Cable Operators

What Makes Cablevision Run

11/08/2010 12:01 AM Eastern

Cablevision Systems
has long had a reputation
as a top-tier MSO
that wasn’t afraid to
take a stand. Nowhere
was that more evident
than in last month’s caustic retransmission-
consent fight with
Fox Networks, which resulted in
a trio of Fox owned-and-operated
TV stations going dark for two
weeks to Cablevision customers.

That battle (the third carriage
dispute Cablevision has endured
this year) ended Oct. 30, and was
punctuated by several rather creative
rounds of name-calling.

While the duel ended up with
the MSO paying a price it didn’t
want to pay, it earned the company
lasting respect from operators
too shy — or too broke — to stand
down a fee increase in an increasingly
important battle.

The Fox dispute seemed to
take the vitriol normally associated
with these skirmishes to new
heights, but Cablevision managed
to have a sense of humor
about it. At the Cable & Telecommunications
Association for Marketing
Summit in New Orleans
on Oct. 20, Cablevision chief operating
officer Tom Rutledge was
asked during a panel discussion
to comment on the biggest news
of that day.

Rutledge acknowledged that
Cablevision had been in the news
lately and wanted to set the record
straight.

With the audience at the edge
if its seat, Rutledge went on to say
how happy Cablevision was to be
named Multichannel News 2010
Operator of the Year.

A STRONG PERFORMER

Trading barbs with programmers
or cracking jokes at conferences
is not why Cablevision
won the award. Despite its
characteristic pit-bull tenacity
— or maybe in part because
of it — Cablevision continued
to lead the cable industry in
practically every performance
metric and managed to do so
through one of the worst recessions
in recent memory — and
against an intense competitor
in Verizon Communications’
FiOS platform.

In addition to its stellar operating
performance, Cablevision
made its first move outside the
New York metropolitan area in
about a decade, agreeing in June
to purchase Bresnan Communications,
with about 300,000 customers
in Montana, Wyoming,
Utah and Colorado, for about $1.4
billion.

The Bresnan purchase was in
part made to spread a little of
the Cablevision operating magic
outside of the New York footprint.
The 3 million-subscriber
MSO has the highest penetration
of advanced services of any
publicly traded cable company
— 96% digital, 54.4% high-speed
Internet and 43.7% telephone.
In 2009 it managed to keep subscriber
losses to a minimum — it
shed about 45,000 customers that
year, or 1.4% of its total base, compared
to a 2.6% dip for Comcast
and a 1.6% drop for Time Warner
Cable.

On the financial front, Cablevision
grew revenue 8.3%
and adjusted operating cash
flow 12.2%, far outpacing its larger
peers (Comcast grew revenue
by 4.1% and operating cash flow
by 4.6% in 2009, for example).

That momentum continued
into the third quarter, with total
revenue up 5.6% to $1.8 billion
and AOCF rose 3.6% to $661.7
million in what is traditionally
Cablevision’s weakest quarter as
its customers in resort areas on
Long Island and the New Jersey
shore leave for their primary residences.
Not including a one-time
adjustment, AOCF in the period
would have risen 8%.

On a conference call with analysts
to discus third quarter results
last week, Rutledge said that
the Fox battle was regrettable, but
necessary.

“It’s a very unpleasant way of
doing business, having a major
conflict like that in public,” Rutledge
said. But he added that retransmission
costs are ultimately
passed to the consumer, and one
of Cablevision’s duties is to try to
keep customer costs down.

“Our behavior was not uneconomic,”
Rutledge said. “We think
we did the rational thing.”

Cablevision’s high-profile programming
carriage fi ghts seemed
to dominate the news about the
company this year.

Early 2010 battles with The Walt
Disney Co. and Scripps Networks
Interactive shone some light on
the issue of rising programming
costs. The Fox battle seemed to
take the industry’s message a step
further — this time, the Federal
Communications Commission at
least off ered to find a third party
mediator to resolve the dispute.
In the past, it has taken a handsoff
attitude to such disputes.

Cablevision seemed more than
willing to take one on the chin for
rest of the industry, a stance that
did not go unnoticed.

THOUGHT LEADERSHIP

 “I think they [Cablevision] are
tending to be one of the thought
leaders in terms of what needs
to be done in this industry,”
said Miller Tabak media analyst
David Joyce.

The Bethpage, N.Y.-based operator’s
two-pronged strategy
— customer education and legislative
involvement (more than
175 state, local and federal government
officials echoed Cablevision’s
call for either binding
arbitration or government intervention)
— drove home the
message that rising costs were
strangling the industry.

“I would say that most effective
was there was possibly some
movement toward some form of
retransmission-consent reform,”
Joyce said. “It also highlighted to
the consumer that cable operators
are not necessarily the bad
guy here.”

Whether Cablevision’s actions
will result in changes to retransmission
consent remains to be
seen. But if that happens, it will be just another in what has been a
growing line of milestones for the
company over the past 10 years.
Cablevision was the first MSO
to launch a $90-per-month triple-
play package of voice, video
and high-speed Internet service
in 2002. Though it was privately
mocked by several operators for
that action, every MSO has since
followed suit.

“They are the role model,”
Insight Communications vice
chairman and CEO Michael
Willner said. “We have no shame
in stealing every one of the ideas
that they have come up with. We
have the utmost respect for their
operations.”

Gabelli & Co. senior vice president
and media analyst Chris
Marangi said Cablevision laid
that foundation years ago, when
CEO James Dolan and his team
decided to invest $4 billion in
building out a network concentrated
in a single market, the New
York metro area. That allowed Cablevision
to roll out advanced services
quickly and efficiently.

“They recognized early that
they needed to deliver more value
to customers,” Marangi said.
“They were the first proponents
of the triple-play bundle. For the
past seven years, they have been
aggressively bundling products.
They have invested heavily in a
robust plant. They were among
the first to recognize the small
business opportunity and advanced
advertising.”

In a research note last April,
Marangi noted that a host of ingredients
— superior plant, bundling,
content from its Rainbow
Media Holdings networks, technology
and branding — make up
what he calls Cablevision’s “secret
sauce” of success. But there
are also some very important intangibles.

“In all of our meetings with
Cablevision management, we
sense a unified resolve to win in
the marketplace unlike any other
company,” Marangi wrote in
April.

Nowhere was that “X-Factor,”
as Marangi calls it, more evident
than in Cablevision’s response to
Verizon Communications launch
of its FiOS video and high-speed
data service in the New York area
in 2007.

Many analysts thought that
the telco would crush the smaller
operator.

“When Verizon came into their
markets, they went on the offensive,
not the defensive,” Marangi
said, noting that despite its unprecedented
exposure to the telco’s
FiOS TV video offering (it is
available in slightly more than
one-third of households in Cablevision’s
territory) the MSO
has so far beaten back the competition.

“They are aggressively taking
share from Verizon and they have
worked very hard to win back
customers,” Marangi said.

That is evident in Cablevision’s
basic subscriber numbers. Over
the past three years, Cablevision
has lost about 2% of its subscriber
base while its larger peers
throughout the industry have
subscriber losses in the doubledigit
percentage range, according
to Wunderlich Securities media
analyst Matt Harrigan.

“That is one of the most amazing
things about [the company],”
Harrigan said.

But with such success comes
the next question — is Cablevision
reaching the saturation
point in its markets? In an interview
with Multichannel News in
May, Dolan said that he still sees
growth in the New York area,
mainly because his current team
— led by Rutledge, cable operations president John Bickham,
technology guru Wilt Hildenbrand
and executive vice president
of corporate engineering
and technology Jim Blackley —
keeps finding ways to enhance
the current product, develop new
offerings and drive penetrations.

“[We’re] following the strategy
my dad [Cablevision chairman
and founder Charles Dolan] started
back in the ’70s, which was to
really push the value equation
with the customer base, pack in
as much value as you can, don’t
worry necessarily about the margins
but go for the volume,” Jim
Dolan said back in May. “And
that’s really been the mantra for
Cablevision since I was selling
door-to-door back in the ’70s.”

That, too, is where the Bresnan
acquisition could come in. While
those systems were highly regarded
as well-run operations,
Marangi believes there is tremendous
upside in bundling highspeed
data and other products.

October