Responding to some Wall Street concerns that the bulk of Charter Communications Inc.'s third-quarter basic-subscriber additions were the result of a two-months-free promotion, Charter offered more information last week designed to ease fears.
Charter said on Nov. 3 it had 11,200 basic-subscriber additions in the third quarter, but said 135,000 basic customers came on the rolls as a result of the free promotion — "Operation Freedom" — which started in September.
That promotion included all of Charter's video and high-speed data products — basic cable, all of its digital tiers, all of its premium channels and high-speed data at 2 Megabits per second — for two months free.
An "entertainment" promotion offered the first, fourth and seventh months free for one of three different video packages — basic cable; one digital tier and one premium channel; or all premium channels, plus all digital tiers.
Charter had posted its first basic-subscriber additions since the second quarter of 2001, but some analysts voiced concerns about a possible return to deep-discounting practices that led to past problems for the MSO.
In response, vice president of sales and marketing Kip Simonson — the architect of Operation Freedom — stressed last week these were in no way like the Charter discounting programs of two years ago, under a different management regime.
Past discounting promotions — notably the "MVP" program — offered a $30 monthly discount from list price for all its video services for 12 months, six times the timespan of Operation Freedom.
"That raises two issues. First, when somebody is paying a certain price for 12 months, that establishes what that consumer believes the product is worth," Simonson said, adding that in the past, when the promotional period ended, Charter would extend it for another 12 months for $5 per month more.
"Those customers had 24 months of deeply discounted product, well over $500 worth of discount," Simonson said.
"If somebody took everything we offered on Freedom, they had a $160 discount. And we don't believe that anyone is going to think that free is our regular price."
Also, the MVP program also had no exit strategy. "It [MVP] was about getting units. We did not go into Freedom without a retention strategy."
Simonson said every Charter customer service representative has been trained in techniques to move customers who might be overextended to packages that are extremely price competitive.
The entertainment promotion has a retention plan built in because customers have to stay on at least seven months to get the full value of the discount.
Simonson also said Charter is moving toward a model in which customers calling in for promotions will get a salesperson, instead of a CSR. "That will dramatically increase your close percentages and your RGUs [revenue generating units] per household sale."
Operation Freedom began in the third quarter for a reason: that's the best time to reach potential customers who are moving to new residences. Simonson said 50% to 60% of all cable connections are moves or transfers.
Also, direct-broadcast satellite competitors DirecTV Inc. and EchoStar Communications Corp.'s Dish Network at the time were conducting four-months-free and three-months free promotions.
"The transfer market at Charter isn't nearly as large as other MSOs, but the move market is as large," Simonson said. "The choice is: Do you let that 50% to 60% of the customer base choose to leave or choose the competitor, or do you acquire them?"
Simonson said the Freedom program was appealing because it had no catches. DirecTV and EchoStar require subscribers to sign long-term contracts, and have additional charges for local-to-local channels and additional television sets in the home.
"The reason Freedom was so successful wasn't necessarily that it was two-months free; it's that there was for the first time from either cable or satellite, the fine print wasn't fine print," Simonson said.
Regarding concerns that a large number of those new subscribers will churn off after the promotion expires in November, Simonson said that is not the case. While he would not give out any specific numbers, he said that churn for the customers who have already rolled off the promotion are below what Charter had anticipated.
But even if churn is high, Simonson said that Charter is way ahead of the game.
Charter added about 450,000 RGUs as a result of Operation Freedom (including some October connects). Even if Charter loses one-third of those customers, it is still ahead 300,000 RGUs in just one month's time.
"That [300,000 RGUs] is one-third of Cox [Communications Inc.'s] non-telephone RGUs for the whole year," Simonson said.
Charter also took pains to ensure that it was not attracting bad debt customers to the program. Simonson said every customer who signed up provided a Social Security number and a credit card number, allowing Charter to perform credit checks on each person. He added that the promotion also was targeted strictly at new customers.
While analysts also were concerned about the cost of the Freedom promotion, Simonson said it was about 40% less than an earlier offer where customers would receive a free $25 Visa debit card if they signed up for service at full price. That Visa promo attracted about one-eighth the new customers Freedom did.
Simonson added that customers were told how much the monthly charges would be for the services up front, and Charter even sent out a bill after the first month of the free offering (for the third month of service). That way, he said, customers weren't blindsided by a huge bill they weren't expecting.