Giving It All Away

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After disclosing its "Operation Freedom" free-service promotions, executives at Charter Communications Inc. were fully engaged in a new initiative last week: "Operation Explain Ourselves."

Charter reported 11,200 basic-subscriber additions in the third quarter, its first positive additions since the second quarter of 2001.

But the basic gains — and 60,900 digital-cable and 140,700 high-speed data adds in the period — were elevated by a two-month free promotional program ("Operation Freedom") that began in September.

The promotion generated 135,000 basic, 121,000 digital and 103,000 high-speed data gross subscriber additions, Charter said.

Some analysts raised mild alarms, alluding to Charter's past problems with allegedly pumping up subscriber counts by giving away service or keeping non-paying customers on the rolls.

While Charter's free promotions drew analyst attention, they had little impact on the company's stock price. It declined 22 cents (5%) on Nov. 3, closing at $4.05. It rose to $4.14 on Nov. 5 and dipped to $4.06 on Nov. 6.

Charter executives spent much talk time addressing the promotions, first on a Nov. 3 earnings call and then on a Nov. 4 call regarding a $500 million debt offering.

Kip Simonson, the former Cox Communications Inc. marketer who joined Charter in April as corporate vice president of sales and marketing, said during the earnings that free promotion was a direct response to direct-broadcast satellite moves.

DirecTV Inc. offered free DBS service for four months, while EchoStar Communications Corp.'s Dish Network offered free DBS service for three months.

"Our [free period] was significantly less than theirs," Simonson said on the call. "It was used as an acquisition tool and was exceedingly successful."

Charter said it has retention plans in place to keep those customers lured by the freebies.

But some cable analysts saw an obvious risk that digital and high-speed data churn could spike when the promotions end.

"We believe there is a risk that these customers will roll off in [the fourth quarter of 2003]," UBS Warburg cable analyst Aryeh Bourkoff said in a research note.

Vogel said during the bond call that Charter does expect churn to rise slightly after customers roll off the promotions, the latest of which expires in November.

The move toward deep discounting also appears to contradict Charter's earlier stance of not competing on price.

In a research note, Fulcrum Global Partners cable analyst Richard Greenfield pointed out Charter had been focused on reducing discount programs. "This September promotion appears to do just the opposite," he wrote.

During the bond call, analysts sounded worried the promotions signaled a strategy shift. One pointed out that in 2002's first quarter — when Charter said it would discontinue discounts and subtract 145,000 bad-debt customers — cash flow still rose 10% and revenue rose 13%.

In the current quarter, Charter added 135,000 non-paying customers — although it hopes they'll start paying after the promotional period — but revenue rose only 3.5% and cash flow rose 5%.

Vogel called the earlier subscriber write-off a cumulative one that dealt with customers whose credit periods had been extended. "We have no intention of extending credit periods for this particular promotion," Vogel said.

This is a tactical move, not a strategic shift, the CEO said.

First, Fourth, Ninth

In addition to Operation Freedom, Charter started an entertainment promotion that gave customers the first, fourth and ninth months of service for free.

After the calls, Charter would not spell out details of the promotional packages in response to a reporter's inquiries.

"We will be experimenting with promotional pricing because I think that's essentially where the market is these days," Vogel said on the bond call. "Our goal is to get people into our bundled product."

Vogel credited the promotional campaigns to Simonson, saying chief operating officer Maggie Bellville approved them, as did divisional management.

Vogel also said Charter purposely did not require customers to sign long-term service contracts to obtain discounts, a common practice for DBS providers.

"We thought that a positive message — no contract and no hidden fees — was the appropriate message," he said.

Free promotions aren't new in the cable industry, and Vogel referred to an offer by Comcast Corp. in Denver.

He said Charter would not allow customers signed on during the promotional period to fall through the cracks.

"I think the differences are, we've gone through and have a much more disciplined process in bad debt, we've got a consistent process managed across the company by one specific individual – we did not have that when I joined the company — we have no intention of extending our disconnects with this particular promotion, so we won't grow to a base that needs to be cleaned up on a go-forward basis," Vogel said during the bond call.

Charter has some new promotions in the hopper, Vogel said, including a campaign expected to begin around Thanksgiving. He declined to elaborate.

Greenfield said Charter's promotions will change in the November/December time frame, away from free months of service toward deep discounts on bundled digital and data packages.

Leichtman Research Group president Bruce Leichtman said that while other MSOs conduct promotions, the Charter deals sounded a bit bolder.

"There is some risk to it, but it's a calculated risk," Leichtman, a former marketing director at Continental Cablevision Inc. "It's a less costly risk than some of the dish buy-back programs that are out there."

Leichtman added that the ability to retain customers will be a key, but said Charter picked the right time – the third quarter – for the promotion.

"That's when people are most likely to be moving in" to new homes, he noted. "If you can lock people in earlier in the move, that's the best time to do it."

The Denver Plans

Comcast Denver spokeswoman Tiffany Payne confirmed a current two-months-free promotion for high-speed data service, effective until Nov. 21. After that, she said, Comcast has a one-month free high-speed data promotion, including free installation, through the end of the year.

Comcast in Denver is kicking off a promotion on Nov. 9, offering customers the first, seventh and 13th month free for any video package above standard basic. Regular pricing for standard basic is $36.04 per month in rebuilt markets in the Denver area and $31.24 per month for non-rebuilt areas.

Comcast does not require promoted customers to sign long-term contracts, Payne said. The Denver operation has staged similar promotions in the past, but Payne had no data regarding how many subscribers turned into paying customers in past promotions.

"If it wasn't successful, we definitely wouldn't be doing it again," she said.

Comcast in Denver also plans to aggressively market the campaign in print, television and other media.

Other MSOs tried to distance themselves from free promotions. In a conference call with analysts discussing its third-quarter results, Mediacom Communications Corp. chairman Rocco Commisso said that his company has engaged in promotional efforts to attract subscribers — it lost a net of 8,000 in the quarter, primarily to DBS — but not to Charter's extent.

"Given the churn that exists we're always doing promotions," Commisso said. "Different companies do different things. We're trying to weigh what we think is in our best interest and selectively doing discounts where appropriate."

Cox executive vice president of operations Patrick Esser said in an interview that while Cox has done high-speed data promotions across its markets, "we're not giving the product away."

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