Alaska’s GCI Sees Train Coming, Gets Off Track

Alaska’s GCI Sees Train Coming, Gets Off Track
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Cable TV and wireline telephone penetration is dropping, and Alaska’s General Communication Inc. knows it.

“In 10 years, no one will have a residential wireline phone,” GCI president and co-founder Ron Duncan said. “Meanwhile, cable TV could stop being profitable for us in as little as eight years. We’ll either have to sell it at a loss to cover third-party programming fees while we keep charging our subscribers reasonable rates, or get out of cable TV altogether.”

Long-distance telephony was the service that launched GCI in Alaska back in 1979.

“No one pays that much for long distance anymore,” Duncan said.

GCI does claim a 45% share of Alaska’s long-distance market, making it the state’s leading provider.

GCI, the largest cable provider in Alaska, reported 122,200 basic-cable subscribers as of Sept. 30. That’s down 4,200 customers from the third quarter of 2011. (GCI moves its signal across these vast spaces by bringing it into remote communities by microwave.)

All told, GCI is experiencing decline in the business cases that allowed it to grow into Alaska’s largest MSO (64% penetration of the 90% of all Alaska homes it passes) and competitive wireline telephone company (22 cities served with facilities-based service with 35% market share).

Duncan isn’t panicking, though. Unlike some companies that freeze when they see the train of change barreling towards them, GCI is already stepping off the track.

UNIQUE MARKET

As a result, GCI is well-regarded by analysts such as Barry M. Sine, with the full-service institutional broker- dealer Drexel Hamilton. “GCI is a really visionary company in a state economy that has been built by entrepreneurs,” he said.

Alaska is a one-of-a-kind market, unlike anyplace in the “lower 48 states” (as Alaskans describe the rest of the U.S.).

The numbers tell the tale: Alaska covers 586,412 square miles, or twice the land mass of Texas. Yet it only has 722,000 residents, which works out to 1.26 people per square mile. The distances between communities are vast and its infrastructure of roads and wires is relatively scant.

This is why GCI uses satellite and microwave radio to link its networks, as well as landlines and a 2,331 fiber-optic undersea cable that connects its Alaska headquarters to Seattle.

By combining profitable urban areas (such as Anchorage, population 295,570) with service to rural areas subsidized by federal grants, GCI has been able to succeed in the Alaskan market.

“It is a very well-managed company,” Frank G. Louthan IV, managing director of financialservices firm Raymond James, said. “There is also a very unique culture in Alaska where being local counts — and GCI is definitely seen as local.”

Even with management that analysts acknowledge as competent, GCI is having a tough time. Cable and wireline revenues are down, while long-distance rates are dropping due to competition. And although wireless is doing well, GCI is earning less income from roaming charges.

Meanwhile, wireless competition will ramp up next year when Verizon Wireless joins AT&T, Alaska Communications Systems (ACS) and GCI in the market.

One bright spot is broadband service: Although GCI has dropped its per-megabyte rate, the company’s use of capped data plans means that subscribers are paying extra every time they exceed their cap — and that’s happening more and more often.

As the state’s leading broadband company with 70% market share, GCI is poised to profit from the growth of such over-the-top television services as Netflix and Hulu.

“Programming sourced from Netf lix is now the largest user on our broadband network,” said Duncan. “This is very good news.”

Times are changing, and GCI is changing with them. For instance, GCI and ACS have merged their wireless networks into a single integrated infrastructure. “We now both run on the same plant, although we maintain separate stores and identities,” Duncan said. “In public, we’re fierce competitors, but we work together behind the scenes on transmission.”

This alliance, plus GCI’s ongoing wireless upgrades, has allowed the company to introduce 4G LTE iPhone service to its Alaska subscribers. As well, federal subsidies are helping GCI push out service to rural communities, where subscriber levels have been growing “by double digits,” Duncan said.

NEWS CHANNEL PLAN

GCI is also getting into the broadcast TV business, by purchasing NBC affiliates KATH-TV (Juneau) and KSCTTV (Sitka), plus CBS affiliate KTVA in Anchorage. “We plan to transform KTVA, KATH and KSCT into a news/ entertainment leader unmatched in Alaska,” said Duncan. “We plan to create a statewide news channel on these operations, which can be distributed to our viewers on cable TV and broadband.”

By doing so, GCI hopes to provide its cable TV viewers with compelling reasons not to cut the cord. This matters: This MSO has dropped channels such as Root Sports Northwest (which offers Seattle Mariners baseball) to avoid raising subscriber rates in a tight economy.

GCI’s strategic moves are not pleasing everyone.

For instance, on Nov. 16, Standard & Poor’s revised its outlook on GCI outlook to “negative” from “stable.” While maintaining a BB-minus corporate credit rating for GCI, “we are lowering the issue-level rating on GCI’s senior unsecured debt to ‘B-plus’ from ‘BB-minus,’ ” S&P said. The ratings agency is concerned that GCI will borrow more money to support its ACS partnership, while seeing declines in income as noted above.

Duncan shrugged off the S&P report. “It’s based on news that is six months old,” he said. Barry Sine also isn’t concerned. Since S&P changed GCI’s outlook, “I have received zero phone calls on it from investors,” Sine said.

As for the future? Duncan is pressing ahead with GCI’s wireless, broadband, and broadcast ventures. He doesn’t like the decline in cable TV, long distance and wireline, but GCI’s sights are set on the future, not the past.

AT A GLANCE

General Communication Inc. (GCI) 

Founded in 1979 by Ron Duncan and Bob Walp, starting with long-distance wireline service. 

Bought local cable companies in 1996; now offers cable TV, wireless phone, broadband and wireless. 

Consumer voice revenue was $52.1 million in 2011, down from $57.3 million in 2010. 

Built a 2,331-mile-long fiber optic undersea cable linking Anchorage to Seatt le in 1999. 

Had 139,900 wireless subscribers at end of 2011, up 1,200 from 2010. 

Largest provider of Internet services with cable modem, wireless and dedicated access with 119,900 commercial/ cable subscribers, up 3,000 from 2010. 

Bought three local Alaska TV stations in 2012. 

Employs more than 1,600 Alaskans.

Source:Multichannel News research

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