Growth Formula: Cut Expenses - Multichannel

Growth Formula: Cut Expenses

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The fall conference season kicked off last week with a trio of cable operators continuing to push the mantra of lower operating costs and new services as the catalysts for growth.

Comcast Corp. started the ball rolling with its prediction that escalating programming costs — long a thorn in MSOs' sides — could be leveling off in the near future.

Cable division president Steve Burke told investors at Morgan Stanley & Co.'s Global Media conference in Boston last Monday that programmers are beginning to lose some of their clout as ratings decline.

Comcast has been one of the tougher negotiators during contract-renewal time and gained more muscle with its November acquisition of AT&T Broadband, making it the largest MSO in the country with 21 million subscribers.

In the past, Comcast has said it expected to reach $270 million in programming-cost reductions this year — a number it is likely to exceed, the MSO said on its second-quarter earnings conference call. At the Morgan Stanley conference, Burke said those programming cost reductions are not just a one-time thing.

"I think we are significantly ahead of where we thought we would be regarding the $270 million, but as important, we think we are going to be arresting the growth rate for many, many years to come," Burke said.

Burke declined to be specific, but added that a 3% to 4% reduction in programming-costs growth would translate into a savings of between $120 million and $160 million, given Comcast's $4 billion programming cost base.

Arresting programming-cost growth probably has as much to do with Comcast's size — the No. 2 MSO (AOL Time Warner Inc.) has 10.8 million subscribers, about half that of Comcast — a fact that Burke acknowledged.

"Obviously, one of the things you get to do when you have 21 million subscribers is try to exert a measure of discipline," Burke said. "It doesn't make any sense to me when inflation is 1% or 2% for a programmer to walk in the door and assume they are going to get 5%, 7%, 10% price increases, let alone 15% or 20%. Most of the basic programming channels' ratings are declining. That was not the case 10 years ago — 10 years ago it made sense to pay more, because you were getting more. That's not the case today. We're going to be extremely disciplined."

While programming growth rates are expected to decline, Burke said that customer additions for its cable-modem service are rising, despite price-cutting by competitors.

While Wall Street has been concerned over digital subscriber line competition from telephone companies, Burke said that high-speed data additions in July and August were up 30% compared to the same time last year.

Burke added that Comcast's high-speed service will be further differentiated from DSL once the MSO doubles the downstream speed of its service from 1.5 Megabits per second to 3 Mbps in all of its markets by the end of the year.

"I think job No. 1 is increasing speed," Burke said.

Cox Communications Inc. president Jim Robbins, speaking at the same conference, said high-speed data will continue to be a driver of growth for the foreseeable future, despite recent pricing pressure from digital subscriber line providers.

"We are very comfortable with where we are and our market product strategy and not seeing the impact that all the noise might suggest that we might be seeing," Robbins said at the conference.

At AOL Time Warner Inc., telephony appears to be a new focus. Chief financial officer Wayne Pace, speaking at the Morgan Stanley conference, said that with the success of Time Warner Cable's VoIP trial in Portland, Maine — involving about 4,000 customers — AOL TW is considering a more aggressive rollout of the technology.

"We're comfortable with the technology, and we believe that the opportunity to bundle voice with data and video is very strong," Pace said. "We're developing a plan that we will discuss with our board to move forward with the rollout of telephony on a wider basis in the latter part of this year and in 2004. We're only going to do this in a sound and financially responsible matter."

AOL Time Warner is on target to hit its previously released guidance, Pace added, noting that the company is also on track to reduce its total debt to about $20 billion by the end of next year.

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