years.

“That’s the power of the bundle,” Johnson said.

Most of that success has been because Knology has no other three-product competitors in its regions.

That will eventually change, said Johnson, but not anytime soon.

“The larger guys get to the secondary and tertiary markets [with bundles] after they go into the big markets,” he said. “Comcast can lose as many customers in one month in Atlanta as we have in the entire Columbus, Ga., marketplace. So you obviously recognize where their priority is going to have to be, as they look to the future.”

March